Janet Yellen in Conversation with Paul Krugman

Janet Yellen in Conversation with Paul Krugman


(audience applauds) – Good evening. I’m Janet Gornick, Professor of Political
Science and Sociology here at the Graduate Center. I’m also Director of the Stone Center on Socio-Economic Inequality, one of the hosts of this evening’s event. It’s my pleasure to welcome
you for this special program, presenting former Chair
of the Federal Reserve, Janet Yellen, in conversation with the– (audience applauds) In conversation with the
Graduate Center’s Paul Krugman. (audience applauds) So welcome, welcome to those
of you in the audience, and also to those of you who
are joining us via livestream. The logistics for this
evening are as follows. After my brief introduction
the main event will begin. At 7:10 the GC staff
will come down the aisles and collect questions from
you written on index cards. And at 7:30 our guests will turn to a 15-minute period of audience Q&A based on those questions and we’ll close the event at 7:45. For those of you who are not familiar with the CUNY Graduate Center let me just offer a few remarks. The City University of New York with a design unique to the United States has dedicated one of its campuses solely to graduate study and
that’s the Graduate Center where we are this evening. The Graduate Center, a small school, embedded in a large system enrolls about 4,000 graduate students across a variety of disciplines. Committed to CUNY’s historic mission the Graduate Center provides access to graduate education for diverse groups of highly-talented students, including those who’d
been underrepresented in graduate education. We prepare our students, our scholars here are
students to-be scholars, teachers and leaders in the Academy, as well as in the private
nonprofit and government sectors. Our PhD students are
an invaluable component of our instructional capacity. While they pursue their own studies here at the Graduate Center, they teach and train over 200,000 CUNY undergraduates every year. The Graduate Center is also home to more than 30 centers and institutes focused on applied and
theoretical research including our own, The Stone Center which is my academic base
and Paul Krugman’s as well. The Stone Center’s mission is to build and disseminate knowledge
related to the causes, nature and consequences of multiple forms of socioeconomic inequality. As you may have seen on the northern wall of the Graduate Center building, the GC has a tagline,
one that we hold dear: The life of the mind in
the heart of the city. The Graduate Center
has long been dedicated to the idea that graduate education should serve the public good. Part of our core mission
includes presenting public conversations aimed at discussing, dissecting and demystifying
the critical issues of the day. Tonight’s program is part of a new Graduate Center initiative called The Promise and Perils of Democracy, a timely and necessary effort supported in part by the
Carnegie Corporation of New York. As we focus on democracy over the course of the next two years, our goals are to ignite
innovative lines of research, encourage new intellectual collaborations, and engage in crucial public conversations such as this evening’s. Tonight we’ll be treated to
a wide-ranging conversation organized around questions
that Paul Krugman will pose to Janet Yellen. We’ll have the opportunity
to learn in detail about the recent economic crisis from someone who had a front row seat. We’ll hear about what catalyzed it, how it was managed, how the recovery unfolded and more. Our special guest Dr. Yellen has been widely lauded for
her predictive accuracy. So if we’re fortunate, she’ll
tell us what the future holds. (audience laughs) We are immensely pleased
to welcome Janet Yellen to the Graduate Center and to offer her the opportunity to spend an evening in
the city of her birth. Dr. Yellen was born in Brooklyn and attended high school in Bay Ridge. (muffled speaking in audience) (laughing) (audience applauds) I said to her jokingly, that would be an applause line. (audience laughs) She earned about her
Bachelor’s degree from Brown and received her PhD from Yale. After spending her early
career in academia, she served on the White House
Council of Economic Advisers from 1997 to 1999. And in 2004 became President and CEO of the Federal Reserve
Bank of San Francisco. She was selected to serve as Vice Chair of the Federal Reserve
Board of Governors in 2010. And in 2014 became the first
woman to serve as its chair. (audience applauds and cheers) That’s a position that she held
until February of this year as some you may have
read in the newspaper. (audience laughs) She is currently Distinguished
Fellow in Residence with the Economic Studies Program at the Brookings Institution. Paul Krugman is Distinguished
Professor of Economics at The Graduate Center and a faculty member of The Stone Center. A prolific scholar, he’s
author of more than 25 books and over 200 papers. Paul has received countless
honors including of course the 2008 Nobel Memorial
Prize in Economic Sciences. All of you are no doubt familiar with his biweekly column
in the New York Times which is followed avidly by
readers all over the world and some of you I imagine are among his four and 1/2 million
Twitter followers. Please join us in welcoming
Janet Yellen and Paul Krugman. (audience applauds) – Well, good evening, welcome. It’s a huge privilege. I can’t say how grateful I am and I realized I forgot the most important pre-event question which is do have a preference
on how to be addressed? Janet, Dr. Yellen– – Janet is absolutely fine.
