SPEAKER 1: Professor Blinder is the Former Vice Chairman of the Board of Governors of the Federal Reserve System. He's also a Former Governor of the American Stock Exchange. He is currently a Professor of Economics and Public Policy at Princeton University, where he has taught since 1971.
He has served as a member of several presidential either campaigns or presidencies. He was a member of President Clinton's original Council of Economic Advisers. He assisted Al Gore and John Kerry in their presidential campaigns. He testifies frequently before Congress. Many of you will have already heard of him. He's authored or co-authored over 20 books, including a textbook that I'm told nearly three million college students have learned economics from. That's a tremendous impact.
Other academics-- well, I used to say when I was a professor that fives of people read my articles. The idea that three million college students have read that book is incredible. His latest book is called After the Music Stopped-- The Financial Crisis, the Response, and the Work Ahead.
As I said, he's been on or spoken to me many, many different news agencies-- PBS CNBC, CNN, Bloomberg, and so on. He's the Academic Adviser for the Federal Reserve Bank of New York. He's a member of the Council on Foreign Relations. He has been elected a Distinguished Fellow of the American Economic Association. He's also a member of the American Philosophical Association, the American Academy of Arts and Sciences, and the American Academy of Political and Social Sciences.
In 2014, he was named by the Carnegie Council as one of 55 global thought leaders. The New York Times calls him "gifted in making complicated economic issues understandable to the lay reader," which we will benefit from today. The Washington Post calls him a national treasure. Please join me in welcoming Professor Blinder as the 2016 Bartels World Affairs Fellow.
ALAN S. BLINDER: Thank you very much for the lovely introduction. I want to thank Cornell and the Bartels family for this honor. I told some of my colleagues what I was coming up here for, with the codicil that this is undoubtedly the only list my name will ever appear on that also includes the Dalai Lama and Desmond Tutu.
I've been on a lot of lists, but nothing like that. So thank you all very much.
So I'm going to speak about what I've called the global evolution of central banking, partly concentrating on America but also probably I think I'll actually have more to say about Europe than about America. You'll see when we get to the end.
But I want to start by putting a, how shall I say, slightly subversive thought in your head. And then I want to elaborate a little on why it's slightly subversive.
So this gentleman is shown in the upper right. You probably don't recognize him as Montague Norman. Montague Norman was the governor of the Bank of England during the interwar period, when I might say, a number of central banks, including the Bank of England, really screwed up. They weren't alone.
Anyway, this is one of my favorite quotations. And I'm going to make reference to it more than once. Can you read it all the way in the back? Yeah, good. It's good when students have really good eyesight.
This is from a book by a journalist named Steve Solomon, old book by now, who said, Montague Norman used to dream that the BIS-- that's the Bank for International Settlements in Basel; the gnomes of Zurich actually meet in Basel, not Zurich-- would one day foster a core of central bankers-- now this is why I've bolded it-- entirely autonomous of governments. That's what I meant by a rather subversive thought. And that will come back.
Why? Why did Montague Norman think that that was a good idea? Largely because of the fear that central bankers then and now had and still have of what politicians with short time horizons might, and indeed, probably would, do. And in particular, in this context that such people could not be trusted to produce what was then called-- and now is, I guess, still called-- sound money.
So what we mainly mean by sound money is keeping inflation low. Now, if you think about it, that was a little curious back then, because secular inflation in any way wasn't really a problem in the interwar period. It became a problem in the post-World War II period. I'm still healing the feedback, yeah? Am I better off coming closer or further?
ALAN S. BLINDER: All right. But one question that's rarely been asked since 1940 but we need to ask today is, what if inflation is too low? Remember, the fear is that politicians will make it too high. And that's why we have to entrust people that are entirely autonomous of governments with this responsibility.
Here's a graph of the inflation rate in the United States since 1947. It doesn't matter that you probably can't read the legend, but you can see where it is now. You are here. We're living with more or less zero inflation in the United States, also in Europe. Negative in Japan, and so on. It's a quite different world from the world of the 1970s and '80s, where those two big jagged mountains of inflation are. Or were.
The world, partly in reaction to the inflation that we just saw-- that one, the old inflation-- in the '80s and '90s moved from a situation in which independent central banks-- sorry, that's what CBI is, central bank independence-- was a rarity. And I think you basically found it in the United States. It was in West Germany and Switzerland, and almost no place else. To a world, by the end of the '90s, where, as I write here, almost all countries-- there are always exceptions-- had made their central banks independent.
Now, Montague Norman thought that the BIS, the club for central bankers-- or wished, I guess I should say-- that the BIS could get that done. That is not how it got done. So sorry, Monty. It was not you guys in Basel that achieved that. What was it? Why did the world make this very major transformation in a period of something like 15 years?
Well, here's my list. It starts with the end of the Bretton Woods system. If central banks other than the United States central bank are charged with the responsibility of maintaining exchange rate parity with the United States, that's what they do. And that was the Bretton Woods system. It is something between difficult and literally impossible to conduct an independent monetary policy when you're in a fixed exchange rate arrangement period. In this case, it was a fixed exchange rate with the US dollar.
Secondly-- I didn't put these maybe in the logical order-- there was that great inflation that we were just looking at, those two big mountains in the inflation rate which got governments around the world thinking, you know, it's not such a great thing to have 20% inflation, and maybe we should put in charge of the inflation rate some people that don't want 20% inflation and have the determination to get rid of 20% inflation.
In the US, by the way, we never got to 20%. But a number of other advanced countries got higher than 20%. We got up to the teens-- 15%, 16% inflation.
Thirdly, that period of time saw a number of financial market shocks-- I might add, nothing like what the world experienced in 2008, 2009. But at the time, they, looked pretty serious. I listed a few of them here on the slide. What was then called the LDC debt crisis, which was concentrated in Latin America but not only in Latin America.
Several ERM-- what does that stand for? This was the European Exchange Rate Mechanism, the precursor to the eurozone, which had a number of rocky periods in which there were exchange rate crises that, for example, knocked either the British pound or the Italian lira right out of the exchange rate mechanism.
The Mexican crisis in 1982, leading to a lost decade of growth in Mexico. And the dot dot dot indicates that's only a partial list.
So governments around the world, including in the countries referred to in the parenthetical remark but not limiting to those, started thinking, maybe we're not actually producing sound money as Montague Norman thought way back in the interwar war period. Maybe we should make or give our central banks more independent power.
And then in 1992, a whole bunch of European countries-- I think there were 15 originally; someone here will correct me if I'm wrong about that-- signed the Maastricht Treaty, which was the beginning of a movement, according to the treaty, that was going to take about seven years, from '92 to '99, towards monetary union, towards the eventual abolition of the 15 currencies-- it worked out to be only 11 in the end-- and replacing them by the euro.
