Transcription
Uh Kevin, I want to turn to you. Um, there's a lot of, there has been a lot of talk over the years that, well, you know, why should we not have a a digital dollar, right? Should the central bank issue a digital currency to circulate alongside, uh, the, you know, the the dollars that we hold in our wallets? And people have advanced a variety of arguments why this would be democratizing and so on. Other countries, China most notably, have done that. What's your view? Should the Federal Reserve be get into the game of issuing a a digital dollar? And if not, what is the Fed's appropriate role in this space?
>> So, in a word, no. Um, in several words, first, uh, it's an honor to be here. Uh, I always wondered what the shining city on the hill looked like, and it's pretty cool to see it once for from for my own eyes. For French, this is a little old home week because he served at the time that the president was in office. For most of us who came into government, guys like Farer and me and some in the crowd, you know, Reagan was he was our hero when we were kids. And I would say, and for many of us, we wouldn't be here. We wouldn't be in public policy without his example. Right.
>> I'll say one other thing that I promise I'll come back with a longer answer than no to, uh, to Greg's question. Um, this this is our Reagan moment. It was 44 years ago at a time like this. President's in office. The media's giving him hell. He's shaking up the establishment. He inherits a mess. People don't like what he's doing. There's some gauzy history about how easy it was. French can speak to it better than I. It wasn't easy. And this is that moment. This is that hinge point in history that we see every couple of generations. Doesn't make it going to be easy. Doesn't mean that every decision is obvious, but it's super exciting. So, that's my thank you to the to the Reagan folks. On on, um, Greg's question. Um, the idea of a central bank digital currency works well for the CCP who want a five-year plan to control their people. Uh, I think it's ahistorical and frankly anti-American. Uh, the central bank has plenty of responsibilities in the United States. I, for one, would like them to be a narrowly focused central bank making sure that we have stable prices as a condition precedent to full employment, not wandering into other areas. Um, and there was some impetus for the central bank here and in some other western countries to establish this. I can think of few things more dangerous than if 300 million Americans had the equivalent of a wallet at the Federal Reserve. Uh, the next crisis happens, Congress acts slowly. Lobbyists come to Washington and a bunch of politicians say, "Well, we really can't fill those wallets. Why don't you guys just do it?" Uh, this is, uh, against the grain of our constitutional republic. I would have to think that Ronald Reagan himself would be outraged by it. And the privacy that in America we take seriously would then be called into question with the central bank policing all these accounts. Another problem, of course, with it is in the US, the strength of the economy is our private sector. We don't need the central bank crowding into that anymore. I'll just say one final point. I think Farer and Chairman Hill did the right way of describing this cryptocurrency in Washington and much of the country. Sounds very scary. Whoever named it that, I think, deserves demerits. C- crypto somehow means secret and currency suggests it's money. Well, what a misnomer. It's software. The coolest need of software that every 16-year-old on the planet wants to do do all their work in. Software can be used for good things and bad things. I don't blame Excel, uh, if a spreadsheet is being used by a bunch of gangs, do I? Um, it's important, as French describes, that there be a clear regulatory framework so this software can find its way into the economy. And as a final point, I would say we're probably on the front end of the, uh, use cases that Greg asked about in the future, probably not that far from now, a year, year and a half from now, we're all going to have these devices in our pockets like we do, but they're going to be our agents and they're going to go off and check in on our flights and see what the traffic's like and make sure the Uber is here to get us without a single instruction by us. The only thing it doesn't right now have the capacity to do is actually verify that I am that person. That agent is my agent. Well, that use case is being made possible by the people sitting next to me. This technology was pioneered in the United States. Like AI, like much of the productivity boom that allowed the 80s and 90s to be there. I think we're on the cusp of another productivity boom, as long as our government doesn't do harm to it and so long as the central bank doesn't say, "Well, enough of this private sector, we'll do it for you."
>> Um, you've written that while the Fed should not be issuing a consumer currency, it should has a role to play in perhaps the issuance or management of a wholesale digital currency. Can you elaborate on that? How is that different?