– Okay. As for me since I have, I have an RA degree from Germany, I’m Herr Professor Doctor Doctor, so anyway.
(laughing) Okay.
– How about Paul? – That’ll do. Okay. Lemme just start with, there’s a lot, so much to talk about, but I want, so you were in the middle witnessing, taking decisions
in the midst of this the worst economic crisis since the ’30s. So the first question is
did you have any inkling in advance that something
like this might happen? And when it did hit, did you have a sense that you kinda knew what was going on? – Well, I saw pieces of it that gave me an inkling. So there were things I was concerned about from 2004 to 2010. I’m thinking of 2007 and ’08 as the, but particularly 2008 as
the height of the crisis. So I became President and CEO of the Federal Reserve Bank
of San Francisco in 2004. My very first briefing
I got from the group that was involved in banking supervision, they were very concerned about CRE, commercial real estate lending, and in the banks that
they supervised which, many of which were banks in California, and Arizona and places that were very hot real estate
markets even back in 2004. And they saw these banks
lending massive amounts for land development and construction in the booming housing market. And that type of lending is backed up by what was probably not enough
capital really concerned them, and they told me about that. We worked for several years
to try to put in place stronger capital standards or some limits on this type of commercial
real estate lending. There had been previous banking crises that looked just like this and so it really felt
to them and to me like yes, this is the type of thing that can go too far and take down these banks and of course many of these
banks ended up failing. And I will say that it
was extremely difficult to convince anyone in Washington to put a stop or to try to
control this type of spending. Members of Congress,
people in the industry, it was hot, it was profitable, it was a booming market. They didn’t want any type of controls. And so even though as
supervisors we saw that coming, really almost nothing was done to stop it. Eventually some guidance was issued. I would say it wasn’t worth
the paper it was written on. So that was the, that was the first, that was the first thing. Then of course house prices
were rising just hugely. I lived in Berkeley. You actually couldn’t
go to a cocktail party or talk to anyone without people
talking about house prices. By 2005 I was convinced that
there was a house price bubble and I gave speeches about it. So I saw that. We supervised some large
institutions in San Francisco. Wells Fargo and early on, Countrywide were institutions we supervised and they were deep into mortgage lending. We talked to them regularly. We examined them. We began to see NINJA loans, no income, no jobs, no asset-type loans. We began see mortgage
loans that were being made a first loan and a second
loan simultaneously. Sometimes the two amounting
to as much as 125% of the purchase price of the house. That was called combined
loan-to-value ratios. That didn’t seem like
terribly responsible lending. So, we were very worried about that. With respect to Countrywide– – For people who don’t know
Countrywide was a huge scandal. – Well, Countrywide was a
gigantic mortgage company. They had a small bank. And the only reason that
the Fed was involved in supervising them at all was because of the small bank. We really didn’t have authority over the mortgage company. But we were able to look
at what was going on there to the extent that
potentially it threatened this small bank.
– Wow. – Well, really the problem
was the mortgage company threatened the financial
system in the country, but we were there because potentially it threatened the bank. And it was expanding in such
an irresponsible and rapid way that we tried to put controls on them. One day the CEO of that bank, a guy by the name of Angelo Mozilo, flew up to see me. I met with him periodically. And he said to me, Janet you know, I just wanna tell you
it’s really been wonderful being supervised by you. We’ve learned so much about risk– – God.
