I was invited to testify at the Subcommittee on Monetary Policy and Trade of the House Financial Services Committee on Wednesday. The proposed bills my fellow panelists (John Taylor, Don Kohn, and Paul Kupiec) and I were testifying on  were the Centennial Monetary Commission Act of 2015 and the Federal Reserve Reform Act of 2015.
The Fed just released it's latest missive to the big banks, and the answer is capital, lots more capital.
They are increasingly understanding that no matter how much they try to micromanage asset decisions, it's impossible to regulate away risk from the top. Issuing (not holding!) more capital does not make firms "bear costs." Firms never bear costs. In a recent Bloomberg piece, "Growth Fantasy of Tax Cuts and Small Government" Noah Smith took on my recent blog posts on 4% growth. Noah's main point is that in my blog posts I did not make any substantive quantitative claims that moving our country from the Republic of Paperwork to Adamsmithia would return the US to the kind of growth we saw in the 60s, late 80s and 90s. My surprise in reading Noah is that he provided no alternative numbers and no alternative policies.
So, one must only conclude that Noah -- and others voicing the same it's-not-possible complaint -- believes 4% growth is not possible.
John Barrdear at the Bank of England just posted an interesting paper, Towards a New Keynesian theory of the price level.
David Miles, retiring from the Monetary Policy Committee of the Bank of England, gave a fascinating speech on the occasion. Much behavioral economics documents that people do stupid things, and then jumps to the conclusion that parternalistic government can do things for us better.
In this article we examine a wide range of behavioral failures, such as those linked to misperception of risks, unwarranted aversion to risk ambiguity, inordinate aversion to losses, and inconsistencies in the tradeoffs reflected in individual decisions. I am interested that behavioral economics seems so focused on mistakes of individual decision making, as nicely summarized in the quote. Mariana Garcia Schmidt and Mike Woodford are lighting up the internet with a presentation on neo-Fisherian economics -- the proposition that, when we are satiated in money as at the zero bound or with interest on reserves, raising interest rates raises inflation. This is a particularly important voice, as it seemed to me that standard New-Keynesian models produce the new-Fisherian result.
For more on the issue, here is a X men first class hindi 3gp in new-Keynesian models, which didn't end well.
The Booth School's Capital Ideas made this really nice (well, I think so) video out of my blog posts on Uber and health care. No economist suggests that New York, New Jersey and Connecticut should each have its own currency, and indeed it would be highly inconvenient if they did. First, unlike Europe, the United States has a fiscal union in which prosperous regions of the country subsidize less prosperous ones. In an earlier era, Greece could have devalued the drachma, making its exports more competitive on world markets.
This seems a good moment to explain why I don't accept this conventional view, despite its authority from Milton Friedman to Marty Feldstein and Greg Mankiw and even to Paul Krugman.

I don't think each country needs its own measure of length, or to shorten it when local clothiers are having trouble and would like to raise cloth prices.
Hence, for the world economy to function, the surpluses need to be recycled though a system of regular transfer payments from the core to the periphery.
According to the theory of comparative advantage as formulated by David Ricardo in the early 19th century, different countries specialise in the production of particular goods and then exchange them for others, and trade is mutually beneficial even if some countries are more efficient at producing all goods. Varoufakis -- that a currency union requires countries to be similar, with similar productivity. They pass costs on to customers, workers, shareholders, or (especially for banks!) the government.
In Vamos brincar de nuvem jota e murilo , I outlined the standard smorgasbord of free-market policies which I suggested would increase our growth, at lest by inducing a substantial level shift. He does not claim that more government wage controls,  unions, stricter labor laws (Uber drivers must be employees) heavier and more politicized regulation, cartelizing more industries beyond health and finance, raising taxes to confiscatory levels, larger welfare state, boondoggle public works and so on -- the alternative path in the current policy debate -- will get us back to 4% growth. If the absolute best economic policies anyone can imagine -- and, again, Noah offered no alternatives -- cannot return us to 4% growth and sustain that growth, why bother being economists? In 1980 Ronald Reagan announced some pretty radical growth-oriented policies, at least by the standards of the time. Like Download netbackup 7.1 trial, it changes the information structure of the standard model to avoid the standard model's problems. But wait, those government functionaries are also human, also behavioral, and placed in group and social settings that psychology as well as economics warns us are particularly prone to bad outcomes. Although such shortcomings have been documented in the behavioral literature, they are also reflected in government policies, both because policymakers are also human and because public pressures incorporate these biases.
The defense of freedom never was that freedom is perfect, merely that government control is worse. In fact the most obvious thing about humans is that we are social animals, not that we are poor individual decision-makers. And if one has to resort to learning and non-rational expectations to get rid of a result, the battle is half won. Schmidt and Woodford promise a paper soon, which will undoubtedly be well crafted and challenging. Garcia Schmidt and Woodford clearly will have a thoughtful and sophisticated paper, on what I think is a deep and important point. The minute Greece reopens its banks, it's a fair bet that every person in Greece will immediately head to the bank and get every cent out. Together we condensed the Uber for healthcare posts into a better essay, here, with link to the video. Feldstein contended that the nations of Europe needed a policy tool to deal with national recessions. Joke version -- liquidity standards are like requiring everyone on an airplane to carry a thousand bucks, so they can buy a parachute if the engines blow up.
He rambled a bit about the predictive value of some state scoring efforts, but that's all quite beside the central point -- how much growth could the best imaginable economic policy, at a national level, produce?

Sustained growth, of the sort that made us all healthier and wealthier, if not wiser, than our grandparents, is a thing of the past. Like Garcia Schmidt and Woodford, I also hope that others will read the papers and help to figure out if they really work as advertised. Many central bankers seem to evolve to the view that yes, they can push all the levers and run things just right. The result is that government policies often institutionalize rather than overcome behavioral anomalies. I would think that behavioralists would be bringing social psychology more than individual decision making to economics. In old-Keynesian models, it was an unstable steady state, so an interest rate peg leads to explosive inflation or deflation.
In the United States, when an economic downturn affects one region, residents can pack up and find jobs elsewhere.
Instead, he argues, some countries are destined to specialise in the production of goods and services, while others on the periphery will forever specialise in consuming them.
In Ricardo's famous example, Portugal sells wine to Britain, which sells wool to Portugal, even if one is better at both than the other. If (if) the cost of equity capital is high by some MM failure, then equity receives higher returns and borrowers pay higher costs.
I'm also a skeptic that big banks are "systemic" and little banks are not, and thus should be allowed to continue with sky high leverage. When an equity-financed bank loses money, share prices decline, but there are no failures or freezes. So all we can do now is fight to carve up a shrinking pie, retreat from an increasingly chaotic world, and pretend that carving up the pie will not shrink it further. Usually, the role of economists is to see the great possibilities that every day experience does not reveal. Rather than heed their counsel, however, Europe adopted a common currency for much of the Continent and threw national monetary policy into the trash bin of history.
However, if you think capital is "held," and it "costly," then you think that banks shifting to issuing equity or retaining dividends to obtain funds has a cost to the economy, and regulators should require as little capital as possible. One would think the tired argument would have less force by now, or that the pessimists would have found a better one.
There are too many equilibria, but if you raise interest rates, inflation always ends up rising to meet the higher interest rate. Feldstein were right: The euro has turned into an economic liability that has exacerbated political tensions. If you recognize that capital is issued, does not tie up funds, does not reduce the amount available for lending, then your mind is open to obtaining financial stability with lots and lots more capital.

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