One of the critical requirements for the entry into monetary union was that you had an independent central bank. At the beginning, in 1992, Germany sat almost alone with an independent central bank. Remember, Switzerland was not one of these signatory countries. By the end, by 1999-- and indeed, before; I can't remember when the last one converted-- all the European countries that were going into the monetary union had an independent central bank. They had to.
And finally, there was generally globalization, and in particular, the desire of many developed and developing countries to get into the club rather than out of the club. So the gold standard, so to speak-- well, it wasn't really gold; the silver standard-- for central banks was independent central banks. That's what they did in America. That's what they did in Germany.
By 1999, that's what they did all over Europe. That's what you were supposed to do if you were a forward-looking, advanced society. And so many developing countries-- and by the way, a lot of the countries that were spun out of the former Soviet Union-- did in that time frame. So you had all of those forces pushing in the direction of central bank independence.
Now, let me be slightly more specific about what that means and how you get it. All right? So it's one thing to say, we want our central bank to be independent. What does that actually mean?
Well, it can mean different things in different places. But I think a very important thing-- and I listed it first-- was some kind of protection in law from political interference by your Congress or parliament or your president or prime minister in making decisions about monetary policy. So making decisions about monetary policy could, in the olden days, mean things like the money growth rate, and more recent days has meant the short-term interest rate.
Keeping the politicians mostly out of it-- the "mostly" is important. Remember the Montague Norman wish, entirely autonomous of government-- mostly.
So I listed two things on this list under the "mostly." First, I like to call it near irreversibility of monetary policy. So when the Federal Reserve has a meeting and decides either to move interest rates or not to move interest rates, it's, in a practical sense, irreversible.
Is it literally irreversible? No. Actually, Congress could come into session the very next day and change that. They could even abolish the Federal Reserve, if they had the votes and the president would sign the law.
The Federal Reserve, unlike the central banks of some countries, has no constitutional protection. Well, the Constitution is not that big a document, including all the amendments. You can search it from the first word to the last word. There's nothing in there about an independent central bank.
By the way, maybe if Alexander Hamilton had more influence at the time, it would have been. But Jefferson didn't like the idea, and it was not in the Constitution.
So you can get this kind of legal independence either by being in the Constitution-- which is not the case in the United States but is, in a weird way, the case with the ECB. It's not in the Constitution, but it's provided for in the Treaty of Maastricht-- or by having your legislature or your Congress, in our case, parliament in many other cases, delegate the authority to you. So that's the case in the United States.
The Constitution assigns the power to, I believe I've got the words right, "coin money and regulate the value thereof" to the United States Congress. That's right in there in Article I. Congress then delegated that authority to the Federal Reserve. And what I was talking about a moment ago is the Congress can grab that authority back any day it chooses. Most congressmen realize that would be a really dumb idea, and they're not about to do it.
Second thing that helps make a central bank independent, or is really essential to independence, is that the people that are put in decision-making authority have long terms of office, cannot be removed at the whimsy of the president or the prime minister-- there has to be for cause, and the cause is a serious cause. And this is not precise language-- the appointment process is not too political.
Now, someone's going to say that's pretty mushy language. And it is, but it's deliberately mushy because one of the things I want to say as we progress, hearkening back to Montague Norman, is you do want it to be political, sort of. You don't want the central bank to be a self-perpetuating oligarchy that is literally autonomous of politics.
But what you do want is that the appointments for the central bank are not considered events for a political donnybrook and are not very political people themselves. You don't want the losing presidential candidate to then wind up on the Federal Reserve Board or something, not that he or she would want that job. But that's not the sort of people that you want to put in charge of monetary policy.
Now, third aspect of central bank independence-- the first word on this chart says "legal." But in many cases, the tradition is more important than what the law says. In fact, as I was indicating a moment ago, literally speaking, the legal protection for the Federal Reserve is pretty thin-- thin in the sense that Congress could change it any day it wants. The tradition of independence of the Federal Reserve is pretty thick and pretty powerful, which is one reason that a politician that would challenge it is looking for trouble and would probably get trouble.
So one thing that I'd like to say-- it was mentioned in introducing me that I was on Bill Clinton's original Council of Economic Advisers. So in the words of the musical Hamilton, I was in the room where it happened. Most of you haven't seen that. You will, though. You should.
I was the person in the transition, speaking to President-elect Clinton before he became president, that explained to him-- and he didn't take this so well, actually-- that in terms of the economy-- and that's, of course, the big issue; remember the economy, stupid-- that in terms of the economy, he'd just been elected to the second most powerful position in the country-- second most. The first was already taken. It was Alan Greenspan, and he hadn't been elected.
I and others-- it wasn't just me-- in the early Clinton team persuaded the president, then President Clinton, to adopt what his predecessors had not adopted, which is basically-- and it really started with Bill Clinton-- a tradition of not attacking the Federal Reserve on monetary policy.
So the mantra of the Clinton administration, which you probably heard from first Secretary of the Treasury was Lloyd Bentsen, and then more famously, Robert Rubin-- must've said this 5,000 times, we don't comment on the Fed. That was the mantra. We don't say we like what they did. Sometimes they did like what they did. We don't say they didn't like what they did. We don't comment on the Fed.
And people forget this now, because this has become the norm. Bill Clinton was followed by George W. Bush, who more or less adhered to the same thing. And Barack Obama has adhered to the same thing. This tradition of we-don't-comment-on-the-Fed-- that's not the literal words those other presidents used-- is pretty young actually, dating only from 1993. But it is a tradition, and at this point a president that would violate that tradition would be, I think, held to account.
Now, coming back to Montague Norman, a lot of people in Europe for years talked about-- and some people in America talked about-- the democracy deficit that you create when you put a bunch of unelected people in such a position of authority. So let's think about that a little bit. How can we at least whittle down, if not completely eliminate, democracy deficit in the context of independent central banking?
Well, first and probably most obviously, the goals can-- and I would argue, should-- be set politically by whatever political authority does such things. So in the United States, it would be laws of Congress signed into law, acts of Congress signed into law by the President of the United States.
The Bank of England is quite pure on this. The elected government has decided that they will have a [? mono ?] goal of low inflation, and they give the Bank of England a number. This is the number you're supposed to produce. And for those of you who don't know this, if you're not an aficionado of central banks, when the Bank of England fails to deliver that number, the governor of the Bank of England has to write an embarrassing letter to the chancellor of the exchequer explaining why they failed.
This is not so different from the system in New Zealand, which really started this. The Fed and the ECB, the European Central Bank, are much more hybrid in the sense that the relevant political authorities-- in our case, the Congress-- in the Federal Reserve Act laid down in kind of vague language the mandate of the central banks. And the central banks themselves made them numerical.
So it's the Federal Reserve, not the US Congress, that decided that the inflation objective for the Federal Reserve is 2% annual inflation in the price index for PCE, personal consumption expenditures. And if you don't know what that means, neither do most Americans. But they do at the Federal Reserve, and the Federal Reserve decided that, not the Congress.