– And managing, managing our growth process. And thanks for all of that good advice, but you know, we realize we really don’t need to
be a bank holding company. We can be a thrift holding company. So that was a different
organizational structure. And if they changed their charter, they would no longer be supervised by us. They would be supervised by an entity called the Office of Thrift Supervision. This was the same entity that supervised the AIG Financial
Products Office in London that, that later blew up. – They’re the chainsaw
people, weren’t they? There was the famous event–
– Yes. – Where the head of, I think it was OTS, made a show of stacks of paper that were supposed to
represent regulation, and cutting through them with a chainsaw. – I believe you’re right. So they were, so we have a system in
the United States where there were many different regulators, different charter types,
different regulators. And then these banks can go shopping for the supervisor they prefer and that’s what they were choosing to do. So when they failed they
weren’t supervised by us. Okay, so I saw those things. All of that made me worried. But then I saw some things that made me worry more broadly. So you know one of the things
that reserve bank presidents are expected to do is to
meet with a lot of people in the business community, nonprofits, people involved in the economy to hear what they’re seeing. And a lot of the business
contacts that I had told me essentially the following thing. They said you know, we’ve never seen conditions like this. Money is being thrown at us for any and everything
that we might want to do including the stupidest projects. They said we’ve never
seen conditions like that. And I heard that enough. At first I thought, oh okay. It’s a relatively low
interest rate environment. There are investors out there
who are reaching for yield and lending standards are relatively lax. But what they were
telling me was something that sounded like absolutely
irresponsible lending. And then one day one of
my contacts who was a senior partner at a major
private equity firm, he came and he told, here’s his story he told me. He said there’s a major company that many private equity firms
are looking to take private. And when you take a firm private, you need to borrow a huge amount, load the company up with debt, and buy out the owners
and take it private. He said the competition to
get this firm is fierce. And we would have to
put so much debt on it, we realized we’re never gonna win this. We’re gonna drop out of this competition. Well, the CEO of this major
company said to these partners, you know, just for the sake of it, write down what you would
need to win this competition. And they wrote it down, and they thought, it’s ridiculous. No will ever lend us money on these terms. And then their CEO said, well
go talk to a couple of banks. So they went to some banks
and their proposition was they needed some enormous amount of debt relative to the earnings of this company. And then if the economy
as much as stumbled, they realized they wouldn’t be able to pay interest on this debt. So fundamentally what they’d need is if the economy stumbled,
they’d need a loan contract where they didn’t have to pay the interest due on the debt for some period of time when they wouldn’t be able to do so. And they thought, there’s no bank that’s gonna give us a loan like that. And then what they found
was that every bank they talked to was
falling over themselves, competing to give these loans. And that was worrisome. They invented something that then over the next year became very common, it was called and is
still called a PIK toggle, P-I-K which stands for
payment-in-kind toggle. And what it means is you’ve
been paying the interest on this outstanding
debt, but now you can’t. And when you can’t, you
just take out more debt that’s called payment-in-kind. I pay you with some more
debt and you let me, you call me square on the
loan and we go on like that. And I began to realize that this was an environment of
huge financial excess, and a house price bubble, overleveraged households. But okay, so I saw all of that and I did talk about that
in monetary policy meetings. But what I did not see
was what was going on in the shadow banking system, how leveraged investment banks were, how reliant they were on overnight short-term wholesale credit, on financing gigantic
portfolios of illiquid assets. So I didn’t understand that the shadow banking system was vulnerable. And then the core banking system would be vulnerable to the kinds of runs that we saw with Lehman,
with Bear Stearns. Nor did I ever imagine that
there was an AIG out there that was selling enormous amounts of insurance that made investors comfortable that they
weren’t taking on undue risk. So I didn’t realize that
this had the potential for a full-blown financial
crisis like we saw. – So this sounds a little
bit like the story I tell about my own which was that
I saw the housing bubble, didn’t realize that it could
trigger the banking crisis. But you’re giving me a level of color to what was going on
