Policy speeches and testimony from my Fed days
Here are several speeches I gave on central bank policy issues while President of the Federal Reserve Bank of Richmond, along with Congressional testimony from that time. I have omitted talks focused on the economic outlook. The links take you to pages on the website of the Federal Reserve Bank of Richmond, where you will find the speech in HTML and PDF formats, plus, when available, audio and video recordings. Also included below is a link to the letter that I wrote to the members of the Federal Open Market Committee in December 2007 explaining my opposition to the Term Auction Facility. The statements I issued after my FOMC dissents are available on the FRB St. Louis FRASER website here.
I should emphasize that in drafting these I benefited greatly from interactions with an array of excellent colleagues at the Richmond Fed. Those specifically involved in preparing each speech are cited in an early footnote in each, but they all deserve special mention here as well: John Weinberg, Jessie Romero, Kartik Athreya, John Walter, Patricia Wescott, Ned Prescott, Huberto Ennis, Roy Webb, Aaron Steelman, and Jennifer Zara. I am very grateful for their assistance. As with all my speeches while I was at the Fed, the views expressed were my own, and not the views of my colleagues in the Federal Reserve System.
From Country Banks to SIFIs: The 100-year Quest for Financial Stability
May 26, 2015
Louisiana State University Graduate School of Banking, Baton Rouge, La.
Link to speech on Richmond Fed website
The federal financial safety net covers more than 60 percent of the U.S. financial system’s liabilities. Regulation alone is unlikely to contain the resulting moral hazard. The path to restoring stability is through resolution planning for large financial institutions accompanied by limits on the power of the government to intervene to rescue investors.
Committing to Financial Stability
Nov. 5, 2014
George Washington University Center for Law, Economics and Finance, Washington, D.C.
Link to speech on Richmond Fed website
“Too big to fail” results from two mutually reinforcing conditions: Investors feel protected by an implicit commitment of government support, and policymakers feel compelled to provide that support to avoid a disruptive adjustment of expectations. The origins of too big to fail go back to critical choices made early in the 20th century and a series of rescues by the Federal Reserve and the Federal Deposit Insurance Corporation starting in the 1970s. The Orderly Liquidation Authority created by the Dodd-Frank Act retains many of the flaws of ad-hoc pre-crisis practices and does little to improve creditors’ incentives to monitor risk-taking. A better strategy for ending too big to fail is the provision in the Dodd-Frank Act requiring large financial firms to prepare “living wills” detailing how they could be resolved under the Bankruptcy Code. Resolution planning is difficult work, but living wills must be credible in order for policymakers to commit to using them rather than relying on government backstops.
Rethinking the Unthinkable: Bankruptcy for Large Financial Institutions
Oct. 10, 2014
National Conference of Bankruptcy Judges Annual Meeting, Chicago, Ill.
Link to speech on Richmond Fed website
[Similar to “Committing to Financial Stability”]
The Fed as Lender of Last Resort: Comments on "Rules for a Lender of Last Resort" by Michael Bordo
May 30, 2014
Hoover Institution, Stanford University, Stanford, Calif.
Link to speech on Richmond Fed website
Published as “Fed Credit Policy: What is a Lender of Last Resort?” Journal of Economic Dynamics and Control 49 (December 2014), 135-138.
Version published in the Journal of Economic Dynamics and Control (paywall)
Clarity about the distinction between monetary policy and credit policy is crucial for understanding the role of a central bank as “Lender of Last Resort.” Arguably, that phrase historically has referred to monetary and not credit policy, but it has been invoked to justify instances of sterilized lending (that is, pure credit policy) to rescue investors in large financial institutions since the 1970s. Equally critical is the distinction between an ex post perspective, focused on a given instance of financial distress, and an ex ante perspective, focused on how financial market participants will structure their affairs given their anticipation of likely central bank intervention. Moving away from interventionist tendencies that have arguably induced financial instability would be aided by rigorous implementation of the “living wills” provision of the Dodd-Frank Act.
Economics After the Crisis: Models, Markets, and Implications for Policy
Feb. 21, 2014
Center for Advanced Study in Economic Efficiency, Arizona State University, Tempe, Ariz.