Secondly is something I mentioned already-- delegated authority can be taken away by the duly elected authorities-- in the US case, the Congress. Top appointments are made politically. So this is what I was dancing around. You want these appointments to be political, because that's what gives the holders of the office political legitimacy. But you don't want them to be too political. You don't really want to put very political types of people in those offices.
And in return, the central bank-- and remember, this is all under the heading, how do we reduce the democracy deficit-- owes back in return honesty, transparency, and accountability-- none of which, I might add, Montague Norman had in mind. His motto was, never explain, never excuse. If you peasants want to know what's going on at the Bank of England, too bad. I'm not telling you. That was his attitude. That is not the attitude of modern central banks, and I think that's a huge improvement.
So the conclusion then is that independent central banks these days are not entirely autonomous of government, nor do they want to be, for the most part. And certainly, nor do they should be. So let's look at a few cases-- two really, the Fed and the ECB.
Is the Fed a good approximation to this ideal? Well, as I said, in the US, central bank independence comes much more from tradition than from law. And some of that tradition is pretty young. I did that already. The leaders of the Fed have usually been not very political people. So I'm talking about the Board of Governors in Washington. Supposed to be seven, nowadays five.
When I put something up there, I have to say, let's forget about Arthur Burns. Arthur Burns was a big exception to the rule, a very, very political person-- some interesting history of him and Nixon that I won't go into.
And I also do want to mention, sitting here in April 2016, that lately-- and, I think, very unfortunately-- appointing people to the Board of Governors of the Federal Reserve System is becoming way too political. And that's why the Fed board now only has five members when the statute says it has seven. It's become impossible to get people on the Fed, just as it's become impossible to confirm judges and blah, blah, blah, blah, blah. This is very unfortunate.
As I mentioned, the goals have been set more by the Fed than by the Congress. I would actually prefer, as a small d Democrat-- I'm also a big D, Democrat, but what matters here is a small d Democrat-- that Congress actually state those objectives. Congress didn't, so the Fed did. But on openness and transparency-- again, as it says, recently, not historically-- the Fed's doing pretty well. The Fed is pretty open now to explaining its actions, why it did what, and so on.
How about the ECB, which is much younger than the Fed? Central bank independence in the eurozone actually comes from a treaty. "Treaty" has an exclamation point at the end of it, because as a practical matter, treaties are impossible to change. Not literally-- if all the countries get back together and unanimously agree to amend the treaty, you amend the treaty.
But that's a very tall order. So in a practical sense, when it's in a treaty, it's forever, unless countries abrogate the treaty and drop out of the eurozone, which as you probably know, was considered in the case of Greece, and may be considered again but hasn't happened.
And in addition to that, by design, there is no government that sits on top of the ECB. So there is a government that sits on top of the Federal Reserve. The US Congress exercises oversight over the Federal Reserve. The Federal Reserve must report to the Congress. There's no such thing for the ECB, unless you want to make the European Parliament look more important than it actually is. So they do report to the European Parliament, but most Europeans will say, the what? They don't report to the German Bundestag. They don't report to the French Chamber of Deputies, dot dot dot.
So in design, it looks like the ECB is incredibly independent. In practice recently, it doesn't look so independent. And I'm going to come back to that in detail at the end of the lecture.
I put up this thing about what kind of people you put in charge. I think it's fair to say that ECB president so far-- there haven't been that many of them-- have been relatively non-political people, much more like smart technocrats. Although, the process for putting somebody in first chair at the ECB-- they call it the president-- looks not only political, but very opaque. It's not a clear process as it is in the United States, where the president makes a recommendation and Congress must confirm or turn it down. The inflation target, as I said, is set by the ECB. And the ECB is also reasonably open and transparent.
I want to point out especially, because they got a lot of criticism in the early days for not being very transparent, they had press conferences from day one, where the head of the ECB came out and faced the press and took questions. The Fed wasn't willing to do that until Ben Bernanke decided in 2012 to start doing that.
I was on the Fed with Alan Greenspan as the leader. And I can tell you, if you suggested to Alan Greenspan that he should have regular press conferences and face the press, he would have looked at you like you'd landed from the planet Mars and that was the dumbest idea he'd heard all week. But now the Fed does that.
Last point I want to make-- I think it's the last-- about central bank independence is that this is not an on-off variable. It's not either that you are independent or you're not independent. It's a continuous variable. And a number of scholars over the years have developed different quantitative measures of how independent particular central banks are.
In addition to that, in terms of not being an on or off, central banks do other things in most countries other than monetary policy. So for example, they're always the lender of last resort, if they do it. They supervise and regulate banks in many but not all countries. That's what I mean. This is the ugly terms that have become terms of art in this world, microprudential. "Micro" means small.
So you're a microprudential regulator if you regulate JP Morgan Chase, which is bigger than most countries? You're a macroprudential regulator if you have responsibilities for systemic risk over the whole economy. And many but not all central banks do those sorts of things, but with less independence in those domains than they have in the domain of monetary policy.
And I think the reason, or a reason, is those kinds of functions look more allocative-- that is, who gets resources, who doesn't, who expands, who doesn't-- and distributional-- who makes more money, who makes less money-- than monetary policy does. And when you're more allocative and more distributional, you're inevitably more political, because that's the blood and guts where it comes to economics of politics.
Now, this is the central banker's image of a politician. So let me fill in some of these blanks very quickly. Independence on monetary policy-- as I've been saying, that's pretty well established in virtually all developed countries, and indeed many developing countries as well, but not all. It's not uniform. There are still places where central banks get disciplined by their political overlords. But it's a smaller and smaller set.
On monetary policy-- now, when it comes to the structure and governance of the central bank, this is a much more legitimate and sensible place for the government to quote "interfere." And what I mean by this case in "interfere" is actually make the decisions. The elected government should decide what's the structure on the Federal Reserve or on the central bank. How do you decide who the leadership is? How many should there be? What authority should they have? These are all perfectly proper roles for politicians.
Having said that, the next bullet point says there are these gray areas. And I just want to mention two, coming back to the United States of America. There are two bills in the Congress now. I don't believe either one will pass, thank heaven. But one is called Audit the Fed, and it has nothing to do with auditing the Fed. I'll come back in a second to what it is. And the second one is the Federal Reserve Accountability and Transparency Act, and has nothing to do with transparency.
These are horrible ideas which, if legislated, would severely-- well, would compromise the independence of the Fed. The Fed gets audited now, in the sense that everybody on Earth uses the term "audit." Accountants come in and they examine the books. Audit the Fed really means giving the Congress a better means than it already has to browbeat the Fed. This should be called Browbeat the Fed, not Audit the Fed.
The Federal Reserve Accountability and Transparency Act-- I like to call it by its acronym, FRAT, because it sounds like a frat house joke-- would force the Fed to adhere to a mechanical rule for monetary policy, and if it ever wanted to deviate from that rule, come in front of the Congress to explain its deviant behavior-- very bad idea. That's all I'm going to say about that. If anyone wants to ask about it later, that's fine.