in the financial markets. I mean this is the Fed system is as you say talking to
people should have been, people should have had their hair on fire. But they didn’t. You’re saying that basically that you were seeing
this and it was alarming, but it really wasn’t ringing enough bells. – It didn’t ring bells sufficiently. We didn’t put the pieces together. In 2006 the Federal Open Market Committee had a half day discussion of the potential for a
bust in housing prices and what it would mean for the economy. And two economists on my staff, John Williams, who’s now President of the Federal Reserve Bank of New York, and Glenn Rudebusch gave a presentation in which they talked the
Federal Open Market Committee through what would likely
happen to the economy if house prices fell nationally 20% which was considered almost unimaginable. Of course they fell more than that. But basically the answer was well we might well have a recession. It would certainly have
negative impact on the economy. The decline in housing would have a negative impact
on consumer spending. The housing industry would
be severely affected. There would be ripple
effects through the economy, but it looked like this was something the Fed could probably contain. The Fed would cut interest rates. This was probably manageable. Something like the decline
in stock prices in 2000 that caused the recession. It was relatively mild recession. The Fed cut interest rates. It was not a pleasant thing, but it wasn’t the financial crisis. – Wow, okay so wow. So this is a, so people did actually, they didn’t just say
nothing will ever happen, but it, all right, boy. – So, I mean this is material
in the public domain. So the Fed was contemplating that house prices could fall
and this could have a serious negative impact on the economy, but didn’t see financial
crisis or what happened. – Okay, interesting. Okay. I wanna pursue that, but I wanna ask a few of the things. I wanna talk a little bit later about what it was like
actually being Fed Chair. But you were, I guess you would’ve been still at the San Francisco Fed when all hell broke loose, Lehman–
– Yes. – But you were in the Fed system and what was the state of mind among Fed people,
Central Banks in general, during the really extreme crisis? Were people sort of saying, oh my god, the end of the world? Or were people fairly confident that they could get through it? – Well, I was certainly saying it was the end of the world. – Okay.
(audience laughs) – Most of the people that I dealt with even if they were calm and felt they had to carry on. I did have the World War II
British poster in my office. Someone gave me the– – Those keep calm–
– Keep calm and carry on poster
which I found reassuring and I found it was helpful when people came into my office and we had to confer on things. Because everyone around me felt, well, and most of the people
who were managing this, Bernanke and others, this was the end of the world. – Okay, so–
– We’re staring into the abyss no doubt about it. And this could clearly be an economic disaster that had the potential to
make the Great Depression look like a mild downturn. – Oh wow. All right, so the sense of doom those of us on the outside were feeling was actually fully echoed, maybe even more so inside, okay. – Oh yeah, no, it was a horrifying. I mean it was a horrifying experience, and it was a completely all hands on deck. We have to do everything we possibly can to address this situation. This requires an absolute all-out effort. I mean the Fed had been a place where we attracted people
to work with the notion we may not be the most
highly-paid organization, but we have a pleasant work-life balance. (audience laughs)
– Yeah. – When the financial crisis came, work-life balance was dead. It was dead for me and I
felt that for everybody who worked for me, forget it. It was 24/7. And you know there are a
lot of different things that caused it to be 24/7. Sometimes it was weekends where some major financial institution was failing. You realize then on a Friday afternoon and it had to be resolved before the market opened up on Monday morning. There were an awful lot of
banks that were failing. The financial system was imploding. And after the, after that phase of it was over and the financial system
had been stabilized, then the economy was in desperate shape. I mean we get 10% unemployment. People were losing their houses. They were losing their jobs. By December of 2008
short-term interest rates were effectively at zero. There was no recovery in sight. And so what are we going to do? And trying to invent
things that we could do that would be helpful was
essentially a full-time job. – I’m just gonna throw it. It shouldn’t explode. I have a relative who was working at the New York Fed in the fall of 2008. On Lehman weekend we actually
had a strong suspicion something was going up because
we were trying to call him for some family stuff and
there was no response. And we said something
must be going down there. So, work-life balance again. So I guess it was probably March that Ben Bernanke gave the
famous Green Shoots speech about the green shoots of recovery– – Was it March?