>> Yeah, so it's radically different. Um, the banks do their business with the central bank. Uh, households and businesses do their business with the US commercial banking system and a bunch of what we call unregulated financial institutions. That's the two-tier system that is, I'd say, fits the American republic exceptionally well. But the Fed does have a lot of plumbing that we do in making sure that the conduct of monetary policy, those pipes work, that the infrastructure in the Treasury markets work. And that's what I think of as wholesale rails. Well, those wholesale rails that our government has been using were created, uh, in the last century, are not done instantaneously. Payments still take days, often weeks. They're not verifiable. They're subject to massive breakdowns. They're not secured. And we can't be perfectly certain exactly whether the counterparty is who we think it is. Well, that's where the new software comes in. I do think there is an important role for the Federal Reserve to help architect outline what the new architecture should look like and to allow the private sector to build a wholesale, uh, new infrastructure using the coolest new software. And it's not just for little gains of efficiency. If you believe what I believe, and I suspect my colleagues up here believe, which is we want the dollar to continue to be the world's reserve currency. I believe our economy will be worthy of that over the course of the next decade and two, and we need to have the best infrastructure. So this is the place where people feel most comfortable conducting their transactions, not just between the banking sector and the government, but that's the backbone then for the rest of the private sector.
Um, Kevin, let me come back to you because I want to like pick up on a point that you made in the earlier remarks and it's a point you've made often, including at your remarks for the, uh, at the International Monetary Fund a month or so ago, and you talked about essentially the the the Fed's, I was going to call it the mission creep, but in your view, it's more of like a mission race or a mission expansion is like this this vast multiplication of Fed responsibilities and and facilities and so forth is a problem. You know, you think, I think you've talked about a crowding out, uh, private sector activity, and you said you referred to the Fed's balance sheet as in some sense a proxy for the impimeter of the Federal Reserve on the private economy. It's around 7 trillion, a consequence of quantitative easing, a program that began when you were on the the board of governors. Do you believe that that, uh, the Federal Reserve, uh, through that mechanism specifically, but in general, is posing a serious financial freedom and stability risk to the economy? And what would what should be done about it? I mean, what do we do about that giant balance sheet? What should the Fed do?
>> Sure. So, um, when I joined the Fed in 2006, I remember calling my dad and telling him I was going to do that. And first thing he said is, "So, you couldn't get a job in the private sector, could you?" I I grew up in a small town. And the only thing he knew, he was a small town businessman, you know, reasonably successful. He said, "Um, oh, that's the thing that Greenspan runs." So he knew about that, um, until the global financial crisis in 2008, from the darkest days of that crisis where we went, as Chairman Volcker said, to the very edge of our powers to try to save the republic from a massive depression, and we got very aggressive, and in my view, rightfully so. The central bank was created in 1913 to respond to panics, much more so than to mess around with interest rates. So it was aggressive moves. But from that moment, really, until this day, the central bank has stayed on the front pages. Instead of going on the front pages when the crisis hits in '08 or the pandemic hits in 2020, the central bank has become the most important economic institution in the world every day for all seasons and all reasons. It wasn't that long ago that we would read about the central bank in an article Greg IP would write a couple of his jobs ago. Today, the Federal Reserve met every, as they do every six weeks, and they raise rates a quarter or cut them a quarter, and it wasn't in everyone's lives. The central bank has now decided, probably with the best of intentions, that they are going to play a more permanent role in the economy, in the business of banking, and I would also argue in the fiscal business of the country. I'll use an example of that to to tell the balance sheet story. Uh, in 2008, in the darkest days of the financial crisis, as people in this room will remember, the markets were down 60, 70%. The real economy was running away from us. If the US economy went down, the world was going to be in a bad place. So, we were willing to take some risks. And we decided after some major internal debate, we'd buy the bonds of our own government. Secretary Paulson was issuing bonds on Tuesday and Wednesday, and we'd buy them on Thursday and Friday. Um, but we said to ourselves, when this crisis is over, we're not going to do this stuff again. This is, this is, you know, this isn't what the most important economy in the world does. But we really never put that tool away. So the central bank's balance sheet today is an order of magnitude bigger than it was the day that I showed up. So part of the reason why Chairman Hill and his colleagues in the Congress have had to witness this massive surge in fiscal spending over the last five years, over the last 15, is your central bank was subsidizing the cost of it. We were showing up not just in crisis, but in times of relative peace and prosperity, and buying the bonds, hiding, camouflaging the full cost of spending. As we sit here today, or I, the statistic is, as of January, our federal government is spending 60% more money than the day before COVID, 5 years ago. I hardly remember that being a time of like an efficient, austere government, and we're spending 60% more, borrowing that money from people, some of whom don't like us, at prices we probably can't afford for projects we don't need, in a time that we're at full employment. The central bank has made that possible. Not from a bad place, but from a good place. And in some sense, they've taken on these powers. This bigger central bank balance sheet crowds out the fiscal authorities, elected leaders like Chairman Hill, Treasury secretaries, and governments, and has put them on the front pages. My view is we should be on the front pages when we're in real trouble. Otherwise, we should be back on page B12 of the newspaper. One final point, one of the consequences of this institutional drift into all sorts of business, climate policy, and everything else is the inflation that we've witnessed over the course of the last five years. Now, for most of us in the room, it hasn't been that big of a deal. We know it when we go to the grocery store, but we also own financial assets. Maybe we own some Bitcoin. Um, 52% of our fellow Americans own no financial assets. They don't have equity in their house. They don't have an account at Schwab. They don't have an account at Coinbase. They're living off their W2 income. And this surge in prices has destroyed them.
