CFA Conference: Randall Kroszner

Randall Kroszner is the Norman B. Bobins Professor of Economics at the University of Chicago Booth School of Business.  He is also a former central banker and in this session he offers an insider’s perspective on international coordination of monetary policy.His presentation is entitled The Search for Stability: Regulation, Reform, and the Role of Monetary Policy. His latest book is available here.

My session notes follow.  As always, these are at-the-time notes.  I make no guaranty as to their accuracy or completeness.

  • We’re on the road toward dealing with monetary fragility, ut there’s a long way to go.
  • Why the fragility? Leverage, liquidity and interconnectedness.
  • Leverage: makes for a thin cushion against losses.
  • Liquidity: banks tend to borrow short and lend long — maturity and liquidity mismatch.
  • Interconnectedness: a change at one institution impacts (nearly) all others.
  • Knowing history is crucial in a crisis (history may not repeat, but it rhymes).
  • Kroszner isn’t a “natural” interventionist, but in the “eye of the storm,” it’s tough to believe that “the market will take care of itself” (especially under great time pressure).
  • Ben Bernanke has terrific powers of persuasion — to get consensus in the 2008 crisis.
  • The ECB is now mimicking the Fed circa 2008.
  •  TARP continues to make money for taxpayers but remains very unpopular (per survey data, torture is more popular!).
  • Incredible demands for short-term safe, liquid assets.
  • Can we get out of this without high inflation? In principle, yes.
  • Obviously, exit strategy is key; it will be very tricky; requires will and good timing.
  • Volcker was reviled in the 1980’s, but revered now; Kroszner thinks Bernanke will be similarly esteemed (if not yet).
  • Are we less fragile today? Similar issues and potential issues….
  • We shouldn’t put too many regulatory eggs in one basket (e.g., high core capital).
  • Banks holding lots of short-term government paper can be toxic (e.g., Greece), but not a likely problem in the U.S.; still we need an alternative.
  • Interconnectedness continues to increase (MF Global shows how little progress we have made via Dodd Frank).
  • Question re banks being active in proprietary trading — the goal is good (reduce risk). but definitional troubles and not a significant source of the crisis; will impede liquidity.
  • A clear regulatory line provides good incentive to move and remain right up to it.
  • Issue: unintended consequences of Fed balance sheet expansion: inflation (issue is will and knowledge to deal with risks); political pressure may undermine decision-making; moral hazard a concern and an issue, but are we willing to bear the cost of non-action.
  • In crisis, the Fed will generally want to increase demand for risky assets; without a reasonable growth path, it’s tough to get people to take such risks.
  • Can the Fed be more proactive? Dodd Frank expands the mandate, but puts the Fed into the “political crosshairs” (and the Fed isn’t elected — Greenspan criticized for hurting the market by claiming “irrational exuberance”).
  • Dodd Frank says the Fed should be looking for ways to help, but at risk to criticism for exceeding its mandate.
  • Kroszner doesn’t think the Volcker Rule is likely to help (see above); people naturally look to get around any imposed regulation.
  • Europe seems to be rejecting austerity (without it really being tried) and Krugman making similar arguments here — Kroszner would like emphasis on what the money is spent on as different investment have different “rates of return” and get money into people’s pockets more efficiently (not many projects were really “shovel ready”); we shouldn’t just spend money to spend money.
  • “We don’t want to end up looking like Spain or Italy in 5-10 years.”