Conference Proceedings Levy Economics Institute of Bard College rd annual hyman p. minsky conference on the state of the us and 23world economies Stabilizing Financial Systems for Growth and Full Employment April 9–10, 2014 The National Press Club, Washington, D.C. A conference organized by the Levy Economics Institute with support from the Ford Foundation Contents FOREWORD 1 PROGRAM 2 WELCOME AND INTRODUCTION Dimitri B. Papadimitriou 5 SPEAKERS Carolyn B. Maloney 8 Sherrod Brown 13 Charles L. Evans 19 Daniel K. Tarullo 29 Peter Praet 39 Jason Furman 50 Vítor Constâncio 70 SESSIONS 1. Financial Reregulation to Support Growth and Employment 82 2. Financial Regulation and Economic Stability: Was Dodd-Frank Enough, or Too Much? 87 3. The Global Growth and Employment Outlook: Cloudy with a Risk of . ? 91 4. The Euro and European Growth and Employment Prospects 96 5. What Are the Monetary Constraints to Sustainable Recovery of Employment? 101 PARTICIPANTS 106 These proceedings consist of edited transcripts of the speakers’ remarks and summaries of session participants’ presentations. Foreword I am delighted to welcome you to the 23rd Annual Hyman P. Minsky Conference, “Stabilizing Financial Systems for Growth and Full Employment,” organized by the Levy Economics Institute with support from the Ford Foundation. As part of its monetary policy research, the Institute is partnering with the Ford Foundation to examine financial instability and the reregulation of financial institutions and markets within the context of Minsky’s path-breaking work on financial crises. Despite the appearance of greater stability in the US financial system since the 2008–09 global recession, the economic recovery remains fragile and uneven, and social conditions are expected to improve even more slowly. In Europe, the introduction of fiscal austerity to deal with the high government debt produced by crisis response measures has worsened the prospects for recovery in many countries—prospects that are unlikely to improve for years to come. Further, decoupling of the Asian and emerging-market economies has failed to materialize; these countries are also suf- fering from the sluggish recovery in the developed economies. In this context of global uncertainty, with growth and employment well below normal levels, the 2014 Minsky Conference will address both financial reform and prosperity, drawing from Minsky’s work on financial instability and his proposal for achieving full employment. Panels will focus on the design of a new, more robust, and stable financial architecture; fiscal austerity and the sus- tainability of the US and European economic recovery; central bank independence and financial reform; the larger implications of the eurozone debt crisis for the global economic system; the impact of the return to more traditional US monetary policy on emerging markets and developing economies; improving governance of the social safety net; the institutional shape of the future financial system; strategies for promoting an inclusive economy and more equitable income distri- bution; and regulatory challenges for emerging-market economies. I look forward to seeing you again at future Levy Institute events. Dimitri B. Papadimitriou President, Levy Economics Institute, and Jerome Levy Professor of Economics, Bard College 1 23rd Annual Hyman P. Minsky Conference on the State of the US and World Economies Program Wednesday, April 9 8:30−8:45 a.m. WELCOME AND INTRODUCTION Dimitri B. Papadimitriou, President, Levy Institute 8:45−9:45 a.m. SPEAKER Carolyn B. Maloney, US Representative (D-NY, 12) “A Prospective from Capitol Hill” 9:45−11:45 a.m. SESSION 1 Financial Reregulation to Support Growth and Employment Moderator: Deborah Solomon, News Editor, The Wall Street Journal Alex J. Pollock, Resident Fellow, American Enterprise Institute Andrew Sheng, President, Fung Global Institute Mercedes Marcó del Pont, formerly, President, Central Bank of Argentina Michael Greenberger, Professor, School of Law, and Director, Center for Health and Homeland Security, The University of Maryland 11:45 a.m. − 1:30 p.m. SPEAKER Sherrod Brown, US Senator (D-OH) 1:30−2:45 p.m. SESSION 2 Financial Regulation and Economic Stability: Was Dodd-Frank Enough, or Too Much? Moderator: Binyamin Appelbaum, Business and Economics Reporter, The New York Times Anat Admati, Professor of Finance and Economics, Stanford University Jan Kregel, Senior Scholar, Levy Institute, and Professor, Tallinn University of Technology 3:15−4:15 p.m. SPEAKER Charles L. Evans, President and Chief Executive Officer, Federal Reserve Bank of Chicago “Fed Communications and Goal-oriented Monetary Policy” 2 Levy Economics Institute of Bard College 4:15−6:00 p.m. SESSION 3 The Global Growth and Employment Outlook: Cloudy with a Risk of . ? Moderator: James Politi, US Economics and Trade Correspondent, Financial Times Bruce Kasman, Chief Economist and Managing Director of Global Research, J. P. Morgan Willem H. Buiter, Global Chief Economist, Citi Frank Veneroso, President, Veneroso Associates, LLC 7:00 p.m. SPEAKER Daniel K. Tarullo, Member, Board of