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e21 Presents the Shadow Open Market Committee Symposium, October 12, 2010

e21 | 10/11/2010

e21 Presents…

the SHADOW OPEN MARKET COMMITTEE (SOMC) symposium:
Addressing Global Imbalances
with keynote speaker Axel Weber,
President of Deutsche Bundesbank
and Member of the Governing Council of the ECB

Position papers addressing global monetary and fiscal policy and banking regulations will be presented by SOMC members Michael Bordo, Charles Calomiris, Gregory Hess, Marvin Goodfriend, Mickey Levy and Bennett McCallum. Audience participation will be encouraged. Read about the event and RSVP via Eventbrite.

Excerpts from Position Papers

Guidelines for Global Economic Policymaking
by Gregory Hess, Claremont McKenna College
Economic policy is at a crossroads. Extraordinary actions were taken in extraordinary times. The worst feared outcomes have been avoided. While we have not yet won the war and we are not yet ready to declare “mission accomplished,” policymakers must be prepared to make sure that we don’t lose the peace. Indeed, laying the groundwork for winning the peace is the most crucial public policy issue for successfully bringing to a close the Great Recession.

Managing Monetary Policy at the Zero Interest Rate Bound
by Marvin Goodfriend, Carnegie Mellon University and National Bureau of Economic Research
The Federal Reserve’s near zero interest rate policy and $2 trillion dollar balance sheet have done much to stabilize economic and financial conditions in the United States. Yet the recovery from the Great Recession is slow. Net private job creation remains too low to absorb the secular growth in the labor force, let alone what is needed to return to work those who lost their jobs in the Great Recession. Measures of underlying inflation have trended lower in recent quarters. Ongoing disinflation and the likelihood that labor markets will remain weak for some time suggest that inflation could fall further. The risk is that inflation expectations are dragged down, raising real interest rates and tightening interest rate policy. With five year market-based inflation expectations running near 1 ½ %, deflation does not yet present a clear and present danger.

Targets for Monetary Policy: Inflation, Exchange Rates, and Others
by Bennett McCallum, Carnegie Mellon University
It is well known that most leading central banks have been, over much of the past 15-20 years, conducting monetary policy according to some variant of inflation targeting, implying that maintenance of a low and stable overall inflation rate is (in principle) the predominate objective. Prior to the financial crisis of 2008, this approach was much favored by academic monetary economists, as well as central bank officials and economists. The intensity of the crisis and our continuing slow pace of recovery have served, however, to diminish support for inflation targeting (IT). Quite recently, as a possibly related matter, there has been an explosion of news items concerning the management of exchange rates, those of China and Japan being especially prominent, and with concern raised by the possibility of widespread trade wars of the “beggar thy neighbor” type, somewhat like those that contributed greatly to the disastrous severity of the Great Depression of the 1930s.

A Three-Part Program for Housing Finance Reform
by Charles Calomiris, Columbia University
During the 1990s and 2000s leverage tolerances on US government-guaranteed mortgages rose steadily and dramatically at FHA, Fannie Mae and Freddie Mac. The average loan-to-value (LTV) ratio of FHA mortgages rose to 96 per cent, and a third of Fannie and Freddie’s purchases leading up to their insolvencies had LTVs of greater than 95 per cent.

Appropriate Roles of Monetary and Fiscal Policies
by Mickey Levy, Bank of America
The financial crisis and recession are over. Global economies are rebounding at a healthy albeit uneven pace. The US is recovering slowly. Inflation is low in the US and Europe, and the probability of deflation is low, while Japan continues to struggle with mild but persistent deflation. Inflation pressures are mounting in fast-growing emerging nations.

Does the Euro Need a Fiscal Union?
by Michael Bordo, Rutgers University
The creation of the euro in 1999 was a bold experiment and now runs the risk of failure. Creating a multinational monetary union with a single central bank and without a fiscal union has a lot to do with the present predicament of the eurozone. The lessons from the history of successful national monetary unions should be heeded (Bordo and Jonung 2000). Federal nations like the United States, Canada, Australia, Germany and Switzerland are examples of monetary unions combined with fiscal unions that have been successful for long periods. However not all monetary unions with fiscal unions have been successful. Two obvious cases of failure are Argentina and Brazil (until quite recently) (Bordo, Jonung and Markiewicz 2010).

Beyond Basel and the Dodd-Frank Bill
by Charles Calomiris, Columbia University
Recently, the U.S. government passed a major financial regulatory overhaul known as the Dodd- Frank bill. Soon thereafter, the Basel Committee revised its capital standards to boost minimum tier one equity requirements for banks over time.

The stated purpose of the US's Dodd-Frank financial regulatory reform bill, and the Basel reforms, was to fix the problems that came to light during the recent financial crisis. Do these reforms address those problems? Three factors were particularly important in contributing to the subprime financial crisis.



SOMC Falll 2010 Symposium Agenda -


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