Interview with Laurence H. Meyer Former Member, Board of Governors of the Federal Reserve System
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Federal Reserve Board Oral History Project Interview with Laurence H. Meyer Former Member, Board of Governors of the Federal Reserve System Date: October 6, 2010; October 18, 2010; and November 18, 2010 Location: Washington, D.C. Interviewers: Winthrop P. Hambley and David H. Small Federal Reserve Board Oral History Project In connection with the centennial anniversary of the Federal Reserve in 2013, the Board undertook an oral history project to collect personal recollections of a range of former Governors and senior staff members, including their background and education before working at the Board; important economic, monetary policy, and regulatory developments during their careers; and impressions of the institution’s culture. Following the interview, each participant was given the opportunity to edit and revise the transcript. In some cases, the Board staff also removed confidential FOMC and Board material in accordance with records retention and disposition schedules covering FOMC and Board records that were approved by the National Archives and Records Administration. Note that the views of the participants and interviewers are their own and are not in any way approved or endorsed by the Board of Governors of the Federal Reserve System. Because the conversations are based on personal recollections, they may include misstatements and errors. ii Contents October 6, 2010 (First Day of Interview) .................................................................................... 1 Educational and Professional Background ..................................................................................... 1 Nomination and Confirmation as a Governor ............................................................................... 11 FOMC Meetings and Chairman Greenspan .................................................................................. 20 Testifying before the Congress ..................................................................................................... 26 FOMC Dissents on Monetary Policy and the Statement .............................................................. 28 Discount Rate Requests ................................................................................................................ 33 Fed’s Dual Mandate ...................................................................................................................... 36 NAIRU (Non-accelerating Inflation Rate of Unemployment) ..................................................... 38 Culture of the Board ..................................................................................................................... 43 Inflation Target ............................................................................................................................. 44 October 18, 2010 (Second Day of Interview) ............................................................................ 47 Consumer Affairs, Banking Supervision, and the Payment System ............................................. 47 Senate Confirmation Hearing ....................................................................................................... 50 First Impressions of the Federal Reserve Board ........................................................................... 52 FOMC Meetings ........................................................................................................................... 53 Supply Shocks and the NAIRU .................................................................................................... 59 The Great Inflation from 1965 to the Early 1980s ........................................................................ 61 Monetary Policy and Asset Bubbles ............................................................................................. 63 Basel Capital Standards for Banks ................................................................................................ 70 Too Big to Fail .............................................................................................................................. 73 The Fed’s Banking Supervision and Monetary Policy Responsibilities ....................................... 82 Policy and the Acceleration in Productivity ................................................................................. 84 iii Financial Crises: Asia and Long-Term Capital Management ..................................................... 92 November 18, 2010 (Third Day of Interview) .......................................................................... 97 Equity versus Property Bubbles .................................................................................................. 101 September 11, 2001 (9/11) .......................................................................................................... 107 Unorthodox Monetary Policy Tools ........................................................................................... 111 The Challenge of a Fiscal Surplus .............................................................................................. 115 The FOMC: Hawks and Doves .................................................................................................. 118 The New Economy ..................................................................................................................... 121 The Fed’s Dual Mandate ............................................................................................................. 123 Public Speeches .......................................................................................................................... 126 Transparency in Monetary Policy ............................................................................................... 128 Economic Forecasting ................................................................................................................. 131 Leaving the Board ....................................................................................................................... 136 iv October 6, 2010 (First Day of Interview) MR. HAMBLEY. Today is Wednesday, October 6, 2010. I’m Winthrop P. Hambley, senior adviser in the Federal Reserve Board’s Office of Board Members. I’m accompanied by David H. Small, from the FOMC (Federal Open Market Committee) Secretariat in the Division of Monetary Affairs. We’re at the Washington, D.C., office of Laurence H. Meyer, who was a member of the Board of Governors for five and a half years, from June 24, 1996, until January 31, 2002. We’re conducting an interview with former Governor Meyer for the Board’s Oral History Project. Thank you for visiting with us, Mr. Meyer. It’s a great pleasure to see you again. MR. MEYER. I’m delighted to participate. Educational and Professional Background MR. HAMBLEY. Tell us about your early life and education. MR. MEYER. I was born in the Bronx, but we moved to Queens when I was six months old. That’s where I was raised. When I was going into the eighth grade, my parents sent me to a private school, mainly because they thought that I was too shy to prosper in a large high school. That turned out to be good choice for my personal and social development. My interest in economics began with a half-semester course on economics in high school. Then when I went to Yale, I took freshman economics. That’s when I fell in love with economics. I knew after my freshmen economics class that I was going to major in economics. As I proceeded in the major, I decided that I wanted a career in the study of economics and decided that I would go to graduate school. There was such a variety of opportunities in the economics field that you could either pursue one area or pursue them all sequentially. I could Page 1 of 137 Oral History Interview Laurence H. Meyer teach, do research, work for a private financial institution, work in government, or be a consultant. I’ve basically done most of those already and found that diversity very satisfying. MIT was a fantastic experience for me. I learned as much from my fellow students as I did from the faculty. The access to the faculty was just great. Franco Modigliani was great as a mentor. I idolized him. And I had the opportunity—and this was very formative in my career— to be his research assistant on the building of a large-scale macroeconometric model, one that was immediately recognized as state of the art, particularly with a focus on the channels of transmission of monetary policy. After that model was complete, it was housed at the Federal Reserve Board. It was the FRB MPS model at that time. So I came away with a love of model building. I always dreamed of being able to have access to a model and use it for policy analysis. My career began at Washington University in St. Louis. I started as an assistant professor, ended up as a professor, and then chairman of the department. But I was not entirely happy and fulfilled. I quickly discovered that I was not a professor who was going to push out the frontiers of the science. I knew all the top people, but I wasn’t one of them. I felt that the only people who read my papers were the referees, and that wasn’t very fulfilling. So I knew I had to do something else. I had this love of model building. Pretty soon I had this vision to start a firm that focused on forecasting and policy analysis. I got a lot of freedom from Washington University to remain a tenured faculty member and also participate extensively in the firm. That was the beginning of the next phase of my career. My mind