 All right, thanks. George, the immediately post-lunch speaking gig is always a little bit perilous, because everybody wants to go to sleep, doubly perilous in this case, because we're following John Taylor. But I could say that this panel is going to be a lot of fun, having spoken to all three of the panelists briefly. The three disagree with each other. I'm just a moderator, but I'm a pretty opinionated one, and I happen to disagree with all three of them. There's also almost nothing more fun for a journalist than to watch economists disagree with each other, because it always follows like the same forced etiquette or forced politeness. It kind of goes, well, I love so-and-so's work. It's so interesting and important and wonderful. Now, here's all the reasons it's totally wrong and might be destructive if anybody actually started to believe it, right? I had some introductory remarks that I was going to give to contextualize this panel, but I think I'm actually going to just incorporate them into the questions. Instead, I'm just going to get on with introducing the panel itself, because I'm a little bit worried about time. So starting from farthest to the right, and then coming inward, although ideologically actually the reverse going from left to right, or at least from most tolerant of some intervention to, well, Walker Todd. So Perry Merling is a professor at Barnard, where he's been teaching for almost two decades. He's the author of three books, the last of which is called The New Lombard Street, How the Fed Became the Dealer of Last Resort. It's a kind of updated budget for the modern era and specifically updated to account for the shadow banking system in all the ways in which the financial system has evolved. Most appealingly to me, he's a blogger himself at PerryMerling.com. His latest post is about why Jackson Hole was kind of a huge waste of time. After that, we'll hear from Kevin Sheedy, assistant professor of economics at the LSE. He's also a research affiliate at the Center for Economic Policy Research. Most recently, he published a paper on housing market dynamics. I wasn't surprised, given the role that Scott Sumner's had in putting this together, that Kevin also wrote a paper for Brookings a couple of years ago arguing for the benefits of NGDP targeting in incomplete financial markets where contracts are denominated in fixed terms. He'll be arguing that unconventional monetary policy instruments are a bad idea. And then finally, we'll hear from Walker Todd, visiting lecturer in Middle Tennessee State and a trustee at the American Institute for Economic Research. He is widely published in Law and Economics. He's a long resume. And a lot of it is about monetary economics. He was attorney and legal counsel at the New York Fed for about a decade, an assistant general counsel and economics research officer at the Cleveland Fed for another decade. In both cases, he specialized in the discount window. The very mysterious, opaque, subtle title of his presentation is emergency lending, the gateway drug for quantitative easing, and other monetary disorders. I wonder how he feels about it. Perry is up first. So how does this work? So I am going to take as my inspiration the talk that Ulrich Binsal gave at Jackson Hole, which is an exception to what I, that was the one that I highlighted. And in particular, he talks about rules and discretion, and I think says some very wise things here. So let me just start there as my, everyone who knows my books knows I start every chapter with an epigram. So this is the epigram. He says automation, i.e. being strictly rule-based, requires having achieved a high level of understanding of the economic relationships at stake. Discretion may sometimes be unavoidable, but often actually reflects inability on the side of the central bank to understand well and pre-program its interaction with the market. Compared to macroeconomics, monetary policy implementation does not appear so complex that it could not be rule-based. And he goes on to talk about the kinds of rules he's advocating here. Well, the bottom line of what I'm going to say today is that emergency lending, I think, is also like that. That there are, it can be a rule-based activity. But most of this conference is, in fact, about the macroeconomics. So let me say a thing about macroeconomics. Compared to macroeconomics or excess. And so here's just a summary. You've heard most of this other people saying that the history of monetary rules, in some ways, starts with the notion that the level of understanding we have is MV equals PY, that this is sort of a true fact about the world. And we can use that true fact to imply some rules. 100% money growth rule, 100% money backing rule, or Friedman's 3% money growth. But if velocity is unstable, that leads to shifting toward interest rate policy and new synthesis. This is the actual rule that Yellen proposed at Jackson Hall, what she called an aggressive Taylor rule. The aggression here being on the unemployment term, as you can see. I always thought of, and since John Taylor is here, I want to maybe ask him, I always thought of the Taylor rule as an augmented Fisher effect. That there's a Fisher effect there. The nominal rate equals the real rate plus inflation. And then you're augmenting this with some policy terms. So I always connected it to the Fisher effect. And I teach it that way, but maybe that's wrong. But because of the zero lower bound, that rule, which recommended minus 9%, she said, in 2009, couldn't be implemented. And so we got some more discretion, and here we are. So high level of understanding in macroeconomics not. So here I put on my hat as a historian of monetary economics. Can monetary policy work? I note that Janet Yellen got her PhD at Yale in 1971, and that her dissertation supervisor was Jim Tobin. And in 1969 was the year that the Journal of Money, Credit, and Banking started publishing with this key paper of James Tobin, the General Equipment Approach to Monetary Economics, which I think is still reverberating in people's heads. They're not learning from experience. They're learning from their teachers in PhD programs 50 years ago. And here's what Tobin said in 1969. Remember, this is a different world in 1969. He says, if the interest rate on money, as well as the rates on all other financial assets were flexible and endogenous, then there would be no room for monetary policy to affect aggregate demand. This is a view of the world that the reason monetary policy has any sort of impulse comes from imperfections and rigidities and so forth, that that's where you get your oomph. And the problem, of course, from that point of view is that since 1969, we've moved very, very considerably in the direction of increasing flexibility and endogeneity. And so is this really the right framework for thinking about monetary policy anymore is the question? These are the three dimensions of increasing flexibility and endogeneity I'd like to emphasize. Deregulation is just one of them. That tends to get overemphasized, I think. I think globalization is another one. And in particular, financial integration, the integration of money and capital markets, which is to say shadow banking. And I'll say something more about that. And I think those two things are connected, by the way. So I depart from the monetary-volrasion framework of Tobin by adding in two things that are abstracted. One is that the economy is a payment system. That in fact, a lot of what central banking does is to manage the payment system. And that its leverage, the incentive, the reason it came up in an earlier talk, why are we talking about the overnight rate of interest? What is that? Well, that is the cost of putting off the day of reckoning by one day, that's what it is. And the Fed can basically control that number because it can give you the means of payment. So that is a piece of leverage that you would get even in a highly flexible market economy. That does not go away. But that is not in the Tobin model, that leverage. The other thing that's not in the Tobin model is the way that markets are made in all market systems, that there are market makers, that are profit-seeking dealers, that are funding themselves in money markets in general. And so that gives leverage, that's where the transmission mechanism comes from. It's not the money multiplier and all that sort of thing. It's this business about dealers making money rates of interest and making asset prices. I'm gonna say a bit more about that. So that the central bank is setting the overnight rate, profit-seeking dealers translate that into a term rate, a funding rate, and asset prices. Not one for one, there's slippage and there's asymmetry, okay, this business about pushing on a string. These I think of as back-to-basics, but I wanna emphasize again, these basics were not in the standard PhD curriculum in 1969. They're basics in the sense that Hotree knew all about this, for example, okay, so that's the sense in which back-to-basics. So here's the world, here's the marginal source of credit in the modern world, according to me, okay, which is market-based credit. This is how I hope people will understand the world, at least my students. There's a shadow bank on the left, and what is shadow banking? It's money market funding