Loyola University ChicagoSchool of Business Administration

Symposium on Economic Policy at a Crossroad: What Next?

CommentatorTassos Malliaris

December 1, 2011

My Plan

• Offer Comments on Monetary Policy

• Offer Fewer Comments on Fiscal Policy

• Global Issues

• Make a Bold Suggestion

“The dogmas of the quiet past are inadequate

to the stormy present”

Abraham Lincoln

“It is better to act and repent than not to act and regret it”

Machiavelli

Prior to the Global Financial Crisis• Success of Great Moderation• Macroeconomic Stability• Dual Mandate: Price Stability and Maximum

Employment• Risk Management Approach• Price Stability implies Financial Stability• Clean vs Lean Against Bubbles (Also called

the Jackson Hole Consensus)

Lessons Learned from the Crisis• Price Stability Does Not Imply Financial

Stability

• The Cost of Cleaning up After a Bubble Bursts is Very High

• Financial Instability Seriously Impacts the Real Macroeconomy

Where Are We Now?

• 15 million Unemployed in the U.S.• 13 trillion of wealth lost in the U.S.• Slow Growth in the U.S. and Europe• Significant Increases in U.S. Deficits• Sovereign Debt Crisis in the EU• Unbalanced Growth in China

Why Are We at a Crossroad?

• Monetary (primarily) and Fiscal Policies Have Contributed to Stopping the Decline of the Real Economy along Multiple Equilibria.

• Zero Bound Policies Contribute Modestly• Reasonable to Target Unemployment• Difficult to Manage Expectations• Time Inconsistency Issue

Moving Forward

• Reinhart and Rogoff: Recovery from Financial Crises takes Long Time

• Additional Difficulties from the EU• The Instability of the Euro and Eventually of

the Dollar.• BRIC Countries and Mild Global Inflation

A Balanced Approach

• The Tinbergen Principle• Priority: Maximum U.S. Employment• The Contribution of Fiscal Policy• The Contribution of Monetary Policy• Financial Stability• Macroprudential Policies

Beyond the Crossroad:

Three Choices

1: Present Course: Primarily the Fed

2: Fiscal Policy for Jobs

• Obama Plan: 447 billion (payroll tax cuts; extending unemployment insurance; new schools; public works; aid to states and cities).

• Modify plan so all 447 billion go for new jobs; may succeed to create 6 million jobs paying an average of $75,000 each per year.

• Reduce unemployment to 5.2%; promote growth.

3: Focus on Financial Stability• Long History described by Reinhart and Rogoff• Monitor Credit Expansion• Lean Against Asset Price Bubbles• Two Bubbles are bursting in the EU: sovereign

debt and the euro• With U.S. interests near zero, do we have a

government bond bubble? What impact on the dollar?

• Are we addressing time inconsistency?

Longer Term: The Fed and Financial Stability

• The Fed and Monetary Policy

• The Financial Stability Oversight Council established by the Dodd Frank Act

• IMF and Global Financial Stability

UBS Nineteen Countries Most Likely to Default

Credit to GDP Loan Deposit ratio Public Sector Debt Debt Score

1 Ireland 56.1% 187.3% 99.4% 7.6

2 Portugal 53.6% 189.2% 83.1% 7.0

3 Spain 66.0% 223.0% 63.5% 6.3

4 Greece 55.7% 117.7% 130.2% 6.1

5 UK 35.2% 150.5% 76.7% 6.0

6 Hungary 21.0% 123.6% 85.3% 5.8

7 Denmark 44.1% 346.1% 44.2% 5.6

8 France 19.4% 163.6% 84.2% 5.5

9 Belgium 22.0% 98.1% 100.2% 5.5

10 Sweden 27.3% 237.6% 41.7% 5.4

11 Netherlands 15.7% 158.7% 66.0% 5.4

12 Bulgaria 36.0% 102.6% 16.6% 5.3

13 Finland 19.9% 156.4% 50.0% 5.3

14 Italy 25.3% 165.2% 118.4% 5.2

15 Canada 23.4% 199.3% 81.7% 5.1

16 Norway 24.8% 214.9% 54.3% 5.1

17 Romania 21.2% 113.3% 35.3% 5.1

18 Poland 24.6% 106.3% 54.2% 4.8

19 U.S.A. 5.1% 147.0% 92.7% 4.8

Source: Business Insider, Mamta Badkar