Money and Government

The 30^th annual Cato monetary conference was held in Washington, D.C. on November 15^th. The theme was “Money, Markets, and Government: The Next 30 Years.” It was heavily attended in Cato’s new state-of-the-art Hayek auditorium. Jim Dorn has ably directed it over its entire history.

Because of the conference’s breadth and depth, I can only provide some highlights.

Vernon Smith gave a brilliant Keynote Address on the history of bubbles. It was rich in slides, which filled the giant screen in the auditorium. It was a tour de force, and I look forward to seeing it in the Proceedings.

The first session was on Avoiding the Next Crisis. It began strongly with a presentation by FDIC Vice Chairman (and retired President of the Kansas City Fed) Thomas Hoenig. He argued that we are sowing the seeds of the next crisis because there has been no reform of the banking system; in particular, the policy of protecting major banks (“too big to fail”) remains intact. He reiterated his call for separating the broker/dealer networks from commercial banking. He also called for more bank capital with simpler rules, and more effective banking supervision. Many fault his solutions, but it is hard to question his diagnosis.

Jeffrey Miron provocatively questioned the focus on preventing crises, as opposed to growth maximizing policies. He argued that, in the pre-Fed era (1790-1915), financial panics did not cause depressions. Crisis avoidance has led to the politicization of monetary policy.

Lawrence H. White presented a paper on an “Anti-fragile Banking System.” He disputed the consensus that banking is naturally fragile. Banking survived 7 centuries before government guarantees. He argued that competition in banking is the path to financial stability. Under competition, bankers learn from past mistakes and evolve sound banking practices.

The second panel was on The Limits of Monetary Policy. William Poole, the Moderator, read Allan Meltzer’s paper, which continued his theme of criticizing Fed policies and calling for a monetary rule. Kevin Warsh, former Fed Governor, gave a critical assessment of Fed policy. David Malpass argued strenuously against the Fed’s low-interest policies, which he said are actually retarding the recovery.

Thomas Cargill and I co-authored, and I presented (at the second session) a paper on Central Bank Independence; Reality or Myth? We examined the history of central banks; the theory of central bank independence; and the empirical literature on central bank independence. We concluded that central bank independence is more myth than reality. We will also present a version of the paper at the AEA meetings in January 2013.

John Taylor gave an excellent luncheon address criticizing Fed policy for being too discretionary, and itself being the source of the volatility it purports to dampen. He provided an updated defense of what is called the Taylor Rule (which others, not he, christened as such).

By the afternoon, the criticism of Fed policy was broad and deep. There was general agreement on the need for a rule-based monetary policy. There was no attempt to come to agreement on the nature of the rule, or on the tantalizing suggestions by some that the Fed could be dispensed with entirely. One easily see the theme of next year’s conference being on “What Next?”

The afternoon sessions focused on the Euro Crisis, and Capital Freedom for China? Charles Plosser, President of the Philadelphia Fed, gave the Closing Address.

The conference was intense and focused on alternatives to current central bank policies.

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