of capital market lending. That's my definition, and so that's residential mortgage-backed securities, stripping out all the risk using derivatives. In fact, they used all kinds of weird Rube Goldberg machine stuff to strip out the risk, trashing and all that sort of thing, but the concept was to strip out the risk and to sell it off somewhere else. The thing I'm emphasizing in this diagram is not the shadow bank, okay, but where the term, where the price of funding comes from and where the price of risk comes from, which is to say, these profit-making dealers. The global bank, which is making the market in funding and derivative dealers. This used to be on the balance sheet of these international investment banks, global banks. Now it's being split into these central clearing counterparties and so forth. We can talk about that maybe later, but the point is that it's the influence of central bank policy on these dealers that is where asset prices come from, when therefore where the leverage over the real economy comes from. I'm moving now toward the emergency lending part. Okay, so leave aside that issue of regular monetary policy transmission and I want to talk about emergency lending. These dealers are keeping the economy going and the liquidity backstop for these dealers is provided by the central bank. More today kind of explicitly than before the crisis. That's one thing that's happened, that it was implicitly backstopping them because it's the liquidity provider of last resort, but it was not explicitly backstopping them. So these red things, these liquidity puts were kind of implicit puts used to be or they went through the traditional banking system or something like that. Now they're more or less explicit puts and I think if you have a put, make it explicit. That's a rule, that's a rule right there. And so I'm putting them as assets of the dealers and liabilities of the central bank, contingent assets and contingent liabilities. And now whoops, whoops, I skipped one. So now in this world, what does emergency lending look like? What I want to emphasize here is that emergency lending of the first sort is a normal occurrence. That if households decide for some reason that they don't want to hold some security that they're holding, they sell it. And who do they sell it to in the first instance? They sell it to a dealer who funds that position by borrowing typically from a bank and notice what's happening there. The money supply is expanding. The private money supply, the bank supply, money supply. The money supply is expanding. Now tomorrow they decide they like Apple after all, they buy the securities back. And the point is that the prices of these securities move and the price of the loans move so that that operation is profit maximizing for both the dealer and for the bank. The central bank is nowhere in this picture except as a backstop eventually liquidity put if the prices move too much. I want to emphasize this because early this morning we're saying we have no experience with crises. They're so rare. This crisis happens every day. This sort of thing where there's an imbalance between supply and demand for a particular set of securities happens every day. And security dealers absorb those fluctuations on their own balance sheet for a price. And banks fund them in absorbing that for a price. This is banking 101 and practicing bankers know it. And central bankers are practicing bankers as well. Maybe not the people making policy, but the people in the trenches running the operation are practicing central bankers too. So here I'm showing a serious crisis where it's the same problem that households don't want to hold these securities, they want to hold money. And the dealer and the bank are not willing, not able to absorb the size of that shock, they're afraid for their own balance sheets, their profit making institutions. And in this case, they hit these stops and the central bank takes over and I'm showing this as the triggering of these liquidity puts, okay? That the central bank is now providing reserves to the bank, the central bank is providing reserves to the dealer, those are the two liquidity puts I was talking about. And look at the consequences, the central bank balance sheet is expanding on both sides. The public money supply is expanding on both sides. So this is just like the previous, it's just one layer higher in the system. What we saw in the global financial crisis was that the dealers basically stopped making markets at all. And we got this much more extreme condition where the central bank actually bought the securities, it's outright, a trillion dollars of mortgage-backed securities, right? They bought these securities outright and it became the dealer, okay? It's balance sheet became a dealer balance sheet. I want to be very explicit about this. This is what the central bank's balance sheet, the Fed's balance sheet looked like in December 15th, 2011. The, you probably recognize the left-hand one, there are long-term treasuries, mortgage-backed securities, currency reserves, I'm shifting, I'm adding stuff to both sides of that balance sheet and rearranging it on the other side so that the balance is still the same. But to show the kinds of exposures that are involved, which, oops, which are equivalent to an overnight index, an overnight interest swap, an interest rate swap, and a credit default swap, those are the actual notional positions that the Fed had accumulated on its own balance sheet as of December 15th, 2011. I'm putting this up here just to say, to really nail this point, that what the Fed did was to act as a dealer of last resort. It acted as a dealer of last resort in the money market, so it's a global money dealer, that's what the OIS position is, okay? And which was a trillion dollars before the crisis and is 2.6 trillion now, so. And then, and it acted as a dealer of last resort in the interest rate swap and credit default swap, just default swap. So that's what emergency lending looks like in a modern market-based credit system. Okay, now I'm winding toward the end. So here's the point. We're, the system that we are managing, that we're running, has been evolving since World War II. When you talked about liquidity in 1955, what were you talking about? You were talking about your holding of monetary reserves, okay? When you talked about liquidity in 1975, okay, this is more about funding liquidity, your ability to borrow, to meet your needs. And when you're talking about it in 2005, you're talking about market liquidity, your ability to sell an asset or to use that asset as collateral for borrowing. So there's an evolution from monetary liquidity to funding liquidity to market liquidity and central bank operations have evolved with that. We saw how the shift from monetary liquidity to funding liquidity led to the breakdown of these money growth rules, right? And so we shifted to Taylor rules, okay, because of that. I'm just putting forth as a possible way of understanding our current intellectual disarray is that we're adding in this layer of market liquidity and we're getting used to it, okay? We're not quite sure how to think about this right now. It caused a breakdown in our rule-based system because it's a change in the way the system is operating. A lot of the new regulation that has been put in seems to be very backward-looking from this point of view. It's an attempt to keep people from meeting their funding liquidity needs by borrowing, that they have to hold liquid assets. So it's like, let's just imagine we're back in 1955 again and everything will be fine. To point that out, I think, is to suggest that it's probably not gonna work, okay? And that we better be really confronting the problem we have, which is the evolution of transmission, okay? This is a street that goes in one direction. So here are new rules. So I emphasized the very first slide that I think that the emergency, this experience of emergency lending suggests some, I don't even know that the Fed knew that it was doing this, okay? It might have been making it up as it was going along, but in retrospect, you can see, here's four rules that I'm gonna propose, okay? As a dealer of last resort, your job is to support markets, not institutions, okay? There's nothing specific, nothing special about banks. Market-based credit means there's nothing special about banks. But there is something special about funding markets, and there is something special about risk markets. And if these markets go away, you can't price assets, you can't use them as collateral, the thing breaks down. So support markets, not institutions. Supported at an outside spread, not an inset spread. That means a price away from the market. This is an analog to budgets lending at a high price, okay? So that's a sort of guardrail, if you will, of a kind. Core assets, not periphery assets. So you don't have to support all assets, because all the other assets are gonna be priced off of these core assets. And you're definitely, definitely, definitely in the liquidity business, not the solvency business is a key. That, I think we can kind of, at least I would like to say, I think we know enough to agree on those rules, okay? About stabilization policy, not so sure, okay? And so I find myself in agreement with a number of things