Link to speech on Richmond Fed website
Economic models containing frictions impeding financial arrangements were often invoked in 2007 and 2008 to justify various credit market interventions by the Federal Reserve, but interventions were also justified by appeal to non-economic terms such as “logjams,” “dysfunction” and “distress.” For example, moves were made in August 2007 to loosen terms on Fed discount window lending to banks and in December 2007 the Fed introduced the Term Auction Facility. Both presumed that markets were suffering from problems for which increased Federal Reserve credit was the solution, a presumption that was open to serious question; there were widespread reports of funds “on the sidelines” awaiting more attractive asset prices and banks were borrowing large sums from the Federal Home Loan Banks. There was little interest in whether observed markets were a good match for particular friction-based models or a deeper inquiry into rationales for Fed intervention. Similarly, there was little discussion about the long-term consequences of the Fed’s response, or the extent to which observed fragility was inherent in financial markets or induced by the history of official rescues.
The Path to Financial Stability
Feb. 11, 2014
Stanford Institute for Economic Policy Research at Stanford University, Stanford, Calif.
Link to speech on Richmond Fed website
[Similar to “Economics After the Crisis.”]
Testimony on Bankruptcy and Financial Institution Insolvency
Dec. 3, 2013
Subcommittee on Regulatory Reform, Commercial and Antitrust Law, U.S. House of Representatives Committee on the Judiciary, Washington, D.C.
Link to speech on Richmond Fed website
Why robust plans for resolving failed large financial institutions without government support would be preferable to institutionalizing the capacity to provide public sector rescues for financial firm creditors outside of bankruptcy.
Toward Orderly Resolution
Oct. 18, 2013
Federal Reserve 2013 Resolution Conference, Mayflower Renaissance Hotel, Washington, D.C.
Link to speech on Richmond Fed website
[Similar to Dec. 3, 2013 testimony.]
A Look Back at the History of the Federal Reserve
Aug. 29, 2013
Christopher Newport University, Newport News, Va.
Link to speech on Richmond Fed website
On the occasion of the Federal Reserve’s centennial, many controversies surrounding the Fed can be better understood by going back to its founding in 1913 and considering why it was founded and structured the way it was. The founders wrestled with questions about the political independence of the Fed and what assets should back the money it issued. While Federal Reserve operations and policy frameworks have evolved over the years, the tensions inherent in these questions remain.
Testimony on the Issue of 'Too Big to Fail'
June 26, 2013
Committee on Financial Services, U.S. House of Representatives, Washington, D.C.
Link to speech on Richmond Fed website
The problem known as “too big to fail” consists of two mutually-reinforcing expectations. The first is the belief among creditors of large financial institutions that these firms are protected by an implicit government guarantee against failure — making creditors less attentive to managing risks. The second is the belief among policymakers that certain financial firms are in fact “too big to fail” because their failure would be too disruptive to financial markets and economic activity. This belief leads policymakers to intervene in ways that protect creditors, strengthening creditors’ belief in an implicit guarantee. Thus, the interventions may well create greater instability by encouraging riskier market behaviors. The Dodd-Frank Act does not eliminate “too big to fail.” The Act’s Orderly Resolution Authority allows the discretionary use of public funds in winding-down distressed institutions and gives the FDIC the ability to rescue their creditors. The existence of this discretion to use public funds, in turn, seems likely to perpetuate the belief in implicit guarantees. The Act does offer a path toward a more stable financial system: the so-called “living will” process which requires financial institutions to plan how they would be resolved under the Bankruptcy Code in an orderly manner and without public funds if they fall into distress. The resolution plans, which are subject to Federal Reserve and FDIC approval, will enable regulators to make more credible commitments to withholding assistance to failing firms.
Ending 'Too Big to Fail' Is Going to Be Hard Work
May 9, 2013
Council on Foreign Relations, New York, N.Y.
Link to speech on Richmond Fed website
Similar to June 26, 02013 testimony.]
Economics and the Federal Reserve After the Crisis
Feb. 12, 2013
Franklin & Marshall College, Lancaster, Pa.
Link to speech on Richmond Fed website
One broad insight I took away from my alma mater was that a critical influence on the choices made by policymakers was the theory they brought to the table — their conceptual understanding of the fundamental forces at work in the world they were dealing with—and that policy makers often have several plausible alternative theories available to them. Recently released transcripts of meetings of the Federal Open Market Committee in 2007 reveal two broad alternative theories of financial market instability. One views financial market contracts and institutions as inherently unstable and government support as important to improving outcomes. An alternative emphasizes the incentive effects of government policy and views fragility as induced by expectations of central bank lending. The internal debate around the Fed’s response to financial market turmoil in August 2007 illustrates these alternative views.