>> Yeah.
>> It's the most regressive tax any government could ever come up with. Imagine if we had had a central bank that had been deadly focused on that. I think we wouldn't have taken a divided country, made it more divided. When we have a big balance sheet, we're asking for the inflation that came. And as a final point, my own judgment is the story that I hear from many of my peers was the inflation, well, that's not really the central bank's fault. That's because of Putin and the pandemic nonsense. A change in prices happens in a market economy because of shocks in the world. Changes in prices happen every day. That's not what inflation is. Inflation is when that change in prices become embedded. It's second and third order effects, and that's what's been the biggest harm to the country. My recommendation is a smaller balance sheet, takes the Fed back to a a a more manageable size, more serious job, and interestingly, if you can have a smaller balance sheet, you can have lower interest rates. Back to you.
>> How much smaller?
>> So, um, when I joined, the Fed balance sheet was about $880 billion, included a bunch of foreign currencies. We do need some balance sheet to take, um, to do our underlying business, to help run the treasuries, to help be a good counterparty to the rest of the central banks in the world. The economy's obviously grown since then. I wouldn't want to put a precise number on it, but right now the Fed balance sheet is about $7 trillion. They are participating in almost every banking market, almost every day. The world has come to rely on the central bank's massive impremature. I would say it is trillions larger than it needs to be. We can't make this change overnight. But if markets knew that our objective was to get to a balance sheet that was as riskless as possible and as small as possible, and we would get there in due time and with a strategy, I think markets and market participants could well adjust to it. The central bank could then be a powerful central bank, but a more limited one, and I would argue wouldn't find its way in harm's way politically or economically.
I I have to ask you this, just I I will come to you because this is important too for for the work you're doing, but you brought up politically at the end. How important is it that the Fed be independent in monetary policy? You you've said operational independence, but does that mean, for example, that governors, including the chairman, uh, should be free from the risk of being fired for other than cause?
>> See Greg, start out so softly, we're talking about crypto, and then you see the the Fed beat reporter in him come out here at the end. Um, I believe in the operational independence and the conduct of monetary policy as a political economy matter. I think the economy is better off if the world perceives, markets perceive, members of Congress perceive, you got central banks that are calling it the best they see it. Being a central banker is not a prize for the perfect. These are hard jobs. Lots of uncertainty. The data is a mess. But the world's better off if they think they're doing their their level best to call balls and strikes. But the operational conduct of monetary policy doesn't mean that the Fed shouldn't be criticized. Central bankers should not be pampered princes. If Chairman Hill and his colleagues think that we're doing a terrible job at the central bank, they should be able to call it out. Same thing with the president. As a matter of fact, I'd rather the president call out his consternation with the central bank to the world than do what used to happen in generations past. I don't mean to be invoking President Reagan again, but being summoned to the Oval Office for a little quiet to-do about what you're doing and right. Central banks were created so that politicians would have someone to blame for this. None of this is new. I read breathlessly in the newspapers how mean these politicians are to the central bank. Well, grow up. Be tough. And here's the most important thing. What's the secret to central bank independence? Hitting its objectives, doing its job. Uh, imagine we had had stable prices in the last 5 years like we did for most of the 30 years before it. Well, there wouldn't really be much of a political fight to be had. Doing its job and having stable prices is the Fed's plot armor. It is how we can succeed and thrive. I call it plot armor. I learned this from Mark and Dreon, who's going to be our lunchtime guest. He introduced the top the the the expression to me. I'm a big James Bond fan. I watch all the movies. But James has plot armor. We know they're never going to get him because we want to watch the next movie. The Fed's plot armor is being good at its job. And so my own judgment is the failings in its job, not just in achieving stable prices, but wandering into things in which they have no business, like climate, suggest that the politics are happening somewhat closer to home. After 9/11, the American people demanded a what went wrong. After the 2008 financial crisis and all the harms that were done, the American people elected representatives said, "Well, we got to get to the bottom of this. How did this happen? Let's connect the dots." Somehow after the great inflation that served many of us well and did great harm to our fellow citizens, barely a peep. What are the fundamental reasons why this happened? Is it really because of Vladimir Putin and the pandemic, or is it something we could have controlled ourselves? It was a very quiet group. Uh, this group in the House of Representatives decided this deserves the same level of scrutiny. I think it's essential. I think it's important. I think it's it's not been done. And just to give another example, uh, after the '08 crisis, the DoddFrank Act was put in place because we were going to make sure we'd have fundamental reform of our banking supervision and regulation. That thing had been running for 15 years. All of our bank regulators said, "Great news. We've got a safe and sound banking system till February of 2023." Two relatively small banks, hardly ones that we thought were systemically significant, had a bit of a run. The regulators thought everything was just swell until they weren't. And we've never asked the question about, well, maybe all that DoddFrank legislation didn't work. Maybe our banking system is not safer and sounder. Maybe we've created less competition. And I think we got to get to the bottom of it. The more honest we are about what we're doing right and wrong, the more we can fix it. And if we don't fix these things, the 21st century will not be ours. It'll be some adversary of ours on the other side of the world.