And then there are these non-monetary policy functions where, as I said before, the argument for an independent central bank is generally quite a bit weaker.
Let me just take a second to ask whether a central bank could actually get too much independence. That's Julius Caesar, if you don't recognize him. Or that's a model of Julius Caesar, I should say. And the answer is yes, you can imagine a central bank that's too independent. You don't want it to be, in the words of Montague Norman, entirely autonomous of government. That's going way too far.
Ironically, in 1999, when the ECB opened for business, many people thought the design of the ECB might be such a case. Remember, I said it's in a treaty, you can't touch it, and it has no government really supervising it. I don't think anybody thinks that anymore, given what's actually happened in recent years. And I'm going to come back to that in some detail.
And in the US today, as you may know, there is a considerable backlash against the Fed for its unchecked and unbalanced power. Right? We believe in checks and balances in the United States, at least in monetary policy. There's no check and there's no balance on the Fed.
And I think what happened to cause the historical irony of it's the political right in America that's now after the central bank, whereas historically-- I mentioned Hamilton and Jefferson-- from the beginning right through till a few years ago, it was always the political left that was fighting the central bank.
I think the reason for that is that the crisis revealed, to many people who didn't understand this before, how much power the Federal Reserve actually has. It was like, what? You can do that? Who let you do that? And the answer was, the Federal Reserve Act. And that's led to a number of people thinking, we'd better amend the Federal Reserve Act, because they have much too much unchecked and unbalanced power. So some people think the Federal Reserve is too independent now.
About a dozen years ago, I wrote a book called The Quiet Revolution. That's the book cover. And I talked about three things-- the worldwide movement towards more central bank independence, which I just talked about; the worldwide movement towards making decisions by committee rather than by a single individual, like Montague Norman way back then. The British now make it in a nine-member monetary policy committee.
We in America make it in a 19-member, when it's at full strength, Federal Open Market Committee. And I think it's just an interesting fact that, as you look around the world, the size of these committees varies from three to 25. That's a pretty big range. I'm not going to talk about that other than what I just said.
And there's been a worldwide movement towards making central banks more communicative and more transparent. What that actually means concretely varies enormously from one country to another. And in the United States in recent years, the Fed has developed what many people call a cacophony problem. Who's speaking for the Fed, and how come it's 19 people, or 17, rather than one, and what does the Fed really mean? So this has been a problem recently for the Federal Reserve. We can come back to that if you want.
But I want to take a couple of minutes to talk about the differences in the Central Bank independence dimension between a central bank in normal times and a central bank fighting a crisis. So this is Ben Bernanke fighting a crisis, or praying about fighting. I believe this photo is actually him falling asleep in a congressional hearing.
But he looks like he's praying.
There are a number of important aspects of financial crises that you don't see in normal times which bear on this issue. So the first and most obvious is that when you're in a crisis, by necessity-- you're a central bank-- have a short time horizon. You're trying to get through to the close of business on Friday often.
Remember, a major reason for central bank independence was the politicians had short time horizons. Nobody really meant only till Friday. When that criticism was leveled legitimately at politicians was always, to the next election. They can't see past the next election. In a crisis, many times you can't see past Friday at five o'clock. So you've got a pretty darn short time horizon.
Secondly, by necessity, the blend of art and science in central banking shifts towards art. The science is good for repeated events. We have statistical studies. We have historical studies. We've seen this 12 times before. We have a notion of what policies A, B, C, and D would do.
When you have sui generis events that you've never seen before, you're by necessity flying by the seat of your pants-- not because you want to, but because there isn't any other choice. And remember, this is part of the argument for giving these decisions over to technocrats. They understand the science better.
Thirdly and fourthly, in a crisis, it's potentially a disaster to let the markets see distance showing between the central bank on the one hand and the treasury or finance ministry on the other hand. That's a hallmark of independence.
In normal operating procedure, the central bank wants to, as often as necessary, make a point of, we're not taking instructions from the treasury. The treasury can think whatever they want about monetary policy. Too bad. We make it here at the Federal Reserve. Ditto for the ECB, ditto for the Bank of England, and so on.
In a crisis, you don't want to let distance be showing. The treasury or finance ministry and the central bank have to be cheek to jowl, both together fighting the crisis. And that's not bad, because in that case, the goals completely converge.
When the decision is, we don't want the financial system to collapse within the next 48 hours, or we want the banks to be able to open on Monday morning, there is no difference of opinion between the Treasury and the Federal Reserve. They think exactly the same. So luckily, even though you have to relinquish the kind of independence that you normally have in non-crisis situations, that's not costly because there's probably no conflict of interest.
Importantly, the central bank's visibility in a crisis increases hugely. And when your visibility increases, your political vulnerability-- or your political salience increases, and with that your political vulnerability increases. That's inevitable in every country. This is not just about the United States.
I remember when I joined the Federal Reserve in 1994, there was a banker on the Federal Reserve Board-- which is a good idea, by the way-- and he said to me when I first met him, half the country thinks the Federal Reserve is a national forest.
That's the kind of thing that can happen when things are quiet. Nobody outside the financial community was thinking a thought about the Federal Reserve. In February 2009, a lot of the population was thinking about the Federal Reserve-- a lot.
So three big questions arise, and I'm going to answer them all, although equivocal on the third. In a crisis situation, is it really possible to have the kind of central bank independence we normally talk about? No. Is it desirable? No, for the reasons I was just saying.
Here's the hard question, which the Fed is wrestling with now and other central banks will be wrestling with in their turn, can you rebuild a wall? I'd better not mention walls in the current context. This is not between Mexico and the United States. Can you re-establish the independence, the separation, of, in our country, the Federal Reserve from the Treasury, and in other countries the central bank from the finance ministry, and go back to the status quo ante?
I think the answer is yes. And I think the Federal Reserve is well along the road to demonstrating a yes answer for the United States. But in many of the other countries that had big crises, that job has barely begun. So we can't be too sure about that.
Short digression on the notion of a global central bank-- Keynes actually thought it was a good idea. And it's an idea that comes up again and again. I don't know if you can read this. That last thing that I just put down there came-- actually, after I sent these slides up to Cornell, I sent a replacement deck. I said, I want to change slide 13, because this had come in my email. This is inviting me and thousands of other people to a conference at the American Enterprise Institute.
And you see the title of the conference, Should the Fed Act as the World's Central Bank? So I put that there so you shouldn't think this is an idea Keynes had in the '30s and nobody has toyed with ever since. This is an idea that keeps coming up and up.
Is the Federal Reserve a global central bank? No, but it sometimes gets treated like one, not by Americans but by people in other countries who complain that Federal Reserve decisions influence things that happen in their own countries, which is true. And therefore, the Federal Reserve should take the welfare of these other countries into account when it makes its decision, which is illegal.