Perspectives on Monetary and Credit Policy
Nov. 20, 2012
Shadow Open Market Committee Symposium, New York, N.Y.
Link to speech on Richmond Fed website
I discuss two dimensions of Federal Reserve policy in the wake of the financial crisis and Great Recession: first, the effort to provide stimulus and policy guidance at the zero bound; and second, the expansion of the scope of Fed policy beyond monetary policy to a broader engagement in credit policy.
A Program for Financial Stability
March 29, 2012
The Banking Institute, UNC School of Law, Charlotte, N.C.
Link to speech on Richmond Fed website
When a government guarantee creates an opportunity to profit from taking risks that are partially borne by taxpayers, competitive markets will rush toward that opportunity and drain resources from other sectors that could put them to better use. The market discipline that is lost when insured creditors do not feel at risk must be replaced by official regulation and supervision. However, we shouldn’t rely too heavily on our ability to offset the effects of explicit and implicit safety net guarantees through more strenuous regulation. Instead, there are several ways to use market discipline to constrain the risk-taking of large financial institutions and improve the stability of financial markets: (1) re-examine bankruptcy law and look for ways to improve its effectiveness for stressed financial firms and reassure policy authorities; (2) rigorously implement the Dodd-Frank provisions that require credible resolution plans (living wills) for large financial firms; (3) further restrict the means available to use public funds to rescue private creditors, which would improve the credibility of a commitment to greater market discipline; and (4) remove legal or regulatory impediments that prevent financial intermediaries from reducing their vulnerability to financial shocks.
Understanding the Interventionist Impulse of the Modern Central Bank
Nov. 16, 2011
The CATO Institute 29th Annual Monetary Conference, Washington, D.C.
Link to speech on Richmond Fed website
Published in The Cato Journal 32:2 (March 2012), 247-53; reprinted in Monetary Alternatives:
Rethinking Government Fiat Money edited by James A. Dorn, Washington D.C.: Cato Institute, (2017), 43-49.
Version published in the Cato Journal
The Fed’s response to the financial crisis was not purely monetary, but involved substantial efforts at credit allocation—that is, acquiring private sector obligations rather than U.S. Treasuries. Why do modern central banks display an increasing propensity to intervene in private credit markets? A key element in central banks’ relative success at sustaining low inflation over the last few decades was their independent ability to control the amount of monetary liabilities they supply to the public. As a by-product, many central banks retain the ability to independently control the composition of their assets as well. This creates an inevitable tension due to the desire of the executive and legislative branches to provide governmental assistance to particular credit market participants in times of financial market stress. At such times, the power of a central bank to intervene in credit markets and thus undertake fiscal policy essentially outside the safeguards of the constitutional process for appropriations makes it an inviting target for other government officials. Central bank lending is often the path of least resistance in a financial crisis. The resulting political entanglements, as we have seen, create risks for the independence of monetary policy.
Economics After the Crisis: Reflections on a Return to Madison
October 3, 2011
University of Wisconsin, Madison, Wis.
Link to speech on Richmond Fed website
There is a popular narrative of late according to which the financial crisis and Great Contraction have eroded the credibility of economics. One popular criticism is that economists did not foresee or predict the financial crisis that began in 2007 and culminated in the dramatic events in late 2008. In one sense, this charge is quite true. But that’s like criticizing seismologists for failing to predict the time and place of the earthquake that recently struck in Mineral, Va., just 40 miles northwest of my Richmond office. As this analogy suggests, I think that criticism is unfair. Just as seismology provides a rich understanding of the forces that led to the quake, the economics literature provides a rich understanding of the forces at work in the recent financial crisis.
Statement before the Oversight and Investigations Subcommittee, Committee on Financial Services
March 30, 2011
Committee on Financial Services, U.S. House of Representatives, Washington, D.C.