– I think it was March 2009. And so–
– 2009. – Yeah, I think, yeah. I can’t, did anybody get it? As people pointed out, he gave a speech which was actually right. It turns out he was right about the financial markets were stabilizing, and a recovery did start soon afterwards. But the speech of was, it turned out I think, it was almost verbatim from the movie, Being There, where Chauncey Gardner talks about. So did he get any ribbing? Were people at the Fed aware of that? – I don’t remember anybody–
– Okay. – Commenting on that.
– Okay, that was funny. – It did seem a little
aggressive at that point to say there were green shoots. They were on not in great evidence. – I would urge people to, okay. All right, I mean he was
in fact right it turns out. That was just about the turning point on the financial side at any rate. – On the, yeah, I mean I think the financial markets were beginning to stabilize at that point. I think the stress tests of, I don’t quite recall, but I think–
– A little bit later. – April.
– Yeah. – I think the decision
to conduct stress tests of the major banking organizations to assess where they
stood in terms of capital and to force those institutions to inject capital if
they didn’t have enough was a real turning point
for the financial system. It stabilized. People were terrified that the major banks were undercapitalized. And no one had ever done anything like the type of stress test that we did. I mean, that was a 24/7. That was a remarkable
exercise that required involvement in hundreds
and hundreds of people throughout the Federal Reserve system to conduct those tests. They clearly had to be credible. I think they were credible. It was a commitment that we would force the firms to go out and issue
stock and raise capital. If they couldn’t do so, the government would inject capital. And many of the firms, the government didn’t
end up at that point, injecting capital– – So injecting capital basically means the government buys stocks. So the firm has more money that can be lost ahead of
hitting the debt holders. – That’s right.
– It’s a funny phrase. You have the image of federal
officials with syringes, but it’s actually, it’s actually basically
government buying stock and diluting existing stock. – Exactly. But quite a few of the banks were forced to issue stock to the public. They didn’t wanna do it. It diluted existing shareholders. But that was I think April of 2009 and that was a turning point
for the financial system. But still we had 10% unemployment. So this was gonna be a long,
slow slog to get out of that. – By the way, this is just one many things I’ve gotten
wrong over the years. I thought the stress test
was gonna be completely, you know, who would believe it? I didn’t think I would matter. I thought it was, no matter how conscientious it was, I was completely wrong. It was in fact, it drastically cleared the air, and what a kind of miraculous turnaround. – We realized that the numbers that came out had to be credible. And while, I mean there were a number of analysts that had done rough calculations, not for individual companies, but for the banking sector as a whole based on aggregate data. And the magnitude of the losses that they were coming up with were huge. And so everyone in the Fed was
looking at those calculations and knew that those analysts
would be closely looking at the data that we put forward and therefore it clearly
had to be credible and it was. – And your audience was therefore really informed people. – It wasn’t–
– Absolutely. – Just the general public’s
vague sense, but your– – No, we knew it worked.
– That’s why it worked. – There were well-informed people who would be able to judge the credibility of these numbers and know
if they weren’t credible. – Okay so the, the real economy was still terrible, financially unstabilized–
– Terrible, terrible. – Now I was, I went back doing a
little homework for this. I looked back at an article
in the Wall Street Journal from 2013 that assessed
the accuracy of predictions by people at the Fed. And you came out on top
(Janet chuckles) largely ’cause you were
correctly predicting through this period that both that inflation would stay low despite all of this monetary expansion and that the recovery would be sluggish despite again the huge monetary expansion. What led you to that conclusion, and why did some of your colleagues come to a very different view? I mean what were you thinking? I think I know what you were thinking, but I wanna know for the audience. – So you’re right. I mean, I was among the most pessimistic about recovery. I was pessimistic because
I knew something about the history of financial
crises around the world. I knew that normally
there are very prolonged downturns following such crises, that there would be a
substantial debt overhang that would probably have to be worked off before you would see any
revival in consumer spending. And that that would
likely take a long time. Often in smaller open economies that have a financial crisis, the country’s exchange rate
depreciates a great deal and that begins to touch off some recovery ’cause a depreciated exchange rate will generate a demand
for the country’s exports and that can be a source of growth. But I felt for the United States that wasn’t likely to
be an important channel. Short-term interest rates
were already at zero and so while we would
do everything we could to do more and to try to
provide more monetary stimulus, it is challenging to
figure out what to do. And there are limits I
think on what one can do after short-term rates, our standard instrument, is at zero. So I worried that the Fed
would not be able to play its normal role in generating a recovery. And fiscal policy was helpful
for about the first two years and then it seemed to me at that time that fiscal policy would
likely not play a helpful role, and indeed it didn’t. – So just for our audience. What the Fed normally does, normally policy consists
of the Fed is able to move very short-term interest rates. Actually overnight rates is what it literally targets normally. And that’s easy and the Fed has very, but it’s very hard to
push them below zero. (audience murmurs) Some other countries have essentially done it.