As I said in the conference earlier today, if you're sworn into the Board of Governors of Federal Reserve, you take an oath to protect and defend the Constitution of the United States. That means you're protecting and defending the piece of the Constitution that Congress delegated to you, which is monetary policy. And nothing in the Federal Reserve Act says a word about taking into account the well-being of other countries.
You may think that's wrong. If you do, you should call your congressman and ask him to change the law. But if you're sitting on the Federal Reserve, it's illegal actually to do that. So the Federal Reserve is not a global central bank, though it is the 800-pound gorilla in the room.
What about the ECB? Well, it's not a global central bank unless the entire eurozone, when it fully fleshes out-- I put the number 25. As I look my notes over, I'm not sure that's the right number. There are a number of countries that want to get into the eurozone that aren't in yet. There are 19 now, so think of this number as actually 19 plus n. n is the number that are wanting to get in. Unless that's the whole world, which of course it isn't, the ECB is not a global central bank.
It is, however, a good illustration of why it's not such a good idea to try to move towards a global central bank. The ECB has is demonstrating now, and has been, how difficult it is to make monetary union work without fiscal union. It's been demonstrating that one monetary policy doesn't fit all, unless there's gigantic amounts of mobility of labor, capital, and everything else you can think of across national borders, which is the way New York and Pennsylvania make it work.
And also, a global central bank means there's no more exchange rates, so that you lose an ability to adjust that way.
I've heard it said sometimes that the IMF either is, which is patently false, or should become a global central bank. And you see no, no, no. Somebody has to give the global central bank the authority to print money and regulate the value thereof. I don't know who that could be. As I just said, one monetary policy doesn't fit all.
And there's certainly not going to be a worldwide fiscal union to back up the monetary union. So the answer to the people that are going to be meeting on May 5, if I remember, at the AEI, is, you're wasting your time coming here. The answer is no.
Now, the conference that Hiro mentioned had the title The Changing Politics of Central Banking. And I want to look at that in particular in the eurozone.
Here's a paradox that I've already alluded to, but I want to state very clearly. By design-- and that's the cover of the Maastricht Treaty on the slide-- the ECB looked to be the most independent central bank ever established in the entire history of the world-- no real government above it and a structure enshrined in a treaty, which means, for all practical purposes, you can't do anything about it. You can't change it.
Yet, the ECB now seems to be more embroiled in politics than almost any other central bank, on the planet certainly more than any of the major central banks. That began with the worldwide financial crisis, but as it says here, got much more severe when the European sovereign debt crisis blew up beginning in and centered on Greece. So this is the paradox-- designed to be hyper-independent, and yet doesn't look very independent.
And I want to spend most of the rest of my time on that. And I want to start by contrasting it with the Federal Reserve.
So the Federal Reserve has a dual mandate to keep unemployment low and to keep inflation low. The ECB has, by the Treaty of Maastricht, a mono goal, to keep inflation low. Does that matter? I think so. I think-- nobody can prove this-- that it's one reason why the ECB reacted more timidly in the crisis than the Fed did. The Fed cut interest rates very fast and very aggressively.
The ECB gave ground much more grudgingly, because it had no mandate to promote low employment, or at least that's one possibility as it says on the third little bullet point there. That's not relevant anymore, because inflation is now too low both in the eurozone and in the United States. But it was relevant at the beginning of the crisis.
It's easy to forget this. On the day that Lehman Brothers went bankrupt, the inflation rate in the United States was 2.5%. The Fed's goal was 2%. Now, some of you think, what's a half a point among friends? But in the world of central bankers, a half a point is a half a point. And inflation was quote, too high. The Fed just ignored that.
I already mentioned this, that the United States, of course, is a fiscal union and has been from the get go more or less. And the eurozone is not a fiscal union. Despite that, the ECB has been very vocal complaining about the budgetary situations in many member countries and calling for structural reforms-- sometimes for specific structural reforms, which in my view is stepping out of its proper domain.
And relatedly-- I had to put this on a slide someplace-- for a member country in the eurozone, and Greece is the main country to think about in this case, borrowing in euro, which is not a foreign currency-- it's your currency-- is very much like borrowing in a foreign currency.
And the reason for that is really simple. The National Bank of Greece cannot print euro. So the Bank of England and the Bank of Japan and the Federal Reserve all have this fallback. If everything else fails and it looks like the government can't pay its debt, we can just print it. As much as we need, we just print it. So there's not going to be default.
There might be inflation. It might be bad. There's not going to be default. Greece can't do that. Neither can any of the other eurozone countries. So it's not literally a foreign currency, but operationally it's like that. I put it here because budget deficits are the root of this problem. How do we cover the budget deficit?
Lender of last resort function, in the United States, is all within the borders of one country. Lender of last resort function in the eurozone can very well be crossing borders. That raises some sticky problems that the Americans don't have to face, such as, how do we convince the citizens of Germany that it's a good idea to lend money to Spanish banks as a lender of last resort?
You all know-- this is one thing everybody here knows-- it's hard to convince the American public that it's a good idea to lend money to American banks. Just imagine that they were trying to sell you on the idea, let's lend money to Mexican banks. I can only imagine what Donald Trump would be saying. I guess I can't imagine.
And then you have the excruciating difficulty of actually lending money to other countries-- the central bank lending to another country, such as Greece-- and the problem of, how would any losses be shared if some of these loans don't get paid back?
Probably a little less importantly, the Fed has always been a bank supervisor regulator. The ECB was not. By the Treaty of Maastricht, it's out of that business. After the crisis, it's been put back into that business in a very major way. So it had to climb a learning curve, acquire a new staff in real time while it's doing this, and probably stepped on some people's toes in the process. I'm not an expert on that.
Another important difference that bears on these subjects is that the ECB decided, unlike the Fed, to do its main open market operations, if you want to call it then-- that's more of an American term-- do its main bank reserve creating or destroying operations not in government securities but in money market instruments.
And you can see why. It's a little dicey. 11 countries at first-- whose instruments, whose treasury bills, are we actually going to do our operations in? It's not a question for the Fed. [? A little ?] hard question for the ECB. And it's become critical once the sovereign debt crisis blew up in everybody's face.
One last difference which is germane to the ECB problem is the no bailout clause in the Maastricht Treaty. Bailouts are very unpopular in the United States, whether you're bailing out a bank or a city or a state-- or Puerto Rico, which is none of those. But for the most part, there's no legal bar. The Maastricht Treaty has a no bailout clause that says the community is not allowed to bailout an individual member state. I should have brought the prose for it and put it on a slide, but I forgot to do that.
So this is a great number of differences between the structure of the Federal Reserve and the structure of the ECB, all of which-- whoops. Oh, sorry. All of which make the ECB have a much tougher problem to deal with, especially in a crisis-- much tougher.