Link to statement on Richmond Fed website
The Dodd-Frank Act was a response to the most dramatic financial turmoil our country has experienced in generations. In my view, the crisis resulted largely from a mismatch between a regulatory structure designed for the explicit safety net (consisting mainly of deposit insurance) and the extent of moral hazard induced by a much broader implicit safety net. Given precedents dating back to Continental Illinois in the 1980's and beyond, market participants made inferences about what government protection might be forthcoming in future instances of financial distress—that is, which institutions were likely to be viewed by authorities as "too big to fail." This lack of clarity about the safety net grew in the decades leading up to the crisis—and came about because policymakers hoped that "constructive ambiguity" would dampen the markets' expectations of bailouts, but preserve their option to intervene if necessary. Other factors contributed to the crisis, but I believe the ambiguity of safety net policy was a major driver.
Reflections on Economics, Policy and the Financial Crisis
September 24, 2010
Kentucky Economics Association, Frankfort, KY
Link to speech on Richmond Fed website
Published in Journal of Applied Economics & Policy 30 (Spring 2011), 61-66.
Three economic forces — the potential fragility associated with maturity transformation, the moral hazard associated with government guarantees, and the time consistency dilemma associated with ambiguous implicit guarantees — are central to understanding the narrative of the financial crisis. Financial institutions that benefitted from implicit government guarantees — notably Fannie Mae, Freddie Mac, and several European banking institutions — fueled the demand for securities backed by risky subprime mortgages. The implicit support of these government-sponsored entities (GSEs) led them and their creditors to underweight tail risk which in turn distorted incentives for a broad range of participants in the distribution chain, from credit rating agencies to originators to loan brokers. The resulting oversupply of subprime mortgage lending contributed to over appreciation in home prices and overinvestment in new housing. Maturity transformation outside of traditional deposit banking made many financial firms vulnerable to runs when their exposure to unanticipated mortgage-related losses was suspected. Ambiguity about the extent and likelihood of safety net support meant that declining to rescue would cause investors to pull away from other similar financial firms. Policymakers faced agonizing choices between bad precedents that would weaken market discipline and the financial market fallout of rapidly realigning investor expectations regarding future government support.
The Regulatory Response to the Financial Crisis: An Early Assessment
May 26, 2010
The Institute for International Economic Policy and the International Monetary Fund Institute, Washington, D.C.
Link to speech on Richmond Fed website
The underlying premises that appear to have shaped policy response during this financial crisis imply that market discipline will provide an inadequate check on risk-taking; regulatory oversight therefore needs to control ex ante risk-taking. I am skeptical of the characterization of systemic risk as an externality that leads market participants to undervalue or ignore risks. I do think there is a fundamental deficiency in the way our financial markets have performed. But this externality is the product of government policy – namely, the provision of government protection to creditors through an ambiguous, implicit financial safety net. The widespread belief that some financial firms are too big or too “systemically important” to fail and that their creditors will benefit from government support increases those firms’ appetite for risk. In this setting, allowing a firm to fail creates contagion by forcing market participants to adjust their beliefs about the extent of future government protection. A compelling alternative premise, one that I personally believe is most likely to emerge as the consensus assessment among future scholars, is that the incentives created by the financial safety net were the chief cause of the financial crisis.
Real Regulatory Reform
March 1, 2010
Institute of International Bankers, Annual Washington Conference, Washington, D.C.
Link to speech on Richmond Fed website
[similar to “The Regulatory Response to the Financial Crisis: An Early Assessment”]
Choices in Financial Regulation
September 14, 2009
Charlotte Risk Management Association, Charlotte, N.C.
Link to speech on Richmond Fed website
In 1993, my predecessor Al Broaddus gave a speech entitled "Choices in Banking Policy," in which he outlined the tradeoffs between reliance on market forces to align banks' incentives and reliance on regulation and supervision to constrain banks' risk taking. Broaddus's speech came just a few years after another major U.S. financial crisis, and though the environment was very different, the tradeoffs he identified are just as relevant today as we consider reforming our regulatory structure. The more we rely on government guarantees of private-sector financial liabilities as our main defense against financial market disruption, the more we must regulate private risk management to offset the adverse incentive effects of that safety net. But by the same token, meaningful market discipline requires a credible government commitment to not shield private counterparties of large financial intermediaries from credit losses.