that were said. QE is shadow banking by the central bank. It's money market funding of capital market lending, but with the assets deliberately mispriced in order to support the housing market. And this seems to me not very good policy. Forward guidance is basically a profit guarantee for dealers, okay? Which means the liquidity risk is being mispriced. I'm not clear why that's a good policy. Negative interest rate policy rewards delay of the day of reckoning. So that means the survival constraint is being mispriced, okay? There's no problem with survival. You know, you can roll over your debt forever. There's no discipline in this system. So I'm hoping that what the future will see is that the central bank will become more of a two-sided dealer of last resort, okay? So that it's not just supporting the... It can actually contract as well as expand. And that it becomes the outside spread, not the inside spread, so that we get a private dealer of first resort, okay? Robust private dealer of first resort that can absorb those little fluctuations, okay? Which we can't currently do. I had a last slide about the international system, but I will just leave it because time's up. Okay, I'd like to thank the organizers for inviting me to this very interesting conference and I'm flattered to be in such illustrious company. So my paper for the session, I've entitled conventional and unconventional monetary policy rules. And I apologize to the organizers if in the session on emergency lending I have gone somewhat off the reservation. I want to argue more generally that many of the instruments that central banks have deployed in this post-crisis world, instruments I label unconventional instruments, have risks involved if we want to set policy according to rules, okay? So it's conservative central bankers by nature. They found themselves experimenting because their traditional tool using open market operations to influence short-term market interest rates, the market risk-free normal interest rate was no longer available at the zero lower bound. They've turned to a rich variety of alternative instruments and one theme of this conference is can we think about rules for policy? So can we think about rules for these alternative instruments? Now in this presentation, I'm not going to talk about why rules are a good thing. Many of us have eloquently put the case for that. I want to focus on a much narrower question which is if we think a rules-based framework for monetary policy is a good thing, can that be carried over to these unconventional instruments? So I highlight two requirements I think for rules to be effective. Maybe these are arguable but they're the ones I'm going to use to frame the discussion in this paper. The first is that you need to be able to lay down some objectives of policy in advance when you formulate your rule that they're either optimal or not too far from optimal that having your hands tied by that rule is not such a bad thing. And the second requirement is that some agency is going to have to act on this rule which I would argue requires that the instruments of policy are put in the hands of people who can follow the rule without having to worry about too much political pressure. In this paper, I want to argue that unconventional monetary policy is harder than conventional policy according to these two requirements. It can be harder to get rules for unconventional policy to meet these two requirements. So I want to, when I get to the conclusion, I want to argue differently that we should try to design policy so as to minimize the need for unconventional instruments in the first place. Okay, so let me just be clear what I mean by conventional versus unconventional. So by definition, I take the conventional policy instrument to be the short-term market risk for your normal interest rate and unconventional policy is basically everything else. That includes emergency lending. So if the central bank extends loans to banks or other institutions that would not receive lending from private sources at the market interest rates, that's one unconventional thing a central bank could do. Central bank could also purchase assets. In the way I build these things into a model later that those asset purchases are going to be at a price different from what the market clearing price would otherwise be. There's a lot of research on quantitative easing that argues there are neutrality effects that basically the central bank buys a certain volume of assets that just displaces an equivalent amount of private purchases. For asset purchases to have any effect in the framework I'm going to use, it's essential that they're done at a price different from what the market clearing price would otherwise be. Other unconventional instruments might include things like credit subsidies which may or may not be directly within the purview of the central bank. So think in the US context of the government sponsored enterprises and the mortgage market in the UK context, the funding for lending scheme that the Bank of England has. So basically subsidizing credit. Finally, I would include the recent discussion of macro-predential policy in this class of unconventional policy instruments. But macro-predential policy is usually designed to do the reverse of what the first free do. The first free allow lending and credit to be extended where the market wouldn't do it. Macro-predential policy is stopping lending from happening where the market would otherwise do it. So I want to argue we can think about these different types of lending and these different types of unconventional policy using a common framework. Now to do that I set out in my paper, it's on my webpage if you want to look at the details, a model suitable for monetary policy analysis in, as this conference has called, a post-crisis world. So it's a little bit different from a traditional New Keynesian or modern DSG-style monetary policy model that you see so often now. But I think it has a number of features that are important for thinking about the post-crisis world. So there is private borrowing and lending in equilibrium because of heterogeneous agents in particular there'll be mortgage contracts. These are nominal contracts. There will be a role for asset prices. Houses will be being bought and sold. This is why people will need to borrow in the model and there's going to be an interest rate lower bound which will preclude the use of conventional policy in some cases if there's a big shock. The details, I don't really have time to go into them in this very short talk but all the equations are there in the paper if you want to read it. To cut a long story short, there is an overlapping generations model. We're borrowing to buy houses, saving for retirement. All this matters because borrowing and lending will also be necessary to support capital accumulation which will be used to produce the output. And crucially for there to be a role for monetary policy there has to be incomplete financial markets. So there are risks that people can't ensure against in private markets. Okay, so what would be the goals of policy? What would be the instruments of policy in this model? So in this model, there's basically two things the central bank should do to get an efficient allocation of resources. These are to avoid what you might think of as a credit cycle, to avoid fluctuations in the ratio of private lending to GDP, to avoid fluctuations in the ratio of overall investment to GDP. What instruments could you use to affect those variables? There's the conventional one, the normal interest rate, that's going to affect the demand for lending but it's going to be constrained by a zero lower bound. So I take it as a given here that there is a zero lower bound and I think so long as there exists physical cash that lower bound even if it's not exactly zero is not going to go away. So if policy hits a zero lower bound, what can you do? You could move to one of these unconventional policy instruments. And in this simple model, it turns out all those four instruments that I sketch are actually formally equivalent to one another. They appear in the equation that determines how much people want to borrow as well as the usual market interest rate. So if the market interest rate can't move, you're at zero lower bound, you could use one of these unconventional instruments instead, they all have an effect on how much people would want to either want to borrow or would be able to borrow. However, if you look at the equations, they turn out not to be equivalent to interest rate policy and this is going to be the thrust of my argument. Okay, so what should mantra policy do in this setting? So what I imagine is a kind of big shock like what happened in 2006, 2007, 2008. There is a shock that causes asset prices to fall. Falling asset prices have an adverse effect on the balance sheets of those who will be the lenders. This leads to a reduction in new private credit, both for mortgages and to finance productive investment. And this leads to a misallocation of resources in the economy. Lower interest rates can mitigate the fall in asset prices, that's what an efficient mantra policy would do, it would try to lean against this fall in asset prices, just like in a boom, it would try to lean against the rise