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Here Beliefs in Axioms Such As Self-Regulating Markets and Perfectly Rational Expectations Are Sufficient to Guide Both Private Decisions and Public Policy

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Here Beliefs in Axioms Such As Self-Regulating Markets and Perfectly Rational Expectations Are Sufficient to Guide Both Private Decisions and Public Policy Conference Proceedings Levy Economics Institute of Bard College th ANNUAL HYMAN P. MINSKY CONFERENCE ON THE STATE OF THE U. S . AND WORLD ECONOMIES 19After the Crisis: Planning a New Financial Structure April 14–16, 2010, 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. Papadimitri SPEAKERS Sandra Pianalto 9 Jan Kregel 20 Richard W. Fisher 33 Eugene A. Ludwig 47 Richard H. Neiman 59 Keith S. Ernst 70 Paul Krugman 83 James Bullard 95 Paul A. Volcker Jr. 108 Paul McCulley 121 Thomas M. Hoenig 130 SESSIONS 1. What to Do with the “Too Big to Fail” Doctrine: United States and Europe 141 2. Financial Regulation Proposals 145 3. Fed/FDIC Regulation 149 4. Minsky and the Current Crisis 152 5. Beyond the Exit: Banks and Central Banks 155 6. Internal and External Financial Fragility 158 7. International Financial Fragility 162 8. Policy Responses of Emerging Markets to the Crisis 166 PARTICIPANTS 170 The proceedings consist of transcripts of the speakers’ remarks and summaries of session participants’ presentations. Foreword I am delighted to welcome you to the 19th Annual Hyman P. Minsky Conference, “After the Crisis: Planning a New Financial Structure,” organized by the Levy Economics Institute of Bard College with support from the Ford Foundation. Hyman Minsky was convinced that economic systems are prone to financial instability and crisis, and urged that lessons be learned from the crisis of 1929–33 so that “it”—the Great Depression—could not happen again. This year’s conference draws upon many Minskyan themes, including reconstituting the financial structure; the reregulation and supervision of financial institutions; the relevance of the Glass- Steagall Act; the roles of the Federal Reserve, FDIC, and the Treasury; the moral hazard of the “too big to fail” doctrine; debt deflation; and the economics of the “big bank” and “big government.” Speakers will also compare the European and Latin American responses to the global financial crisis and proposals for reforming the international financial architecture. Moreover, central bank exit strategies, both national and international, will be 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 19th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies Program Wednesday, April 14 9:00–9:30 a.m. WELCOME AND INTRODUCTION Leonardo Burlamaqui, Ford Foundation Dimitri B. Papadimitriou, Levy Institute 9:30–10:30 a.m. SPEAKER Sandra Pianalto, Federal Reserve Bank of Cleveland “Regulatory Reform: Lessons from the Front Line” 10:30 –11:30 a.m. SPEAKER Jan Kregel, Levy Institute and Tallinn Technical University “Minsky Moments and Minsky’s Proposals for Regulation of an Unstable Financial System” 11:45 a.m. – 1:00 p.m. SESSION 1 What to Do with the “Too Big To Fail” Doctrine: U.S. and Europe Moderator: John Cassidy, The New Yorker Philipp Hartmann, European Central Bank “Macro-prudential Supervision and How to Limit the Risks of Systemic Financial Intermediaries” Bert Ely, Ely & Company, Inc. “What to Do with the “Too Big to Fail Doctrine: U.S. and Europe” Bernard Shull, Hunter College and NERA Economic Consulting “Bank Merger Policy in a Too-Big-to-Fail Environment” 1:00–2:45 p.m. SPEAKER Richard W. Fisher, Federal Reserve Bank of Dallas “Minsky Moments and Financial Regulatory Reform” 3:00–4:00 p.m. SPEAKER Eugene A. Ludwig, Promontory Financial Group, LLC; former Comptroller of the Currency “Are We Addressing the Root Causes of the Problem?” 4:15–5:30 p.m. SESSION 2 Financial Regulation Proposals Moderator: Gretchen Morgenson, The New York Times Michael Greenberger, The University of Maryland Martin Mayer, The Brookings Institution Eliot Spitzer, 54th Governor of New York; former New York State Attorney General 2 Levy Economics Institute of Bard College 5:30 p.m. SPEAKER Richard H. Neiman, Superintendent of Banks, State of New York; and TARP Congressional Oversight Panel Thursday, April 15 9:00–10:00 a.m. SPEAKER Keith S. Ernst, Center for Responsible Lending 10:00–11:00 a.m. SPEAKER Paul Krugman, Princeton University, London School of Economics, and The New York Times “Six Doctrines in Search of a Policy Regime” 11:00 a.m. – 12:00 p.m. SPEAKER James Bullard, Federal Reserve Bank of St. Louis “Containing Risks in the New Global Financial Landscape” 1:45–3:00 p.m. SESSION 3 Fed/FDIC Regulation Moderator: Louis Uchitelle, The New York Times Jane D’Arista, Political Economy Research Institute, University of Massachusetts Amherst “Is the Fed Perpetuating its Failures?” Richard S. Carnell, Fordham University; former Assistant Secretary of the Treasury for Financial Institutions “Regulators’ Incentives” Ernest T. Patrikis, White & Case, LLP; former First Vice President of the Federal Reserve Bank of New York 3:00–4:00 p.m. SPEAKER Paul A. Volcker Jr., Economic Recovery Advisory Board; former Chairman of the Federal Reserve Board 4:15–5:30 p.m. SESSION 4 Minsky and the Current Crisis Moderator: Jeff Madrick, Challenge; Roosevelt Institute; and Bernard Schwartz Center for Economic Policy Analysis, The New School Jan Hatzius, Goldman Sachs Robert W. Parenteau, Levy Institute and MacroStrategy Edge “Minsky and the Eurozone Predicament: Transcending the Dismal Science” 5:30 p.m. SPEAKER Paul McCulley, PIMCO 3 19th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies Friday, April 16 9:00–10:15 a.m. SESSION 5 Beyond the Exit: Banks and Central Banks Moderator: Deborah Solomon, The Wall Street Journal Peter R. Fisher, BlackRock, Inc.; former Under Secretary for the U.S. Treasury for Domestic Finance Kevin M. Warsh, Board of Governors of the Federal Reserve System Richard Sylla, New York University “Threats to Central Bank Independence” 10:15–11:15 a.m. SESSION 6 Internal and External Financial Fragility Moderator: L. Randall Wray, Levy Institute and University of Missouri–Kansas City Eric Barthalon, Allianz Investment Management, SE “Perceived Returns, Risks of Loss, and Minsky’s Financial Instability Hypothesis” Frank Veneroso, Veneroso Associates, LLC “The Serial Bubble Epoch: Is It Over?” Robert J. Barbera, Investment Technology Group, Inc. 11:30 a.m. – 12:30 p.m. SESSION 7 International Financial Fragility Moderator: Dimitri B. Papadimitriou, Levy Institute James K. Galbraith, Levy Institute and University of Texas at Austin Luis Carlos Bresser-Pereira, Getulia Vargas Foundation “Capital Flows and the Changing Balance in the World Economy” L. Randall Wray, Levy Institute and University of Missouri–Kansas City “Minsky’s Money Manager Capitalism and the Global Financial Crisis” 12:30–2:30 p.m. SPEAKER Thomas M. Hoenig, Federal Reserve Bank of Kansas City 2:30–3:45 p.m. SESSION 8 Policy Reponses of Emerging Markets to the Crisis Moderator: Jan Kregel, Levy Institute and Tallinn Technical University Nelson H. Barbosa Filho, Secretary of Economic Policy, Federal Government of Brazil “Development and Countercyclical Policies in Brazil” Fernando J. Cardim de Carvalho, Federal University of Rio de Janeiro “International Reserves and Policy Space in Latin America” Rainer Kattel, Tallinn Technical University “The Crisis and Policy Responses in Eastern Europe” 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. Welcome to the Ford Foundation and to the 19th Annual Hyman P. Minsky Conference. I’m Leonardo Burlamaqui, the program officer at the Ford Foundation working on reforming global finance. On behalf of our president, Luis Ubinas, I welcome you again to the Ford Foundation. This is the sec- ond time that we have had the privilege of hosting this prestigious event, and Luis regrets that his trav- eling schedule did not permit him to attend. We’re delighted to have such distinguished guests joining us as speakers, as panelists, as moderators, and as an engaged audience. This year, as last year, the conference is immensely timely and pertinent. In the aftermath of the financial crisis, the debate is now squarely about economic recovery and financial reforms, and the conflicts between them—key themes for Hyman Minsky and for the Ford Foundation. In fact, a common theme for Ford and Minsky’s approach is that both have long understood the key role of sound financial governance, and of financial stability that also looks to achieve poverty alleviation. We have argued for some time that financial markets need the oversight of democratic institutions to ensure transparency and accountability. As it is, a small group of nations and institutions has been setting the rules and basically retreating from regulation. The result is a global financial system that is more unstable and unresponsive to the inequities of economic globalization. The reform financing initiative at Ford supports efforts to reform key global institutions to make them more transparent, accountable, and effective in delivering financial stability, development, and poverty alleviation. We want to bring new voices to the emerging global public dialogue, and to build alliances with academic partners, advocacy 5 19th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies groups, global organizations, and national governments to ensure that these institutions advance the public good. This conference, which we are proud to host with the Levy Institute at Bard College, is one step toward spurring the creative thinking needed to approach these issues from a multitude of angles. But among those angles, the Minsky approach bears special relevance as we face today’s economic challenges. I’m confident that much will be said about that in the coming days, and we’ll start right away on that avenue with Dimitri and Jan Kregel.
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