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The Big Four Takeaways on Monetary Policy

May 27, 2014 5 minute Read by The Bush Institute

Here are the major points from the Bush Institute conference last week on monetary policy. View videos from the sessions, including a conversation between Ben Bernanke, former Federal Reserve System chairman, and Joshua Bolten, former White House chief of staff for President George W. Bush.

Yes, the Fed matters

The Fed provides the scorecard. That’s how Mark Okada, co-founder and chief investment officer of Highland Capital Management, described the Fed’s work in setting interest rates. During a panel moderated by Al Hubbard, former director of President George W. Bush’s National Economic Council, Okada explained that the price of Treasury bills, which the Fed impacts through interest rates, shapes  investors’ decisions every day.

During the economic crisis of 2008 and 2009, former Fed governor Kevin Warsh noted, the Fed showed it mattered by being a “panic responder.” The Fed was set up to handle crises, he said, and it did so well. Many other panelists acknowledged that point, too.

Bernanke himself said the economic crisis was a “classic financial panic that the Fed was set up to handle.”  During his remarks preceding the Bernanke conversation, President Bush recalled the Fed chairman telling him in the Roosevelt Room that he better do something or else the nation could be headed to the next Great Depression. Bernanke later applauded the president for making tough choices and backing up the Fed’s independence. 

But, Bernanke emphasized, there is a limit to which the Fed can impact the economy. “We need a broader-based attack on these problems,” the former Fed chairman said, referring to other ways to stimulate growth.

Warsh, now a distinguished visiting fellow at Stanford University’s Hoover Institution, had a similar take. The Fed “should not be a repair shop for broken fiscal policy, trade policy and regulatory policy,” he cautioned.

We need more than monetary policy

Along with Bernanke and Warsh, panelists across the spectrum acknowledged the need for more than monetary policy. Serious fiscal reforms are in order.

Richard Fisher, president and CEO of the Dallas Federal Reserve Bank, and John Williams, president and CEO of the San Francisco Federal Reserve Bank, each made it clear that the economy is hamstrung by the lack of movement in Washington on issues like reforming entitlement programs. “Congress is the choke point now,” Fisher said, echoing a point that he emphasized in this Bush Institute blog interview.

Stephen Friedman, retired chairman of Goldman Sachs, lamented the regulatory overload that puts a drag on economic growth. Now head of Stone Point Capital, Friedman also said it was time to privatize Freddie Mac and Fannie Mae, the two institutions that generally guarantee the vast majority of housing loans. 


What’s Next for the Fed?

Rep. Kevin Brady, a Texas Republican, explained to the standing-room-only audience his bill to rethink the Federal Reserve, which has two congressional mandates. One is price stability and the other is full employment.

Brady thinks the Fed should only focus on price stability. And he thinks now is the most appropriate time to reevaluate Fed policies. His bill would do so through creating a bipartisan commission to reexamine the Fed. 

George Selgin, professor of economics at the University of Georgia, applauded Brady’s work. He told the audience that Canada regularly rethinks its central bank’s role.

Not all shared their enthusiasm. Friedman, for example, said he favors analyzing and improving the Fed’s role, but “I would not draw a lot of comfort from Congress deeply analyzing changes in the Fed.”

The Fed matters even in the dugout

A little known fact about Bernanke was revealed during the conference. The revelation proved that academic-sounding Fed tools like “quantitative easing” matter beyond the business pages.

As it turns out, the Washington Nationals’ Jayson Werth regularly tips his hat to Bernanke when the slugger enters the dugout. Bolten, who shares seats with Bernanke at Nats games, said he had noticed this and wondered why.

Bernanke explained that when he was first introduced to Werth at a practice session last year, the slugger said “So, what’s the deal with QE3 anyway?”

The relevance of monetary policy to everyday business people was touched upon in this Bush Institute blog essay by Paul Rowsey, chairman of the Real Estate Council of Dallas.  Bernanke explained it further, too, saying that keeping interest rates low helps companies grow jobs, which in turn benefits those seeking work.

The conference was full of flashpoints, producing lively exchanges. You may not expect that from a monetary policy discussion, but the nation’s central banking system remains at the forefront of much debate.