in asset prices, but you might hit the zero lower bound. What then, when you hit the zero lower bound, can you do, can you bring in unconventional policy to support lending? Well, the model says yes, but how close does it get to achieving an efficient allocation of resources? So for conventional policy, lower interest rates will boost demand for credit, both for mortgages and for physical investment. Unconventional policy, if you loosen that, so you do some emergency lending, you do asset purchases at higher than market prices, these also have the same effects contemporaneously on lending for mortgages and for capital investment, but it turns out the effects are not equivalent, it stores up problems for the future. Whilst you boost credit today, when you use this unconventional policy instrument, you actually have an adverse effect on credit in the future. And the intuition is relatively straightforward that if you can't lower the market interest rate, if you basically keep lending going too much in the short term now, you leave balance sheets in a worse position in the future. And that means that you can't postpone forever using unconventional policy instruments, the negative effects of asset prices falling. So it turns out that if you could use conventional policy, interest rate policy, unconstrained by the zero lower bound, you would in this framework be able to achieve an efficient allocation of resources. The policy rule would be a kind of inflation target, but it would be an inflation target that puts a lot of weight on asset prices. That's very controversial, I know. It's something I want to argue for, but that's another paper. So I take it for granted, you can't do that because you've already hit the lower bound using the conventional policy instrument. Can you then turn to the unconventional policy instrument? Well, you can use it to help credit conditions now, but because it doesn't fundamentally change balance sheets, it stores up problems for the future, and it turns out that you're not able to implement an efficient allocation of resources using any of those unconventional policy instruments. Now, this model is just something that I would not claim is a true model of the economy. It's a thought experiment, but it points to one of the dangers of using unconventional policy instruments because they go beyond what normal central banking is. Normal central banking works through market prices. All of these unconventional instruments work through changing the quantities given a fixed market price when the normal interest rate gets to its zero lower bound. So their transmission mechanisms are very different. OK, so on the first criteria I laid down that you can establish a simple goal for policy and lay down a rule that says the central bank should go away and do that. For the conventional policy instrument, that would be fine. You just tell them not to allow asset prices to move around too much. For the unconventional policy instrument, the rule is much more complicated. You face a trade-off between helping credit conditions now versus helping them in the future. So that trade-off is like what you'd get with forward guidance where you might have a commitment to lower interest rates, which will help you today. But when that comes in the future, you store problems for the future. On the second criteria I laid down that you're able to hand over control of the instrument to an independent institution that's going to be able to act about political pressure. We all know monetary policy has distributional effects. And these could potentially lead to political pressure on the central bank. Now, that's a problem for conventional policy as well. Interest rates have distributional effects. These discussions seem to have surged up the political agenda in recent years, people criticizing unconventional policies for redistribution. Is there actually a sense in which unconventional policy is worse than conventional policy on this ground? So notice that if you go to the details of the model, I've actually set it up so that lumps and taxes and transfers are used to offset any direct distributional consequences of these policies. So if you give a group of people a credit subsidy, you take that back with a lump sum tax. So actually, my setup is sort of biased towards not finding distributional effects of unconventional policy. What do I actually find? Well, in equilibrium, it turns out that unconventional policy instruments have greater distributional effects than conventional instruments. How do I reach that conclusion? I ask, suppose a central bank maximizes some weighted sum of utilities. So that gives it a concern both for the economy's overall efficiency, but also for the distributional consequences of policy. The favored groups would have a higher utility weight than the less favored groups. Suppose you could choose, the central bank could choose which instrument to use. It's got both conventional and unconventional instruments. You can show that in that situation, the central bank would use just the conventional instrument to react to shocks. And the unconventional instrument will be determined entirely by the weights the central bank puts on different groups of agents. So it will be used just for distributional reasons. Now, of course, at the zero-low bound, if you can't use the conventional instrument, you might want to use the unconventional one to help the economy a little bit. But this result shows that it also has strong distributional effects. And those might get in the way of formulating a suitable rule for these unconventional instruments. OK, so I argue it's difficult for two reasons to write down a rule for unconventional policy. What can we do then if we value a rules-based framework? So I want to argue that we can reduce the need to use the unconventional policy instruments in the first place. How would we do that? Basically, I want to think of an alternative target that could be achieved with conventional rules about having to hit the zero-low bound, at least hitting it less often than standard inflation targeting. So we all know that inflation targeting can be implemented with rules like the Taylor rule, but what happens when you get to the zero-low bound? In this model, I found actually surprisingly that if inflation targeting was changed so that it put more weight on asset prices, this would lead you to hit the zero-low bound less. Therefore, you could rely largely on conventional policy. Intuitively, if you want to stabilize asset prices, you can't have interest rates move around too much, because asset prices are a present discounted value. So interest rate fluctuations will mess up those asset prices. So in conclusion, I argue unconventional policy rules, unconventional instruments of monetary policy and rules are not easily compatible. A rules-based framework may require us to get back to conventional policy, but if we were to do that, we may need unconventional targets instead. Thank you. Let me see to advance across. Okay, it is indeed a pleasure to be here today. I want to thank those who are responsible for inviting me and enabling me to enjoy the fellowship of old friends and new acquaintances whom I long admire. Okay, I called my paper, Emergency Lending at the Fed, The Gateway Drug for Quantitative Easing and Other Monetary Disorders. And I think my inspiration for that was a chart that you've probably all seen, that graphs credit easing by the Fed after the crisis in 08, where you see a nice steady line going along till the summer of 08, and then suddenly it blips upward like a lightning strike hit the Fed. And then after that, a parabolic curve upward as quantitative easing followed the initial round of emergency lending. What is the problem with emergency lending? It's very hard to justify. We've already sort of gone through the earlier part. Do we need rules for the conduct of monetary policy at the discount window, discount window policy? Yes, we do. Should discount window policy be aligned with monetary policy? It would make some sense, I think, if you're following a given monetary rule, wouldn't it make sense to have your discount window rule also aligned with that? At the Fed's origin, and this I put in to stir up George Seljan a little bit, real bills proponents wanted to make the discount window the focal point of any monetary policy. The idea was that the Fed would be a passive actor in the face of liquidity demand in the real economy, but the Fed abandoned the last vestige of that rule affecting the bankers' acceptances market in 1984. US entry into World War I shifted the Fed's emphasis toward open market operations and away from the discount window in the years that followed. There's Carter Glass, the author of the Federal Reserve Act and the principal congressional proponent of the real bills doctrine. In the 1920s, large-scale discount window operations resumed with a split emerging between the board staff's moral suasion view and the Reserve Bank staff's quantitative and interest rate management view on how discount window credit should be rationed. And most importantly, emergency lending by the Fed did not exist by statute until 1932. It only came then, as Naftar thought, and it was while the late Hoover, early Roosevelt administrations were trying to figure out