On top of that-- I forgot I had this slide here-- Europe is different from the United States in many dimensions, not only that the wine and cheese are better but also that the links between the banks and the government are much tighter within Europe in general and the EU in particular than they are in the United States.
It is commonplace in Europe in banking and also in some other industries for countries to have national champions. This is the bank that's representing country x, so we love that bank and we try to protect that bank. There's no such thing in the United States banks.
I phrased it gingerly here. Banks have a much stronger claim on the public purse in Europe than they do in the United States. I have two favorite quotations from the financial crisis. This is one of them, which came out of a book by David Wessel published in 2009. I've tried to find out who this person was. It's relating a conversation he had as a reporter, then for The Wall Street Journal, with an unnamed European Central banker. I've been trying to find out. I keep asking European central bankers, was that you?
I haven't found the person. Anyway, that person-- probably he, because most of them were he's-- this was right after Lehman went under and the Federal Reserve didn't save Lehman. He told this reporter for The Wall Street Journal, we don't let banks fail. We don't even let dry cleaners fail. It's a very, very different attitude about how normal, proper, it is for the government to come in and bail out, or keep a bank from failing.
In addition to that, the last point on this list-- banks in Europe generally hold quite a bit of the sovereign debt of their country. And so if the sovereign debt falls in value, you have losses to banks.
So you have a two-way street. When banks get in trouble, that puts the government in trouble because it starts bailing them out. If the government gets in trouble, that puts the banks in trouble because the debt falls in value. None of that really happens in the United States. And there's no single country or treasury backing up the central bank.
All of that adds up to-- this is where I was two minutes ago, forgetting the previous slide.
This is Mario Draghi, if you don't recognize him, the president of the ECB. The ECB had during the crisis, and still has, a much, much harder job than the Federal Reserve. The Federal Reserve was-- I don't want to give the impression that it was all a piece of cake for the Federal Reserve. It was not. They had a pretty hard job. But the ECB's job was then and is now very substantially more difficult, for a lot of reasons that are either quite clearly political or quasi-political.
Which leads me concretely to the sovereign debt crisis. I want to take the last few minutes on this. And I think there are four stages on this slide.
So the first stage about the ECB's involvement in the sovereign debt crisis was the so-called securities market program, SMP, in 2010, which I don't know what the right verb is, authorized-- the ECB decided it would buy relatively small amounts by Fed standards but very large amounts by European standards, because they weren't doing this, of the debts of these periphery countries-- Greece, Spain, Portugal, Ireland, and Italy. God, I shouldn't call Italy a periphery country. Never mind.
So as it says here-- this is a smallscale analog to the Fed's QE 1. The Fed's QE 1 was vastly larger in magnitude than the SMP. But this is important, for reasons that will become clearer shortly.
Stage two was the amazing statement, the miraculous statement, the miracle of London-- he said this in London-- in which Mario Draghi said out loud to the press that the ECB would do, quote, "whatever it takes to prevent the bustup in the eurozone. And that will be enough." And nobody asked him, what will you do? Or show me the money. Remember show me the money?
This completely turned around the market situation in a flash. And the outright monetary transactions, which Draghi was quote threatening, have never to this day been activated-- not one euro. The Federal Reserve, as you probably know, bought, in the various QE operations, something around $3 trillion worth of securities.
The ECB bought zero euro in the outright monetary transaction. And it worked just like that. It was an amazing-- it is the most amazing act of central bank communication in the history of the world. I'm not sure Draghi knows how he pulled it off, but he did.
Stage three-- and this is where the plot thickens-- in 2014, the ECB joined what then became the troika, three institutions-- the community, the IMF, and then the ECB-- joining together to bargain with and discipline the Greeks. And as it says on the slide, it's pretty unusual to put a central bank in the role of an enforcer to a government.
Remember I said the ECB has no government? It either has 19 governments or no governments. If it has 19, one of them is Greece. And to put the central bank as the enforcer to the government is pretty unusual.
The rationale given by the ECB and others was that this was a necessary corollary to stage one. The SMP meant that the ECB owned some Greek debt-- also Spanish, Italian, and so on-- didn't want to suffer a loss, and therefore it was a necessary part of protecting its own capital base, and therefore the European taxpayer indirectly from default by Greece. I think that's a pretty thin rationale, but that's my personal opinion.
Stage four-- and this is where it led-- by 2014 and into 2015, the ECB is basically keeping the Greek banking system alive by doing what central banks do, being lender of last resort to banks that otherwise probably had no place to turn. After exhausting the regular channels, it started providing what's called emergency liquidity assistance, ELA.
And that wound up making, of the three members of the troika, the ECB the one that actually pulled the plug on Greece in the beginning of July 2015. They pulled the plug by saying, we can't give you any more ELA. That's it. You've gotten all you're going to get. I don't mean that they withdrew what they had given. They just stopped adding, and the Greek system was needing.
So joining the troika made the ECB, in principle, an enforcer on a recalcitrant government. Having to pull the plug on the ELA made it an actual enforcer and ratcheted up the crisis. Don't get me wrong, I don't mean to say that the ECB was wrong and Greece was doing everything right-- hardly. The point is that this was a very dicey situation to have to be in as a central bank.
The title of the conference that Hiro mentioned at the beginning was "The Changing Politics of Central Banking." This is a pretty big change in the politics of central banking. And as someone once said, we're not in Kansas anymore.
Thank you very much.
SPEAKER 1: So I'll just ask two of my three questions, and then hopefully people will stand up. You talked about the cacophany problem in the Fed. And I wondered if you could just elaborate a little bit on the problem and why it's a problem, and especially I'm coming at it from thinking about answering the democracy deficit than thinking, well, is it really a problem? Anyway, so that's my one question.
And my second question has to do with the ECB. If you could have all of the members of the European Union together and happy to sign an amendment to the treaty that you could recommend, what would be the very next step you would suggest, or very next change the ECB could make to be more effective?
ALAN S. BLINDER: Well, I'll answer your first one while I'm trying to think of an answer to the second one.
The cacophony problem at the Fed is this. The decision-making body-- and the experts on monetary policy know all this-- at the Federal Reserve, the Federal Open Market Committee, has now 17, because there are two vacancies, members, seven of them, now five, are the Board of Governors in Washington, whose chair is Janet Yellen. All of them are presidential appointees confirmed by the Senate.
The other 12 are heads of regional central banks. So you're here in the New York Federal Reserve district. I live in the Philadelphia Federal Reserve district. There are 10 others around the country.
The problem comes when these other 16-- so that's the 17 minus Janet Yellen, who's the leader-- speak about monetary policy and sound differently from what the chair of the Fed has said. That doesn't always happen. Sometimes they're singing from the same hymnal, as they say.
But quite often in the case of the Federal Reserve, and especially from the Reserve Bank presidents more so than from other governors in Washington, they sing rather dissonant songs that don't sound like simple variants on the Janet Yellen theme.
