Conference Proceedings Levy Economics Institute of Bard College th ANNUAL HYMAN P. MINSKY CONFERENCE ON THE STATE OF THE US AND 20WORLD ECONOMIES Financial Reform and the Real Economy April 13–15, 2011, New York City A conference organized by the Levy Economics Institute of Bard College with support from the Contents FOREWORD 1 PROGRAM 2 WELCOME AND INTRODUCTION 5 Leonardo Burlamaqui Dimitri B. Papadimitriou SPEAKERS Gary Gensler 10 Stephen S. Roach 19 Paul A. McCulley 24 Andrew Sheng 31 Phil Angelides 45 Charles I. Plosser 54 Gary B. Gorton 63 Mercedes Marco Del Pont and Arturo O’Connell 72 Paul Tucker 81 Athanasios Orphanides 98 Charles L. Evans 106 Vítor Constâncio 117 Sheila C. Bair 134 Martin Mayer 145 SESSIONS 1. The Ford–Levy Institute Project on Financial Instability and the 148 Reregulation of Financial Institutions and Markets 2. Financial Journalism and Financial Reform: What’s Missing from the Headlines? 155 3. Swaps Regulation 159 4. Financial Reform and the GATS: Challenges and Opportunities 164 5. Fiscal Constraints and Macro Perspectives 169 6. Reregulating the US Financial System: Beyond Dodd-Frank 175 PARTICIPANTS 180 The proceedings consist of transcripts of the speakers’ remarks and summaries of session participants’ presentations. Foreword Welcome to the 20th Annual Hyman P. Minsky Conference, “Financial Reform and the Real Economy.” Organized by the Levy Economics Institute with support from the Ford Foundation, this year’s confer- ence marks the Institute’s 25th anniversary, and the third year of its joint initiative on reforming global financial governance. As part of its monetary policy research, that the Institute is partnering with the Ford Foundation to examine financial instability and reregulation within the context of Minsky’s work on financial crises. Minsky was convinced that a program of financial reform must be based on a critique of the existing system that identifies not only what went wrong but also why it happened, and his approach provides the theoretical framework for this initiative. This year’s conference addresses the ongoing effects of the global financial crisis on the real economy, and examines proposed and recently enacted policy responses. The European, Latin American, and Asian responses to the crisis are compared, and proposals for reforming the international financial architecture are reviewed. Central bank exit strategies are also considered. I look forward to seeing you again at future Levy Institute events. Dimitri B. Papadimitriou President, The Levy Economics Institute, and Jerome Levy Professor of Economics, Bard College 1 20th Annual Hyman P. Minsky Conference on the State of the US and World Economies Program Wednesday, April 13 9:00–9:30 a.m. WELCOME AND INTRODUCTION Leonardo Burlamaqui, Ford Foundation Dimitri B. Papadimitriou, Levy Institute 9:30–11:00 a.m. SESSION 1 The Ford–Levy Institute Project on Financial Instability and the Reregulation of Financial Institutions and Markets Jan Kregel, Levy Institute and Tallinn Technical University L. Randall Wray, Levy Institute and University of Missouri–Kansas City Éric Tymoigne, Levy Institute and Lewis and Clark College 11:15 a.m. – 1:00 p.m. SESSION 2 Financial Journalism and Financial Reform: What’s Missing from the Headlines? Moderator: John Cassidy, The New Yorker Jeff Madrick, Challenge, Roosevelt Institute, and Bernard Schwartz Center for Economic Policy Analysis, The New School Joe Nocera, The New York Times Steve Randy Waldman, Interfluidity.com Francesco Guerrera, Financial Times 1:00–2:45 p.m. SPEAKER Gary Gensler, US Commodity Futures Trading Commission “Bringing Oversight to the Swaps Market” 2:45–3:45 p.m. SPEAKER Stephen S. Roach, Morgan Stanley and Yale University “The Next China” 4:00–5:00 p.m. SESSION 3 Swaps Regulation Moderator: Justin Lahart, The Wall Street Journal José Gabilondo, Florida International University Michael Greenberger, The University of Maryland Michael W. Masters, Masters Capital Management, LLC 5:00 p.m. SPEAKER Paul A. McCulley, Society of Fellows, Global Interdependence Center “Triangulating the Triangle” 2 Levy Economics Institute of Bard College Thursday, April 14 9:00–10:15 a.m. SPEAKER Andrew Sheng, China Banking Regulatory Commission and Tsinghua University “‘Finance Cannot Be Left to Free Markets’: An Asian Tribute to Minsky” 10:15–11:15 a.m. SESSION 4 Financial Reform and the GATS: Challenges and Opportunities Moderator: Roger Lowenstein, The New York Times; author, The End of Wall Street William H. Janeway, Warburg Pincus and Cambridge in America Philip Suttle, The Institute of International Finance Lori M. Wallach, Global Trade Watch, Public Citizen 11:30 a.m. – 12:30 p.m. SPEAKER Phil Angelides, Financial Crisis Inquiry Commission “Justice, Reform, and Rebuilding in the Wake of the Financial Crisis” 12:30–2:15 p.m. SPEAKER Charles I. Plosser, Federal Reserve Bank of Philadelphia “Strengthening Our Monetary Policy Framework” 2:15–3:30 p.m. SESSION 5 Fiscal Constraints and Macro Perspectives Moderator: Louis Uchitelle, The New York Times Robert W. Parenteau, Levy Institute and MacroStrategy Edge Richard Berner, Morgan Stanley Peter Hooper, Deutsche Bank Securities Marshall Auerback, Levy Institute and Roosevelt Institute 3:30–4:30 p.m. SPEAKER Gary B. Gorton, Yale University and National Bureau of Economic Research “The Financial Crisis and the Future” 4:45–6:15 p.m. Policy and Regulatory Responses of Emerging Markets: Latin America Mercedes Marco Del Pont, Central Bank of Argentina “International Crisis and Policy Space: Challenges for Emerging Countries” Discussant: Arturo O’Connell, Central Bank of Argentina 6:15 p.m. SPEAKER Paul Tucker, Bank of England “Financial Stability and the UK’s Macroprudential Regime” 3 20th Annual Hyman P. Minsky Conference on the State of the US and World Economies Friday, April 15 9:00–10:00 a.m. SPEAKER Athanasios Orphanides, Central Bank of Cyprus and Governing Council, European Central Bank 10:00–11:00 a.m. SPEAKER Charles L. Evans, Federal Reserve Bank of Chicago “Four Lessons from the Financial Crisis” 11:15 a.m.–12:15 p.m. SPEAKER Vítor Constâncio, European Central Bank “Financial Regulatory Reform and the Economy” 12:15-2:30 p.m. SPEAKER Sheila C. Bair, Federal Deposit Insurance Corporation “Financial Reform: The Road Ahead” 2:30–3:45 p.m. SESSION 6 Reregulating the US Financial System: Beyond Dodd-Frank Moderator: Eric Dash, The New York Times James K. Galbraith, Levy Institute and University of Texas at Austin Robert A. Johnson, Institute for New Economic Thinking Alex J. Pollock, American Enterprise Institute for Public Policy Research 3:45–4:15 p.m. SPEAKER Martin Mayer, The Brookings Institution “The Man Who Got It Right: Hyman P. Minsky and the Economics of Trouble” 4 Levy Economics Institute of Bard College Welcome and Introduction LEONARDO BURLAMAQUI Program Officer, Governance and Civil Society, Ford Foundation DIMITRI B. PAPADIMITRIOU President, Levy Economics Institute LEONARDO BURLAMAQUI: Good morning, everyone. Welcome to the Ford Foundation and the 20th Annual Minsky Conference. I am Leonardo Burlamaqui, program officer here at Ford, and I’m leading our initiative on reforming global financial governance. On behalf of our president, Luis Urbiñas, and our program vice president, Maya Harris, I welcome you once again to the Ford Foundation. This is the third time that we’ve had the privilege of hosting this very prestigious event, and both Luis and Maya regret that their traveling schedules . did not permit them to attend. But as always, we’re delighted to have such distinguished guests joining us as speakers, as panelists, and as a very engaged audience. Once again, this year’s conference is immensely timely and pertinent. The link between this initia- tive and Minsky should be obvious to most of you by now, especially those who have become regulars at the conference. In one sentence: Minsky’s approach is the theoretical framework guiding our initia- tive . on reforming global financial governance. The initiative is very much Minsky going global. So what I’ll do is give you, disguised as an opening remark, a snapshot of what we see as the global financial sys- tems map. I’ll raise five quick points that I hope will follow from just observing the map, and I’ll conclude by asking a Minsky question, which is something I believe Dimitri will talk about when introducing the conference. Ladies and gentlemen, welcome to the Global Financial System. If this looks like kind of a messy slide, it is, and that’s because the global financial system itself is messy. But let’s try to give it a little bit more order so that I can make very quick comments on what we’re seeing. Let’s reorganize it in terms of coor- dinating bodies, regulatory mechanisms, fiscal shelters, financial players, and customers. Let’s go very quickly through them. 5 20th Annual Hyman P. Minsky Conference on the State of the US and World Economies Coordinating bodies: we have here the G20, BIS, Financial Stability Board, OECD, IMF. Let me make clear, this is not exhaustive—we could have more here. The coordinators themselves are not very well coordinated, so that’s a first problem. If we go to regulatory mechanisms, we have the public regulatory system—and again, I’m not exhausting what could be here, but just looking at that, the comment that I think applies is that we have actually very shallow corporations in the sense that national interests are taking priority over what we’ll call the global loopholes. Let me introduce you to another concept that is equivalent to the shadow financial banking system. I want to suggest that we also have a shadow regulatory system, which is composed of those entities that not many people acknowledge exist. When they do, they generally don’t know precisely what those enti- ties do.