Chairman Fischer Discusses Lessons from Financial Crises (with Lofchie Comment)
Vice Chairman of the Board of Governors of the Federal Reserve System (the "FRB") Stanley Fischer discussed lessons he has learned from the financial crises of the last two decades. He delivered his remarks at the International Monetary Conference in Toronto, Canada.
Drawing from three academic papers the Vice-Chairman published in 1999, 2011 and 2014 while working at the International Monetary Fund, the Bank of Israel and the FRB, respectively, Vice-Chairman Fisher discussed the following lessons:
- Negative Interest Rates – Contrary to pre-Great Recession economic theory, central banks may use monetary policy to reduce interest rates below zero, although perhaps not much below minus one percent;
- Active Fiscal Policy – Fiscal policy "works well, almost everywhere," and can likely be made more expansionary at low real cost by borrowing to finance public works;
- Financial Stability – The United States should experiment with using monetary policy (i.e., the interest rate) to address financial stability, in addition to macroprudential tools;
- Moral Hazard – Resolution procedures for "too big to fail" financial institutions must permit equity and bond holders to lose all or most of the value of their assets; and
- Continued Supervision – The United States must not allow successful reforms to breed complacency, and must continue to disincentivize bad conduct by, e.g., punishing individuals "severely" for misconduct personally engaged in.
Lofchie Comment: The Vice-Chair's remarks as to financial regulation demonstrate a confidence in Dodd-Frank that is misplaced. The statute was hastily adopted, as were many of the rules thereunder. To describe the criticism expressed by market participants of the statute and of the rules as "bankers' backlash" (in the words of the Vice-Chair) belittles disagreement and the views of those who have the experience of trying to comply with the rules. Contra Vice-Chair Fischer, serious question can be raised as to the net benefit, if any, of considerable portions of Dodd-Frank and of many of the rules thereunder.