how to handle the emerging Great Depression, they hadn't quite figured out what policy instruments they wanted to deal with the situation they were confronting. The emergency lending statute is section 13.3 of the Federal Reserve Act, now 12 USC, section 343. It wound up that the Fed rarely used its emergency lending authority in the 1930s and it wasn't used at all after 1936 until we get to 2008, of course. What's this moral suasion stuff that the board sets great store by? One WAG defined it as a moral suasion as a persuasion tactic used by an authority, such as the Federal Reserve Board, to influence and pressure, but not force banks into adhering to policy. Tactics used or closed-door meetings with bank directors, increased severity of inspection, appeals to community spirit, or vague threats. And the illustration I use is Devious Diesel, character from the Tommy the Tank Engine children's books, and that's Devious Diesel expressing moral suasion. Graph here doesn't come quite through as nicely as I'd like, but on the left axis you have percent per annum ranging from six through 15. The X axis has dates ranging from July of 78 through December 82, and it shows what the Fed did once Paul Volcker became chairman especially in 79 to use quantitative or interest rate measures to fight the inflation of the day. Interest rates spiked upward, peaking out at 14% on a monthly average in the summer of 1981. From the 1930s through around 1960, emergency lending was done not by the Fed, but in sequence primarily by the Reconstruction Finance Corporation from 33 to 47. The Exchange Stabilization Fund did a lot of it from time to time. Lend, lease, and the World War II era and the post-war UK loan, those were done by State Department or Treasury. The Defense Production Act entities were a form of emergency lending for private manufacturers who were producing goods for the war effort. It was enacted in 1940. The Fed was appointed as fiscal agent for the Treasury, but the Treasury was clearly backstopping the Fed in whatever it was putting out through Defense Production Act loans. And so it was just a flow-through on the Fed's balance sheet. And finally, there are foreign exchange swap lines and warehouse facilities for the Exchange Stabilization Fund and activity that the Fed got into around 1962 and has continued to the present moment. That's Jesse Jones, who was the head of the Old Reconstruction Finance Corporation in the 30s. If Fed open market operations were conducted under a monetary policy rule after 1951, what was that rule? And the suggestion here was read Robert Hetzel's 2008 text on the history of Fed monetary policy or the two volumes by Meltzer 2010. And I characterize them as starting with the first one, William McChesty Martin, 51 to 70 after the 51 Accord. It was discretionary leaning against the wind or taking the punchbowl away when the party is getting good. Next, you had print money on demand from the executive branch while claiming that you were not responsible for the inflation that followed. That was Arthur Burns. Monetary policy as an auction process, G. William Miller, briefly in 78, 79. Interest rate targeting disguised as quantitative efforts at monetary control, 79 to 82. And then afterward, bending all the rules to save the big banks from the international follies. It was Paul Volcker. Then we had discretionary targeting of a secret gold price at 350 an ounce, Alan Greenspan, first two terms. Then strict adherence to the treasury's wishes afterward. I think he was telling staff, I'm following the Taylor rule, but I think all he was doing was whatever treasury wanted that kept showing, especially on the international side. I characterize Bernanke as rules, what rules? And Yellen as negative interest rates are to be avoided at all costs. Given that overview, what discount window rule, if any, should be written? At any weight, what discount window rule might work better than others? Go back one. That's William McChesty Martin leaning against the wind, removing the punchbowl. That's a time magazine cover, and I think that's 1954. Paul Volcker, interest rates went to the moon, but too big to fail, doctrine also emerged on his watch. So here I try to derive five principles for a discount window rule. First, the best discount window is no discount window. Don't have one if you can get away with it. In theory, you could do everything you're trying to accomplish by a discount window in a non-crisis atmosphere with open market operations. Alan Greenspan confronted that a few times and did it correctly in October of 87. Remember the great stock market crash? Flooded the market with liquidity. Was he throwing open the discount window? Well, it was open, but banks didn't want to borrow, but instead, boy, did the open market trading desk do a big activity buying government securities from the dealers. That's the way to do it. And then when the crisis was over, you take it back. He did a similar operation in the run-up to 2000 on the Y2K crisis. In classical economics, there was no lender of last resort, banks kept their own reserves. Not every country had a central bank. Banks of issue were more common, however. And here's the classic illustration of the difference between open market operations on the one side and a discount window operation on the other. Imagine in the Middle Ages, a king tells his chancellor of the Exchequer, I want you to increase the money supply for my people. Open market operations would be, chancellor goes up in the towers, he's a pile of gold coins, takes a shovel, opens the window, turns backward, throws the coins out the window, and slams the window shut without looking to see who caught the coins below. In a roundabout way, this is the way Fed open market operations work in theory. What about the discount window? In that model, chancellor goes up to the tower, stuffs some coins into bags, takes the bags down to the street, looks at the line of needy and worthy borrowers, and hands them to you pick one. Those who need the coins the most, those who are willing to pay the highest price or interest rate for the coins or the friends of the king. Who gets the coins? And remember, this is Washington you're sitting in. So that's the problem. Open market operations tend to follow an auction market model and the Fed can't necessarily tell who's gonna get the coins. Discount window makes politically favored lending possible and therefore, after time, inevitable. That problem would persist even if Walter Badget himself were running the discount window. What else might you do for bank, for discount window reform? You might steal yourself to accept and tolerate bank runs. Nobody likes them, but runs might be both rational and necessary to the good functioning of a financial system in the sense that they finally force supervisors to do the right thing at long last. Let bank runs continue. George Kaufman has a nice article about this in the 1988 Cato Journal. Bank holidays, nobody likes bank holidays in the U.S. for crises that appear systemic, but holidays enable supervisors to examine all banks simultaneously and license only solvent banks to reopen. That is an action that restores public confidence even without emergency lending, bailout investment or expansion of deposit insurance. My friend Anna Schwartz, my mentor, also agreed with me on that point. Another thing about discount window reform is some of the Dodd-Frank reforms were good and useful, but I consider them only a halfway step to full reform, especially regarding discount window. The Dodd-Frank reforms of the discount window and emergency lending are in Title 11 of that act. But my conclusion is too big to fail as alive and well and the big banks are trying to kill any remaining supervisory initiatives. In April 2016, supervisors rejected five living wills of the eight big U.S. institutions required to file them. Those are essentially blueprints for how big banks and their affiliates could be disposed of in bankruptcy court without taxpayer assistance. Sorry, went backward one. That rejection of the living wills, by the way, was nearly six years after Dodd-Frank was enacted and the banks still are having trouble filing an acceptable living will plan. City bank passed and nobody knows how. Supervisors were divided on Goldman Sachs and Morgan Stanley, but the other five failed outright, J.P. Morgan Chase, B of A, Wells Fargo, Bank of New York Mellon and State Street. Next, banks are already complaining about the Dodd-Frank acts of beefing up liquidity requirements, liquidity reserves affecting the types of assets that they hold. Banks have now been asking the Fed to accept state and municipal debt as the same kind of qualifying liquidity instrument as full-faithing credit treasury securities. Bank trade associations also are contemplating a lawsuit challenging the Fed's authority to compel them to participate in the capital adequacy stress tests as those tests are currently designed. So here's a recent article just last week in the Wall Street Journal, stressed out. Bank trade groups are mulling over whether to sue the Fed to challenge the methodology it uses to perform annual stress tests on financial institutions. Some banks believe the Fed is violating the Administrative Procedure Act by not allowing public input into