The Role of the Safety Net in the Financial Crisis
May 9, 2009
The Asian Banker Summit 2009, Beijing, China
Link to speech on Richmond Fed website
As the tumultuous events unfolded in financial markets over the last two years, the U.S. Treasury, the Federal Reserve and the other federal banking agencies responded with an array of measures to attempt to limit the damage to the financial system and the broader economy. These measures included lending and asset purchases by the Federal Reserve, as well as capital infusions, debt guarantees and expanded deposit insurance from the government. The use of the financial safety net in the last two years has exceeded any historical precedent in the United States and amounts to a dramatic expansion of the depth and breadth of explicit and perceived government protection from financial risk. Looking back on the crisis thus far, I believe that a strong case can be made that the financial safety net, especially those parts that were more implicit and perceived than explicit and written into the laws, played a significant role in the accumulation of risks that ultimately led to the turmoil we are still experiencing. While deployment of the financial safety net is often viewed as an essential response to the financial crisis, I believe we need to give serious thought to the extent to which the safety net was actually a significant cause of the crisis.
Government Lending and Monetary Policy
March 2, 2009
National Association for Business Economics, 2009 Washington Economic Policy Conference, Alexandria, Va.
Link to speech on Richmond Fed website
Published in Business Economics 44 (July 2009), 136-42.
Version published in Business Economics (paywall)
Government programs that target particular credit market sectors alter the allocation of credit across markets. The monetary base can be expanded in a way that is neutral across sectors, for example, by buying only U.S. Treasury securities, thus having little effect on the relative credit spreads across sectors. This is one reason for my dissent at the last FOMC meeting against Fed purchases of mortgage-backed securities. Government lending, whether by the Fed or the Treasury, represents fiscal policy. The presumption ought to be that such lending is subject to the checks and balances of the appropriations process laid out in the Constitution. A “credit accord” that assigns to the Treasury the responsibility for all but very short-term lending to solvent institutions would help limit the financial safety net and reduce financial fragility.
What Lessons Can We Learn From the Boom and Turmoil?
November 19, 2008
Cato Institute 26th Annual Monetary Conference, Washington, D.C.
Link to speech on Richmond Fed website
Published in The Cato Journal 29:1 (Winter 2009), 53-63.
Version published in the Cato Journal
Financial market participants have faced uncertainty about aggregate losses on mortgage lending, uncertainty about where losses will turn up, and uncertainty about where and how the public sector will intervene. Boundaries around such interventions would help markets cope. Note that Bagehot’s Dictum was about monetary policy—the size of the central bank’s balance sheet, that is—not credit policy, which alters the composition of the central bank’s balance sheet by swapping government securities for loans to private entities. An d note that the onset of the Great Depression was a failure of Fed monetary policy, not a failure of Fed credit policy. The critical policy question of our time is where to establish the boundaries around the public sector safety net provided to financial market participants, now that the old boundaries are gone. Doing so will be a difficult task, but it will be essential to that task for central banks to, at times, disappoint expectations and refuse to lend, even at the cost of short-run financial market disruptions.
Financial Stability and Central Banks
June 5, 2008
Distinguished Speakers Seminar European Economics and Financial Centre, London, England
Link to speech on Richmond Fed website
Published as “The Role of Central Banks in Credit Markets,” European Economics & Financial Centre Economic and Financial Review 15 (Autumn 2008) 103-18.
There are models in which runs are self-fulfilling prophesies, are costly, and could be avoided, perhaps through central bank intervention. Other runs arise from fundamental developments, and for these, central bank intervention interferes with market discipline and distorts market prices. My reading of recent financial market events suggests to me that fundamentals have been at work, and that given the large shortfall in mortgage returns confronting the financial sector, recent strains should not be surprising. It is almost always impossible to know precisely how much of a market disruption is justified by any observed shift in fundamentals, but with either type of run central bank support can weaken the incentive of financial intermediaries to structure their contractual arrangements to protect against run-like behavior. In the short-term, governments and central banks may be able to alleviate financial market strains, but such intervention may affect financial intermediaries' choices in a way that makes instances of financial distress more likely. So policymakers face an excruciating dilemma when the potential and more immediate cost of inaction appears greater than the longer term costs of lending aggressively.
How Should Regulators Respond to Financial Innovation?
December 1, 2006
The Philadelphia Fed Policy Forum, Philadelphia, Pa.