And that gets the markets thinking, hmm, what is the Fed's actual position? What's their reasoning? What's their position? What might they do next? I don't want to exaggerate. This is not the biggest problem on Earth. But in ways that are sort of unhelpful to the Fed doing its job, and to some limited extent, seem-- I think it's much more "seem" than actually "do"-- undermine the authority of the leader of the Fed when some of her quote "followers"-- this is the problem. They're not followers.
The origin of this is, at least in part, structural in that the 12 Reserve Bank presidents are not presidential appointees that come up a normal way, but are independent decision-makers that are not actually government officials. You asked about changing the ECB. I'll tell you, my pet peeve about the Federal Reserve is that the Federal Reserve Bank of New York, Philadelphia, dot dot dot should be .gov, not .org's. They're all .org's. They're making a statement, we're not .gov's. I think that's wrong.
But they don't view themselves as government appointees inferior to the chair of the Fed, and many of them just talk about monetary policy without really taking into account the kind of dissonance it can create in others.
What would I do with the ECB? My goodness. It's relatively easy to think of things in principle, the airy fairy things. In practice, it's very difficult. So for example, in that category, if the eurozone countries were closer to a fiscal union than they are, that would make the job of the ECB easier. The Fed goes all the way. The Fed is supervising a complete fiscal union.
But what that means is that more European government budgets pass through Brussels on their way from, say, Germany to Greece, as opposed to going straight from Germany to Greece, to pick a nonrandom case. But that's not the only one that I mean. And I think it would be easier-- not to say easy, but easier-- if there was a thicker fiscal union in the sense that I just said. I don't believe that's going to happen, to tell you the truth.
The other thing that would help the ECB-- which might happen, though I'm dubious that it will happen-- is if there was a market for a eurozone bond. This is a government security. This is the debt of the eurozone in exactly the same way that treasury bills, which is what the Fed deals in, are a debt of the United States government. The ECB doesn't have that, either. So I mentioned briefly in the talk, if it goes into the government bond market, the first question is, OK, which government bonds are we going to buy? And that can be a very difficult question, which the Fed never has to ask or answer.
SPEAKER 1: Thank you. All right, so if you could introduce yourself and then ask your question, that'd be terrific.
SPEAKER 3: Hi, I'm Michael. So Dodd-Frank seeks to expand the regulatory state. But do you think that there's maybe a cultural problem in the United States?
ALAN S. BLINDER: Sorry, I'm having trouble hearing you. It must be the microphone.
SPEAKER 3: Dodd-Frank seeks to expand the regulatory agencies. But do you think there is maybe a cultural problem, or what Antonio Gramsci would call cultural hegemony? Because most of the regulatory measures, like [INAUDIBLE] in the 1980's, have been passed with bipartisan support almost unanimously, whereas something like Dodd-Frank was obviously very contentious.
ALAN S. BLINDER: Yeah. I think it's very unfortunate-- nothing I could do about it-- that Dodd-Frank passed on such a partisan vote. Now, it wasn't as partisan as the health care, for example, but it was still pretty partisan.
And you mentioned some other things. It's also the case that previous big banking-- oh, I guess you did mention correctly-- previous big banking bills have generally passed on very bipartisan votes. This one didn't.
There are two consequences of this that I think have been very pernicious. One is that, just like with Obamacare, the Republicans keep talking about repealing it. This is settled law. Would everybody stop talking about repealing it, and thinking about how to make it work?
Well, the answer is no. The Republicans just keep saying, we're going to repeal Dodd-Frank. We're going to repeal Dodd-Frank-- which I don't think they'd be saying if most Republicans had voted for it to begin with.
The second thing, which most people don't understand-- if you understand the workings of Washington, you do understand it; but this is kind of mysterious, inside baseball-- the major pieces of legislation, financial legislation in this case-- also, trade legislation, tax legislation-- are virtually always followed in pretty short order, usually six months to a year later, by what's euphemistically called a technical corrections act.
What does that mean? That means Congress goes back and looks at its handiwork and said, we did that? We never meant to do that. We really screwed up. And they get together on a bipartisan basis, and they pass a technical corrections act.
That never happened with Dodd-Frank, because of the political partisanship poisoned the well. I actually talked to one or two Democratic senators to make sure I was thinking about it the same way. And they said the same things. They said, we don't dare bring up a technical corrections act, because the Republicans will just say, here's my amendment. Repeal Dodd-Frank.
And that's very unfortunate, because they didn't get it exactly right on Dodd-Frank. Neither Dodd nor Frank nor anyone else thinks they got it exactly right on Dodd-Frank. It's complicated. And there should have been one or more technical corrections acts, but there weren't.
SPEAKER 4: Thanks very much. I'm [? Shrieker. ?] I'm a second-year business school student here.
Recently, a group of us were able to go to Israel and be in the audience of Dr. Karnit Flug, their central bank governor. And in their bank's mandate, they specifically state that one of the mandates is to reduce social gaps. She expressed frustration with kind of a goal that's unattainable. Do you believe other banks should have this? Would America be in a better place if banks had this in mind when they're changing monetary policy?
ALAN S. BLINDER: You mean the central bank?
SPEAKER 4: The central bank, yes. Thank you.
ALAN S. BLINDER: I think not, because first of all, unless you give the central bank many more powers than it has-- such as, for example, over the tax transfer system, just to take an example-- the central bank can do almost nothing about the income inequality, social gaps, whatever you want to call it.
Furthermore, I would say-- again, as a small d Democrat-- we don't want to give that power over to a bunch of unelected technocrats. It should be decided in the political arena. So it's not wrong that this stuff is in the political arena.
So I think, apparently in agreement with Dr. Flug in Israel, this is just not a business for the central bank. And harm can come from the central bank if people get the idea that they are in that business and they're failing at it.
SPEAKER 1: I want to follow up on that, just briefly. But would you make a distinction then between central banks that are in the business of setting the goal-- so for example, the inflation rate-- and the central banks that are implementing a goal set by the political arm--
ALAN S. BLINDER: Not much. A little bit. But the truth is that in terms of a long-run goal, as opposed to short-run tradeoffs, like we're not where we want to be. How fast do we get there? That's different.
But in terms of sending the long-run goal, whether you set that goal at 2% or 3% or 1% or 4% probably has next to nothing to do with inequality.
SPEAKER 1: Thank you.
SPEAKER 5: Dr. [INAUDIBLE], Center. You talked early on about the lack of checks on the Fed. And I'm just wondering, given the state of Congress at the moment, if we did have checks, what could some of those look like? And do you personally think we need them?
SPEAKER 1: That's a great question.
ALAN S. BLINDER: I don't think we need them. And that largely stems from the low esteem in which I hold the monetary expertise of the US Congress. I might have a different attitude if I thought they really knew what they were doing-- I might. But they don't, and I don't.
The kinds of things-- first of all, let me give a more positive answer to your question. I wish, actually, that the Congress had set the numerical inflation target, not the Fed. I think there could have been a congressional debate. Some of the things that would have been said in the debate would have been really stupid, but some of them would have been smart. And at the end, Congress would have made a decision.