the test, including from the banks. So I think when I get home, I will ask my students to help write the final exam. How about that? In light of the description of this item four, it's fair to ask whether you want or should have a discount window at all. Whatever discount window you do create, it ought to be consistent with the monetary policy rule you claim you are following. And George Selgen and I agree that a good discount window model might be the term auction facility that the Fed eventually developed after 2008. Essentially, you're auctioning off discount window credit in my Chancellor of the Exchequer analogy. This is offering the coins to the one who will pay the most to have them. I don't want collateral classes expanded. I don't want the classes of institutions eligible to borrow at the Fed expanded. I would keep the shadow banks out. The Fed does not inspect them. And it's usually a mistake to lend money to people whose books and accounts you cannot inspect. Remember above all, central banks not a solvency or support lender. If you want solvency support, do it through the reconstruction finance organization or some other treasury accountable entity. Covered those points. So I will stop there. My time is up, but if you will send me an email, I will send you the paper. And it is right there. Okay, thank you. Okay, thanks to all three of our panelists. I thought I'd start with something that all three speakers alluded to, but didn't get into because they didn't have time during the formal part of their presentation, which is whether or not the Fed has any international responsibilities in this regard. Obviously, during the last crisis, the Fed coordinated with all the other central banks to open up the swap lines and to ease funding market stresses, dollar funding market stresses abroad. And one of the big debates in recent years is about just how cosmopolitan the Fed should be in the way it does things. So let me just start by asking all three of our panelists, does the Fed have any particular lender of last resort responsibilities in a global crisis or when a crisis abroad threatens economic activity or the financial system here? Perry, I think you most explicitly referenced this but didn't get into it, so do you want to get started? So you're giving me an extra minute. Yes, exactly. All three of you guys. Yeah, so the last slide was just to, meant to point out that some of these principles that I was trying to say have come out of this about emergency lending have already been implemented also at the international level. These permanent swap lines among the big C6 central banks are basically an outside spread, 50 basis points away from covered interest parity that the Fed is willing to lend dollars to the ECB, the Bank of Japan, Swiss National Bank, Bank of England, so forth. This is an outside spread, and it supports foreign exchange markets basically to make markets inside that outside spread. So I think this is an experiment that sort of is forward looking toward the kind of thing. So is the Fed de facto and de jure? The Fed is acting as lender of last resort, but to other central banks. Okay, that's the important thing here. It's not lending to all comers or anything like that. It's to this very select club of, and only six central banks, there's only six central banks, not all of them, just the major ones. Kevin? I think to the extent the dollar is used internationally, it's inevitable that the Fed will have some role in providing international support. If financial institutions worldwide have dollar liabilities, then ultimately the Fed is the only one that an aggregate could satisfy, could help the banking system meet those liabilities. But it does create dangers in that international banks, if they're outside of the Fed's regulatory purview that there's no way to provide a price or set down some rules that can minimize the need for banks to turn to the Fed in the first place. So I think that calls for greater international cooperation between regulators and bank supervisors. I would merely ask my fellow speakers, what is the statutory authority for the Fed to make loans to a foreign central bank? The treasury is given some kind of explicit authority in this regard under the Gold Reserve Act of 1934. There is nothing explicit about this regarding the Fed. Following my own view of the matter, if foreign central banks need dollars from the US, who should provide those dollars? A, the United States Treasury under proper authorization and appropriations approved by Congress? Or B, the Fed putting its own balance sheet at risk and through it, the backstops of the American Payment System, the US taxpayer, should it be the Fed fronting the money? And don't think that it cannot get up into serious money. During the 2008-09 crisis, those swap lines peaked out above $600 billion at a time when the Fed's balance sheet was still only about 1.5 trillion, okay? So, and the Fed was not honest and forthright in reporting those numbers, they only finally disclosed them after March of 2009 when Congress raised a stink about it. So, I know it's nice in a model, it's nice in theory for the Fed to help out its fellow central banks, but to the extent that we wanna act within the law, it'd be nice to have a statute telling us to do that, or congressional appropriation like the Defense Production Act of 1940 saying, if you the Fed lend money to the European Central Bank and they default, don't worry, we will pass an appropriation bill getting you the funds. John Taylor just asked, what about the IMF? You mean, could the IMF make those loans instead? I think that was the original intention of the IMF, in my view, and there's a fair amount of statutory authority for the Treasury and the IMF to interact, by the way, can the Fed make a loan to the IMF? What do you guys say? I'm not qualified to call it on the legal assistance. Are you asking me really or is that a rhetorical? No, I'll ask, you and I agree on so much with those few where we disagree. Yeah, so I think the IMF is maybe overrated as an instrument in this regard. The problem was this $600 billion, that's exactly right, and the Fed did lend to central banks which on lent the money to their domestic banks that were in trouble. So the other central banks were the cut-out men and there were guarantees for those lendings from other sovereign governments for that. The Fed was not, I believe, thinking of itself as taking credit risk in this regard. And I think we agree that the Fed should only confine itself to liquidity operations. So liquidity operations do not require an appropriation of Congress. This isn't the taxpayer's money in that sense, and I would like to be clear about that, that now in reality in the heat of battle can you always distinguish between liquidity operations and solvency operations? No, okay, I agree with that. But the RFC was a solvency operation. These were recapitalization operations. I agree with you, the Fed should never be in that business, never, the way you know you're in a liquidity operation is that you make money on it. One final point on that loan to foreign central banks, though, isn't it one of the hallmarks of liquidity operations that they are short in duration and that fairly quickly the money is paid back? He said, laying the trap. Yeah. And how long do you think it was before the Europeans, the Japanese and others paid back those 0809 loans? I think, wasn't that like about six months? The bulk of it was paid in six months, but I can show you the balance sheet with those loans still on the books two years later. The bulk of it was paid back in six months. That really went in an unanticipated direction. We're really fascinating. My next question, which is also for all three of the panelists, requires a bit of a lead in. This is what I excised from my opening remarks in favor of making jokes. If you go back and you look at a comprehensive list of the Fed's response to the subprime crisis, right? And you can find these lists all over the place. The one I'm referencing now is from the GAO report in 2011. There are 14 entries for things that the Fed did that were categorized the time as emergency lending. Only one of those was what we now refer to as QE1. A lot of them were, to use a word that John Taylor used earlier, kind of weird, right? A few of those were your sort of traditional liquidity facilities that just expanded the kind of collateral that they accepted. But just as a brief reminder, the facilities that the Fed opened for AIG, the lending pledges for city and bank of America that people forget now because nothing really came of that, the lending to non-banks, the targeted support for securitization markets, for money market mutual fund assets, all the stuff that like if in 2006 you'd said the Fed would be doing at some point, you'd say, well, it's kind of weird. In early 2010, Don Cohn, who was then Vice Chair, gave a speech essentially defending all this activity and saying that it did very carefully follow the spadget stick them. You lend freely, you lend against collateral that would be good in ordinary non-crisis times and you lend at a penalty rate. And subsequently there have been quite a few debates about that. A couple of years ago, Frederick Mishkin and Eugene White wrote what to me at least is still