Link to speech on Richmond Fed website
There is a strong case that financial innovation in the U.S. has brought real, tangible benefits for macroeconomic performance and growth, and financial innovation can bring similar benefits to economies at different stages in the growth process. Regulators serve their mission best, not by second-guessing observed risk allocations, but by assuring that individual institutions with access to a public sector safety net conduct their businesses using risk measurement and management practices that keep pace with the ever-changing market.
The Evolution of Consumer Finance
May 18, 2006
Conference of State Bank Supervisors, Norfolk, Va.
Link to speech on Richmond Fed website
The broad expansion of consumer credit has been driven by advances in information and communication technologies, which have reduced the cost of obtaining, evaluating and monitoring consumer account information. These developments have also had important consequences for the structure of retail lending markets and for the activities of community banks. On the whole, technological advances in lending based on quantitative underwriting seem to have favored larger institutions. Consequently, these changes have tended to move community banks toward lending based on less quantitative and more judgmental underwriting techniques where they appear to have a comparative advantage — exploiting the fact that quantitative measures of creditworthiness will always be to some extent incomplete, and that other information available to local lenders can be difficult to commoditize. Thus, loans where it’s hard to quantify risk assessment, as in “character lending” and commercial real estate, have become increasingly important to community banks.
Central Bank Credit in the Theory of Money and Payments
March 29, 2006
Federal Reserve Bank of New York, The Economics of Payments II Conference, New York, NY
Link to speech on Richmond Fed website
Payments system policy — specifically, the terms on which daylight credit is offered — ought to be analyzed within the broader context of the array of central bank policies surrounding the provision of deposit accounts. This viewpoint naturally connects daylight credit policy to the lender of last resort function as well as the operational mechanics of setting the overnight interbank interest rate. This viewpoint leads quite naturally to a modest proposal for improving payments system policy and the operations of monetary policy: the Fed would automatically “sweep” excess reserve account balances of banks into reverse repurchases agreements, selling banks U.S. Treasury securities for excess reserves. One side benefit of such a sweeps service is that monetary policy operations could in principle be substantially simplified by supplying, via open market purchases, more reserves than the banking system wishes to hold.
Payment Economics and the Role of the Central Banks
May 20, 2005
Bank of England Payments Conference, London, England
Link to speech on Richmond Fed website
Published in The Future of Payment Systems edited by Andrew G. Haldane, Stephen Millard and Victoria Saporta, London, U.K.: Routledge, (2008) 68-72.
My description of central bank payment activities implies a minimal service provision role – basically just offering clearing accounts that are used to settle interbank obligations. And, this role is a byproduct of having de facto monopolized interbank settlement. The rationale for more extensive central bank service provision depends on the extent to which there are economies of scope between additional activities and the basic clearing account function. My sense, however, is that there are far less by way of economies of scope than would be needed to justify, on economic efficiency grounds, the current scale of Federal Reserve service provision, particularly in clearing “retail” payments such as checks and ACH. In fact, the evidence suggests that the Fed’s role in clearing retail payments rests on altering the allocation of clearing costs that would result from purely private provision.
Inflation Targeting and the Conduct of Monetary Policy
March 1, 2005
Stanley S. Watts Lectureship, University of Richmond, Richmond, VA
Link to speech on Richmond Fed website
The minutes from the latest meeting [February 1-2, 2005] of the Federal Open Market Committee cite three benefits of an explicit price-stability objective: (1) its usefulness as an anchor for long-term inflation expectations, (2) its power to enhance the clarity of Committee deliberations, and (3) its usefulness as a communication tool. I strongly support each of these reasons in favor of an explicit long-run numerical objective for inflation. In terms of the Price Index for Personal Consumption Expenditures I would want a 1.5 percent midpoint for the target range. I favor a range around our target with a width of 1 percentage point, rather than a simple point target. Our announced inflation objective is meant to guide monetary policy over the long run and it should not prevent the Fed from taking the kinds of policy actions it takes today to stabilize employment and output in the short run.
Letter to Federal Reserve Board of Governors and Conference of Presidents regarding proposed Term Auction Facility
December 5, 2007
Link to Federal Reserve Bank of Richmond News Release, January 18, 2013
This was originally classified “FR Restricted Controlled” but was approved for release when the transcripts of the 2007 FOMC meetings were released in January 2013. The letter is referred to in the transcript of the December 6, 2007 videoconference call: see pp. 28-29.