Governors of the Federal Reserve System Thursday, April 10 9:00−10:00 a.m. SPEAKER Peter Praet, Executive Board Member, European Central Bank “The Financial Cycle and Real Convergence in the Euro Area” 10:00 a.m. − 12:00 p.m. SESSION 4 The Euro and European Growth and Employment Prospects Moderator: Tom Redburn, Economics Editor, The New York Times Heiner Flassbeck, Director, Flassbeck-Economics; formerly, Director, Division on Globalization and Development Strategies, United Nations Conference on Trade and Development (UNCTAD) Denis MacShane, European Policy Counsel; former UK Minister for Europe Dimitri B. Papadimitriou, President, Levy Institute 12:00−2:00 p.m. SPEAKER Jason Furman, Chairman, Council of Economic Advisers, Executive Office of the President “Is the Great Moderation Coming Back?” 2:00−3:00 p.m. SPEAKER Vítor Constâncio, Vice President, European Central Bank “Growing Out of the Crisis: Is Fixing Finance Enough?” 3 23rd Annual Hyman P. Minsky Conference on the State of the US and World Economies 3:15−5:00 p.m. SESSION 5 What Are the Monetary Constraints to Sustainable Recovery of Employment? Moderator: Jon E. Hilsenrath, Chief Economics Correspondent, The Wall Street Journal Robert Barbera, Co-director, Center for Financial Economics, The Johns Hopkins University Frank N. Newman, Chairman, Promontory Financial Group China; formerly, Deputy Secretary, US Department of the Treasury L. Randall Wray, Senior Scholar, Levy Institute, and Professor, University of Missouri–Kansas City 4 Levy Economics Institute of Bard College Welcome and Introduction DIMITRI B. PAPADIMITRIOU President, Levy Institute Let me welcome you to the Levy Economics Institute’s 23rd Annual Hyman P. Minsky Conference. The theme of this conference is stabilizing financial systems for growth and full employment. First and foremost, of course, I want to thank the Ford Foundation and especially Leonardo Burlamaqui, who have supported us over the years and continue to support us, especially in the Institute’s program on rereg- ulating the financial structure. My sincere thanks also go to my partner in crime, who has been co-organizing this conference: Jan Kregel. He is a senior scholar at the Levy Institute and a long-time friend, and he directs the Institute’s research program on monetary policy and financial structure, which he inherited from Hyman Minsky in 1996. Every year we find that many more colleagues in the academy, the financial community, and the policymaking arena recognize Minsky’s prescient contributions to economics that help us understand the workings of a sophisticated and finance-guided economy like our own. This year we’re holding the conference in Washington to make sure that Minsky’s insights on the financial structure and its relationship to the real economy become better known to the policy- making constituency. The Levy Institute continues to sharpen its focus on strategic issues of economic policy relat- ing to achieving financial stability, long-term growth, and high employment in a period of low inflation and, unfortunately, high unemployment, inequality, and decreasing public spending on basic research, research and development, education, and physical infrastructure. We continue our research, writings, and international activities on current monetary and fiscal policies in the US, Europe, and the rest of the world; the systemic risks and lack of significant progress in reforming the financial services sector; and the structure and organization of regulation in concert with the advances of financial innovation. The Levy–Ford Foundation project on reregulating financial markets and institutions offers policy proposals for reforming the financial structure that draw from Minsky’s research and writ- ings. Some of our publications are outside by the table. We invite you to take a look at them. It has been almost four years since the Dodd-Frank Wall Street Reform Act was passed, with the struggle over its shape still ongoing. To our minds, Dodd-Frank was based on the idea that financial markets are normally stable, with the exceptional alarming event. The New Deal’s 5 23rd Annual Hyman P. Minsky Conference on the State of the US and World Economies Glass-Steagall Act and the Clinton-era Gramm-Leach-Bliley Financial Services Modernization Act shared these assumptions. All these legislative corrections were conceived as system-wide over- hauls. Dodd-Frank in reality was designed only to remedy random ad hoc crises, like the 2008 financial meltdown, that we have come to know as a “Minsky moment.” Ironically, Hyman Minsky actually believed that these moments were anything but random or ad hoc. The increasingly risky practices that fueled danger and instability in our economic system are still happening and being rewarded, and if allowed to continue will ultimately lead us to yet another financial crisis. Each new threat to stability is destined to be different than the last. Dodd- Frank aims at identifying the most vulnerable institutions and practices. This approach is too brit- tle to contain the disastrous effects of risks that are always morphing.