probably the most useful paper contextualizing all this weird stuff that the Fed did and put it in the context of historically how central banks have acted. What they found was kind of fascinating, which is that actually central banks historically as a norm ignore badger. They usually lend too freely. They usually don't lend at a penalty rate. So I guess my next question is, is that simple principle, right? Maybe even still updated for the evolution of the financial system in the modern era. Is that still a useful realistic guideline for central banks to follow in a crisis? Perry, again, I think you most explicitly have invoked badger in your own work. So why don't you get started? Well, of course I say yes, okay. But that it needs to be elaborated in those ways that I suggested. What I maybe would like to be very clear here, okay, is to draw a distinction between emergency lending, those sorts of liquidity operations and QE. Let's be clear that I was not in favor of using this same kind of balance sheet operation for stabilization policy to try to stimulate the economy or something like that. Catching a falling knife, that's one thing, okay. Pushing on a string, that's a very different thing. I think Badger's principle is still the best thing we've got in the way of a rule regarding liquidity provision. But I'm not sure it's entirely operational in the sense that in the heat of the crisis and you have to distinguish between a liquidity problem and a solvency problem which was I think the most severe problem the Fed was facing in the financial crisis in its early stages, how that rule is going to be followed in practice. Where do you draw the line? And I think trying to make that rule more precise to lay down more precise regulations as to what circumstances and in what terms banks would be able to draw on the Fed's liquidity in an emergency is going to be very difficult. I mean, look at how easy it was for the banking system to get around the provisions of the Basel Accord. So once you start to make this rule very specific and you've got very smart bankers trying to get around it, it's gonna be hard to make that rule work in the heat of a crisis. So I'm not sure I can improve on Badger, but I think there are dangers there. And I would say in the longer term, I would see it as a better step again to move to reforming the financial system to make these facilities to reduce the need for them. I mean, narrow banking is one big proposal which we haven't really touched on, but I think that would, if our goal is to get rules, that's something that looks a lot more promising, though of course it may have over disadvantages. I have some positive references to narrow banking in my paper, but once again, bearing in mind that the best discount window is no discount window, do it all with open market operations and what cannot be done through that tell Congress to get in the act and recharter the RFC or something. That lending to the non-banks, by and large, is a bad idea because the Fed does not inspect them. How can it rationally be expected to distinguish between liquidity and solvency of institutions whose books it does not have? I'm just gonna leave that one out there. The reason I asked that question is also because if historically it's been the norm, the central banks in the heat of the crisis, as Kevin referenced, have abandoned badger than essentially what we're talking about now. When it comes to emergency lending and monetary rules is constraining their discretion at the very moment when it seems that their intervention is most necessary. In other words, if nobody else can act, then are we really willing to let things keep spiraling downward? Because in the future, as Walker mentioned, it might help with moral hazard and these other things. That seems like a really hard trade-off. So let me try to bring this into the present day because all three of you have presented a kind of ideal scenario for how the Fed could act hypothetically in the future, but if in five or 10 years, another part of the shadow banking system, not repo, but something else, suffers some kind of a run and there is a big break in the chain of credit intermediation and the Fed has at its disposal the same tools that it has now, that seems like a harder issue, right? Should it just ignore the idea that it can definitely use QE to stabilize things? Should it ignore the possibility that it can at least open some facilities and lend freely? You guys wanna comment? That's not even a very specific question, but do you wanna comment on what the Fed has at its disposal now and whether or not it should still use it if another crisis happens? So what I was trying to suggest was that we not understand the Fed's intervention as 14 separate little cobbled together ad hoc operations, but there was a certain logic to this, okay? And that was this logic that I called dealer of last resort, okay? That it was engaging with the new realities of market-based credit and it was doing it in this sort of piecemeal fashion, but now that it's over and we can look back, we can say well that's what it did, that's what it did and that's why it worked, okay? Now that we know that, we can be more efficient about that, we can be more deliberate about that, we can be more transparent about that, we can set up these outside spreads in the first place so that maybe the crisis doesn't happen because people know that once you hit 80 cents on the dollar, the Fed's gonna be a buyer, so I'm gonna buy it 81 and so there's no reason for this to happen, so we don't have to go to $600 billion of ECB, of credit on central banks because they know that there's a backstop there and so it all happens in the private market. This is the world that I'm hoping will happen, okay? That you create outside spreads so that you don't have to use them, okay? Kevin, your presentation was largely about the distorting effects of unconventional monetary policy rules. What about in a crisis? Well, I think these facilities, if they're left in place and they're available and the banks know they're always going to be available, that's not solving the fundamental moral hazard problems that many people have alluded to, so I think we need, and until we've got a framework that deals adequately with moral hazard, I'm uncomfortable with having all of these facilities there on a permanent basis. Walker, has the Fed's job done when it lowers the target rate to zero? No, I would go negative, but anyway, the, on the question you were asking though, the facilities did raise the ire of Congress, so in Dodd-Frank, Title 11, there are provisions saying that going forward, the Fed cannot use Section 133 authority to make these institution-specific loans. Instead, it can jump through various hoops and then declare that the facility is available for an industry to borrow, and so you can make it available to an entire industry, like mutual funds, for example, and the Fed then was allowed to write the rule defining what's an industry, how many players make an industry, and the answer the Fed came up with is five, five or more players, you've got an industry, and so the Fed can start making emergency loans. In theory, this should prevent one-off loans to AIG and things like that. My favorite facility of the ones you were describing was the asset-backed commercial paper lending facility, which the Wall Street insiders used as a way of leveraging their personal portfolios. Matt Taiibia of Rolling Stone wrote a great column around 2011 or 2012 about that facility, where he called the column the Real Housewives of Wall Street, and it was revealed that the wives and girlfriends of some senior Wall Street officials were taking money from their husband's say and running down to the Fed, and the Fed required a minimum capital investment saying you put up $100,000 and we'll sell you $10 million of this commercial paper, and you were guaranteed to make a profit on it because of the subsidy rate you were receiving on the loan from the Fed versus the promised yield on the paper. So the personal fortunes of many on Wall Street improved greatly in the aftermath of that facility. Okay, great, let's turn now to audience Q and A. There's Mike in the back. I'm Bob Feinberg and I've been working on the financial, I came late to the financial crisis in 1973. So I'd like to start with asking Walker again whether a rule wouldn't require that a bank that went to the discount window would do that to save the system, but once the system was safe, the bank would be put through resolution. I hope your answer will be the same as it was when I asked you before, but then also what is your and Professor Melring's evaluation of the current state of the derivatives market thinking of Deutsche Bank having been called and solvent by an expert in Switzerland and does that not affect the two big to fail banks here? And then also the moderator let loose the term repo. So what is the state of that market which Professor Melring alluded to as I think you might have been thinking of this as creating a crisis every day? Thanks. Let me just start with the first question and then head it off to Karen. What should happen to a bank that goes to the discount window? Ordinary discount window lending to the extent that that continues, you don't have to wind up the bank