He is an interesting gentleman. He is an Atlanta native and came from a very modest background. He began working at the Fed in the 1960s without a college degree but with some knowledge of computers. The Fed sent him to get a management degree. He also received a Harvard M.B.A. eventually. He ended up with responsibility for the "operations" of the system--check clearing and electronic payments.
I am especially interested in the development of electronics payments. Too bad he didn't discuss that. Instead, he gave a presentation about monetary policy.
He explained that he is there when the Board of Governors and the Federal Reserve Bank Presidents play "Hollywood Squares," that is, have video conferences where they plan out the direction of the U.S. economy. He is very impressed with "Ben" and "Tim." He was especially proud of the leadership they showed in bailing out AIG and protecting the U.S. from another Great Depression.
"He" believes that the economy began to recover last summer but that we can expect only a slow recovery. Eventually, the entrepreneurial spirit of the American people will win out, and things will improve, but high unemployment is likely for an extended period.
Most of the U.S. economy is the consumer, and because consumers have so much debt they will be slow to spend. Investment and employment, on the other hand, is being held back by the fears of entrepreneurs. "Is the recovery real?"
The Fed's policy instrument, the Federal Funds rate, was cut to approximately zero, and it didn't do any good. That is why they have had to use extraordinary measures. The have purchased more than a $1 trillion worth of mortgage backed securities to help the housing market. Housing prices have fallen a third and residential investment is very low.
At the Thursday evening presentations for the MBA students, I asked a policy question. Why is the Fed paying interest on reserve balances? He said that this was a tool "we" have always wanted. He explained that in order to control inflation, they can raise this rate and slow the economy.
Well, he paused and I rather rudely, insisted on a "follow up." I said, "so you are saying that you introduced this tool that is useful to slow down the economy, and you did it in the fall of 2008 when nominal expenditure was dropping like a stone?"
He responded, that the interest rate is only .25 percent. I said, "it was 2 percent to start with, and only after nominal expenditure collapsed in the fourth quarter did y'all drop it to .25 percent. Nominal expenditure is still 10 percent below trend. Why are you using this tool whose purpose is to slow the economy now? Sure, .25 percent isn't much, but zero is where it was before." He responded that polling of businessmen shows that interest rates are the number 7 concern about what is holding them back from expansion. The number one concern is a lack of sales. Well, it was time to go, and heatedly debating our guest is hardly the Charleston way. (It seemed to me that the MBA students were rather shocked and appalled.) My thought was, of course, the problem is that sales are low. I was torn between responding that if one firm borrowers and spends that creates sales for another firm, or else, jumping up and saying, "forget interest rates, it is money that counts, not credit." Well, I would get a second crack the next day.
The next day he spoke to cadets. It was timed so that I could bring my macro principles section, but two or three other professors sent students to the auditorium. He gave the same presentation, and I spent the entire time thinking about what do I ask him this time. "Why not nominal expenditure targeting?" was where I was leaning.
Of course, when the question period came, I had to let the students ask questions first. Then, he says something like, "no more questions, are you ready to go?" And with, dismissal being in the cards, no cadet would think of asking a question. So, my turn. Well, I just asked him to describe his career path. (Yes, I can be the good teacher sometime.) And I am glad I did. It was interesting.
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