By the way, I don't think they would have picked the price index for PCE, because none of their constituents ever heard of such a thing. And I don't think that was a good choice for the Fed, by the way. But that's neither here nor there.
But I would have liked to have seen the Congress done that. But they didn't. The kinds of things you fear are Congress second-guessing with power the monetary policy decisions of the Fed. The "with power" is important. They do second-guess it. They yell at the Fed all the time. Everybody understands it's a perfectly legitimate part of the game. And it's harmless, and it's OK.
I remember a story Paul Volcker told me once when he was chair of the Fed. There was a congressman in his office and they were talking about whatever they were talking about, at the end of which Volcker said to him, would you like me to call in the Fed photographer to take a picture of you wagging your finger at me?
So congressman do wag their finger at the Fed. And that's OK. That's all OK. But I wouldn't want, frankly, the Senate Banking Committee or the House Banking Committee making monetary policy decisions. It's, to me, a frightening prospect.
SPEAKER 1: Thank you.
SPEAKER 6: Professor Blinder, you said that central bank independence derives from institutions-- institutions of law or institutions of tradition. But given the same institutions, is it possible that it's also a function of individuals? In other words, is it impossible for a pliable, weak Federal Reserve Chairman to cede independence or for a powerful president to snatch independence from a central bank?
ALAN S. BLINDER: It absolutely is. I mean, it's a very good question. Institutions are only as good as the people behind them. I can think right off-hand-- in fact, I mentioned right off-hand; let me just elaborate on one sentence each-- I mentioned two cases in point, exactly to your point.
Federal Reserve Chairman Arthur Burns basically gave over the independence of the Federal Reserve to President Richard Nixon. I exaggerate only slightly, but gave much too much of it to Nixon. And I mentioned Bill Clinton breaking the tradition of several presidents before him who were browbeating the Fed frequently and deciding not to do that anymore. He didn't have to decide that. We on his economic team were pushing him in that direction. But he could have said, you know, none of you guys got elected. I got elected, and I'm going to yell at the Fed as soon as it raises interest rates.
By the way, I can tell you, we're not talking out of school at this point because it's so far in the past-- in February 1994 when the Fed first raised interest rates, Clinton was furious-- turned red. I thought he was going to turn the table over-- really mad. But he never said anything about it. This was respecting the Fed's independence. So that was a person.
SPEAKER 1: Thank you. Go ahead.
OTOO HEINZ: Otto Heinz from the ECB.
ALAN S. BLINDER: I know.
OTTO HEINZ: Well I learned this morning-- I was really impressed that in the US there's a musical partly about the Fed as well. But with this microphone, I promise not to start to sing.
But I would have some questions and comments. First is that you mentioned-- well, one statement first. When you spoke in general about central bank independence in a crisis, you pointed out that there's no scope for divergence between the government and the central bank. Fair enough. Also, that the actions are much more visible and, in a way, political. But one question I would avoid necessarily means that central bank independence doesn't hold in that situation.
Second, and related, comment I would have-- just when you describe European situation, of course, in a very short space of time, a lot of things changed in the meantime. For example, the comment about banks and dry cleaners being very safe and always bailed out. In the meantime, the new legislation about recovery and resolution of banks was introduced, which basically lead to the automatic haircuts on equity holders and bondholders as well. So there's no such oppressing need to bail out. Plus, as stated, rules in Europe as well prohibit governments stepping in and bailing out banks. So arguably, the situation is more nuanced in that respect.
And thirdly and most importantly, I also found it very candid and very interesting your insightful comments about the difficult situation of the ECB. But I'm struggling a little bit with the conclusion about the independence being questioned at the end of the day, because whilst you're absolutely right that the ECB has been drawn into a lot of areas where they didn't think that they would be drawn into, and very, very political matters as well.
But it seemed to me that the institution has been acting really independently, according to some commentators, even too independently, and deciding in a way the situation's above the head of the governments in a way. So if anything, I would have thought that the conclusion is the opposite in a way, that the independence of the ECB has been confirmed in this crisis. While I wouldn't say that we pulled the plug, but certainly would have been in a very uncomfortable position having to do so. Thank you.
ALAN S. BLINDER: OK, let me take a stab at that. Why did I say that you lose independence, a central bank, in a crisis? I think to me, the answer is simple-- that because there is a necessity not to have any distance showing between, say, the Treasury and the central bank, you have to make decisions jointly. So you're not independent anymore.
In normal operating procedures, the Fed does not call up the Secretary of the Treasury and say, we're thinking of raising interest rates 25 basis points. What do you think? You think we should do that or not? They don't do that. And if they did that, we would call them a non-independent central bank.
But believe me-- you know this-- when they were fighting the crisis, Ben Bernanke and Hank Paulson were like this, conferring 20 times a day, almost hand in hand, almost literally. I mean, Bernanke had to take them down to Congress once practically hand in hand saying, they won't kill you, Hank. Come with me.
So when you're making joint decisions, you're not independent anymore. You're in a partnership. And the memoirs that both of those gentlemen wrote after the fact, and also Tim Geithner's memoir after the fact, mentioned a few places where their own first best solutions were different but they had to compromise it among themselves. So they kept a united front.
The ECB-- why did I say the ECB has become more political? You said yourself actually, in finishing the question, that the ECB got dragged into political things where central banks don't like to be. So that's more than half of my answer to you, but you answered it yourself. And I'm pretty sure most of the top people in the ECB want to get out of that, because they're in an uncomfortable place.
But the other thing is, even before that, you'll remember-- and I think those people in the room that pay attention to these things will remember-- in thinking through a lot of the extraordinary steps that the ECB either took or was thinking about taking, there were a lot of media reports- now, I wasn't there; I'm not an eyewitness-- that Mario Draghi was checking this out with Angela Merkel. You will remember, Germany's own central banker was usually against them, opposing it inside the ECB, and Draghi was making sure Merkel had his back.
That's not exactly independent. I mean, I understand why he was doing it, but it's not exactly independent. I'm
SPEAKER 1: Join me in thanking Professor Blinder again.
ALAN S. BLINDER: Thank you.
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Alan Blinder, professor of economics and public affairs at Princeton University, delivered the 2016 Bartels World Affairs Fellowship Lecture April 19, highlighting differences between the Federal Reserve, the United States’ central bank, and the European Central Bank (ECB). Blinder's lecture was part of the global conference "The Changing Politics of Central Banking," held at Cornell on April 18-19 and organized by the Einaudi Center in collaboration with Meridian 180 and the Global Finance Initiative.
Blinder is former vice chairman of the Board of Governors of the Federal Reserve System, was a member of President Bill Clinton's Council of Economic Advisers in 1993-94 and was vice chairman of the Federal Reserve System's Board of Governors from 1994 to 1996.