just because it needs some money overnight. The emergency lending under 13.3, I do agree with you that a minimum required should be the ejection of management in the appointment of a federal conservator to decide whether the place needs to be wrapped up or sold to another buyer. Warren Buffett did a lot of investment bank type lending during the crisis and I think he'd be willing to buy a few of these guys but you wanna take the second question? So the second question, I have no insight information about Deutsche Bank or in fact about anything. I get my information about the world by reading the Financial Times just like you. But here's how I interpret what I read. What I interpret what I read is that we are going through a period of institutional change, some of it driven by regulation, some of it driven just by banks that got their hands burned and they decided they wanna be in a different business. And so in that process, certain businesses are getting shut down before they're located somewhere else. These things are moving around. So one of the things that's happening is a derivatives book is being split into a mashed book part that's gonna be on the CCP's and a speculative book part that's gonna stay on the balance sheet of some speculator and they're gonna be backstopped in different ways because the first one really needs a liquidity backstop, the second one needs a solvency backstop. I think this in general is a good idea. One of the reasons we had too big to fail was because there were public purposes being done by these private banks and that's not good. You can't provide them liquidity support without providing them solvency support and you don't wanna do that. You wanna backstop markets, not institutions. So I think it will be better once we're through this transition period but it's gonna be a rocky transition period because it's a period of institutional change when books are getting shut down in one place in the system and they haven't yet grown up in some other place in the system and things are gonna get dropped. And that's true of the derivatives book which you specifically mentioned but it's also true of the repo book that there's essentially no interbank borrowing happening anymore and this does not seem to me to indicate a system that is healthy. Hi, I'm an urban Bureau of Labor Statistics. My question is for Walker Todd and it's about banking holidays and I'm wondering whether banking holidays would actually exacerbate the problem because economic agents would realize that there's actually a problem precipitating the crisis. This reminds me of what happened in the banking holiday in Nevada for example in 1932. Thank you. Right. Bank holidays are a two pronged problem. I participated in the last major bank holiday in the United States. It was the state of Ohio State Chartered Savings and Loans 1985 and that was part of the Fed SWAT team that went out to Ohio to contain it and I wrote the annual report of the Cleveland Fed that year about that problem. And holidays, let me put it this way. If the Fed's position is, I don't know anything about you and I'm not gonna lend you until I know something about you. The only way to get that knowledge is to close them all simultaneously and examine them and then you can decide whom you wanna lend to and whom you wanna liquidate. That's what we did then. The public is not disadvantaged. They may be panicked, but that's where it comes to the political authorities to try to calm the public saying we will only license solvent banks or other financial intermediaries to reopen. So you the public can have confidence if you find this thing open on Monday morning next week, it is good and the state will see to it that ordinary creditors are paid back in full and we will take it upon ourselves to work this thing out. It does work. Part of the problem we have now has been 83, 84 years almost since we had the last nationwide bank holiday and there was an opportunity for one in March of 2009 that I think sadly the administration let drop and we'd all be better off today had we done it then and cleaned out the system. By the way, I keep hearing from German economists that they are hoping that the Fed will raise rates because that would then give heart to the German authorities to get serious about cleaning up the German banks. And that's without addressing specifically the earlier question about a German bank. Feeling it's been a while since any of us have heard a pro bank holiday platform. Next question please. I'm Chris Hezerfoglu, investment advisor. I question for Walker, I apologize in advance for my lack of clarity and the question. I was at a program in June and I was listening to a speaker describe how during the Great Depression in 1934, 35, the economy was showing signs of rebounding and things looked like they were turning around nicely. The Fed chairman at that, if I recall correctly, the Fed chairman at that time looked at some numbers and made a decision that was opposite of the decision that he was supposed to, that would have been the best decision to make and that was largely responsible for plunging the economy into another, the second leg of the depression. You had said something about emergency lending being ceased, you know, ceasing in 1936. I'm wondering if the two are related. Hopefully that makes, if you could clarify that for me, I'd appreciate it. Yeah, and I'd say let Perry comment on what I say here too. But you're referring to the episode that's called the doubling of reserve requirements that happened in phases in 1936, 37 and it induced a recurrence of the depths of the depression, including the great rise of excess reserves. The board felt motivated to do the raise, the rise of reserve requirements because they then had what they viewed as a very large excess reserve problem. It was holy smokes equal to 50% of total reserves. And today, of course, required reserves are only 5% of the total. So it's a radically different problem now. But anyway, they did double the reserve requirement. Understandably, banks retrenched lending in the aftermath and that caused the recurrence of the recession. That's a general view. There are other factors offered by Alan Meltzer's history of that period, including some that were purely political, having nothing to do with the Fed. So the jury is still out on that one. It would be a mistake to raise the reserve requirement in the face of something like that. And the Fed, so the Fed's absence of emergency lending authority really had nothing to do with it. The RFC was still open in doing business and they could have made loans, probably did make loans in that circumstance, but the Fed was not a player for that other than raising the reserve requirements. I've got time for one last question. Does that even have a response to that? I just say one thing about that. Some people would talk about the liquidity coverage ratio as it de facto raising the reserve requirement today. That's fair, that's fair. Final question. Yes, question for Mr. Todd. Basically a trick question to bring a historical perspective to monetary issues. Founder Roger Sherman wrote the very simple rule into the Constitution, no state shall make anything but gold and silver coin a tender and payment of debt. He only wrote one paper that explained that, it was titled, Cabiot Against Injustice, or an inquiry into the evils of a fluctuating medium of exchange, written in 1752. His experience was that each colony had its own currency, Rhode Island inflated more than Connecticut where he did business, and he was stuck in a court settlement receiving payment due in Rhode Island to money, which was rapidly losing its value. And the question is, have we not just become kind of Rhode Island to the whole world? And it's been stretched out basically because of the petrodollar system, but isn't there a basis for calling back to a new Bretton Woods agreement that would be geopolitically based in a somewhat neutral space where each nation could facilitate restoring an honest unit of monetary account, gold and silver, and at the same time, prevent one another from dumping excess currency into each other's economies. I wrote a column about bringing back the International Gold Standard in the Christian Science Monitor in November of 2008. A month later, I was denounced by name in a lead editorial in the largest newspaper in the world, The People's Daily Online of China, the official organ of the Communist Party for that column. So anyway, my heart is with you, but years later, I asked Robert Mundell what he thought of this idea of bringing back Bretton Woods because we have such a conference, and here was this answer, pay close attention. He said, an international conference on the scale of Bretton Woods to re-establish currency exchange rates would probably be a good idea, but I feared that it is beyond the capacities of the politicians globally whom we have today and that in the absence of serious statesmen, that the best we can do is these silly competitive devaluations step by step, which at least have the virtue of driving the market to where it ought to be in the first place if you did have the conference. All right, an appropriately quasi-fatalistic place to end this discussion. Thank you so much to our panelists. A round of applause, please.