uh, with Treasury market dislocation and foreign repatriation of bonds and dollars, what are the risks for Fed and Treasury now to keep market integrity, especially with swap FX structures and trades? Um, I don't know if you saw Jamie Diamond speaking earlier today, but he talked a lot about his concerns about the ability of a market that transacts in the trillions of dollars a day to maintain its integrity. So I'll put that question to you, but I might actually put it a bit more broader and just say what keeps you up at night? What, you know, you've lived through a horrible one 15 years ago, and you knows better than anybody that there's always something out there lurking. What, what are the extent risks to our financial system that we need to worry more about?
>> So, what keeps me up at night mostly are red eyes from here back to the East Coast. Um, otherwise, I sleep pretty well. Um, I've been out of government 12 or 13 years now. So most of the scars from the global financial crisis have have healed, until guys like Greg bring them up again, and, uh, guys like French threaten to drag me back into things. Um, so I'd say the biggest risks that the US have, um, are risks that no one's talking about, almost by definition. If financial markets and households or businesses are really focused on something, the amazing thing about the American spirit is in our own haphazard way, we deal with it. Um, I would just note a couple things. One is, we need to keep our eye on the ball for all of the significant risks that the US economy and the country is facing. I would rather have our cards than anyone else's in the world's, by far. Uh, George Schultz, who was my mentor at Stanford a million years ago and served under President Reagan. I remember working with him on a little project, uh, about something, and he interrupted me. He was a dear colleague of Mike Boskin's, who was a friend and mentor and another Hoover fellow. And what George would say is, the broad conduct of government policy doesn't have to be perfect. In fact, even in the heyday of the Reagan era, it never was. Government policy just can't be too destructive. And if we can achieve that, the US economy will be in great shape. The problem over the course of the last several years is government policy has been too destructive. Too destructive to banks, too destructive to individual liberty in the post-COVID era, too destructive of technology and innovation. If over the course of the next few years, we can just try to arrest most of that destruction, what we used to describe in economics as the micro foundations of macroeconomics. This has nothing to do with the brilliant conduct of monetary policy or fiscal policy. The micro foundations are what matter. And what is that a fancy word for? The culture of this country. The willingness to work hard, take a risk, have it fail, and try again. Everybody, no matter where you're from, there's no stigma associated with your station. You try to make it, and other people don't say, "Well, you're too big for your britches." This is not an American birthright, but it's why the US economy has chronically outperformed from 1946 until this very day. But if we do harm to those micro foundations, we decide we just want to try to hold on to what we've got. We let some of the things that are most important, like stable prices, eat at the conscience and the integrity of an opportunity society. Well, we're going to be no better off than a lot of these countries with whom we're trading with. That's why this moment is such an important moment. That's why getting policy right at this inflection point, like we haven't seen in 44 years, is huge. And if we do that, the 21st century will be our century. I'm not so worried about the other guys on the other side of the ocean. Um, they're not doing a lot to motivate their technology sector. They are not freeing their people to create and innovate. A lot of them want to come to the US where they can do their best work. If we can focus on what we do best and try to copy someone else's five-year plan, we're going to be just fine. So, while this might seem like a scary moment for a lot of us hanging around government in the private sector, this is the best opportunity we've had. And I have a parochial American view. If the US does well and can get through this inflection point as well as President Reagan did 44 years ago, our allies are going to love us like never before, and our adversaries will be scared of us. The essential thing is that we grow during this period. And if we do, that'll take care of a lot of the problems that are subjecting us and causing us to think that this is a period of malaise.