John B Taylor

Here is a quick overview of that overview: I started off by reviewing the empirical evidence on the role of “monetary policy in causing, in bringing about, the financial crisis…because that [interest] rate was so low, with excess risk taking to get a higher rate, excesses that spread to the housing market. The government, if necessary, will bail out these banks, because surely they wouldn’t cause a crater on the economy.’ ” While he argues that more could still be done, including reforming the bankruptcy law, he also notes that “Since then, things have changed. The answer is, risky investments need to be financed like the tech stocks, with investors’ money, where if it’s a risky adventure that loses value, if your statement goes down in price and you can’t run and say, ‘Give me back my money now,’ In sum, while there was by no means full agreement, the series brought attention in different ways to the central unifying fact that many economic policy issues still need to be addressed–from accountable top-level leadership to underlying legislative changes–if we are to prevent crises and keep the economy growing  smoothly in the future.

Yesterday the Senate Judiciary Committee held an important hearing entitled “Big Bank Bankruptcy: 10 Years Originally scheduled for October, but postponed because of the debate over the Kavanaugh confirmation, the hearing concentrated on legislation that would create a new “Chapter 14” of the bankruptcy code under which large financial institutions could go into bankruptcy without spreading the crisis to the rest of the financial system. In any case, there is now no serious obstacle to passing Chapter 14 legislation, and while national attention on yesterday’s hearing was nowhere near that on the Kavanaugh hearings, the issue is no less important. As Emily Kapur shows in a counterfactual, having a Chapter 14 reform of the bankruptcy code could prevent the catastrophic meltdown experienced 10 years ago which devastated many people’s lives and left wreckage which we are still clearing up after ten years.

It was organized by the Group of Thirty, led by Jacob Frenkel and Tharman Shanmugaratnam, and focused on “Sustaining an Open and Stable Global Order,” a broad topic, within which I focused on the global monetary and financial system in the following way: A long-held view of mine—based on solid economic theory and much empirical evidence—is that a global monetary and financial system conducive to a stable global order has three attributes: (1) open capital markets, (2) flexible exchange rates between countries or blocs and (3) a predictable and transparent, or rules-based, monetary policy. We need an international policy framework in which each central bank follows its own rules-based monetary policy, and in doing so contributes to a global rules-based system. Also in February of last year, Stanley Fischer gave a talk with a similar message, comparing actual policy with monetary rules and explaining how rules-based analyses feed into FOMC discussions to arrive at policy decisions. There are risks, of course, but an international policy framework will help if it is based on those three attributes: Rules-based monetary policy at each central bank, flexible exchange rates between countries or blocs, and open capital markets.

Today is the first day of the fall quarter at Stanford, and I begin teaching Economics 1, the introductory economics course, and the course after which this blog is named. On the first day, I of course focus on the central idea that economics is about choices people make when faced with scarcity and the interaction between people when they make these choices. Mark Tendall on how to run firms & interact with people in markets, Caroline Hoxby on economics of education & income inequality, Pascaline Dupas on how to bank the unbanked in Africa, and Chad Jones on how to raise economic growth & reduce global poverty. As I wrote earlier, “One must know about supply and demand for housing (micro), interest rates that may have been too low for too long (macro), moral hazard (micro), a stimulus package (macro) aimed at such things as health care (micro), a new type of monetary policy (macro) that focuses on specific sectors (micro), debates about the size of the multiplier (macro), excessive risk taking (micro), a great recession (macro), and so on.