– Some countries did do that. Yes.
– The interest rates in Germany and in Japan are
negative at the moment, but not by a lot not. And so if you have hit zero, your sort of pedal is to the metal and it’s really hard to do more, so yeah. So all right. Now why did, and you didn’t think that inflation, I mean if you are
watching CNBC, let’s say, you, or Glenn Beck or something, but you know there was a
lot of inflation stuff, and you didn’t see that
as a risk at the time? – Well, you know the theory of inflation that I was operating under basically said that you
begin to encounter inflation when demand is pushing
against an economy’s limits in terms of what it’s able to supply. And this was a situation where there was an immense shortfall in demand, and vast capacity of the economy to supply goods and services relative to the demand for them that was showing up as
very high unemployment. It peaked at about 10%. This just wasn’t an
inflationary environment. Now I think inflation expectations also matter to inflation. I could conceive of this situation where people were so convinced
that what we were doing was going to be inflationary, that that might touch off some process of self-fulfilling expectations
for no good reason at all. But I frankly thought
that was far-fetched. But there always were, well at least for many years, there were always a group of people in financial markets and in
Congress and in the public who thought that printing
money or creating reserves even in this situation as
depressed as the US economy was was bound to create inflation. And you could see that in
financial market expectations. If you looked at survey measures of inflation expectations, most people thought they would be low, but there would always
be a group of people who thought we were on the
verge of hyperinflation. Now what I thought was
we were in something that when I was in graduate school
was called the liquidity trap. And a liquidity trap is a situation where short-term interest rates are at zero. And normal conduct of monetary policy if the Fed were to go out
and buy say short-term debt and pay for it by printing money, you’re creating reserves, that would just have no
effect on the economy at all. And it wouldn’t create inflation. It might not even
increase the money supply as people normally think
of the money supply. – Actually, so something, so obviously this is a
topic too dear to my heart. So I have to watch not
to keep on talking about. Some of the people who were worried about in advance about this possibility
and who thought we were, including Ben Bernanke on the inside, but also people like me on the outside were thinking a lot about
Japanese experience. Had you studying Japan at all? ’cause they kind of went
for a dress rehearsal for what we went through on all of this. – Well, yes. I mean we absolutely had studied Japan and your writings on Japan, also there was thinking within the Fed. The Fed, I think it was in 1999, held a big conference on Japan. What could Japan do? It was stuck with short-term
interest rates at zero and was experiencing mild deflation. Fed economists thought it was worthwhile to think through what could Japan do. So work of yours, a few other economists, people inside the Fed–
– Bernanke, especially. – Ben talked about and
gave speeches on Japan. He had done a lot of thinking about it. So nobody ever at the
time that work was done thought that was something
that was gonna happen in the United States. But that thinking was certainly useful when we found ourselves in
that situation ourselves. It was work that was
well worth having done and we did think about it of course. – Okay, administrative pause. People might want if you have, I assume that you have your cards. So just start passing questions over to, to somebody there, yes. We’ll collect cards for questions. We’re gonna do them as a, I guess there’s somebody
coming up and down the ends of the aisles. Okay. Yeah so, or yeah, thanks. We’ve discovered this is the better way than that having people stand
when we have a large group. Okay. All right. Now I have to do something
terrible to the audience and use the words quantitative easing. Normal human beings have
no idea what it means. But, and the Fed actually always
calls them LSAPs, right? Large-scale asset purchases. How do you feel about that program. I mean it’s enormous. The Fed ended up with an
enormous balance sheet. Do you think that was a good idea? How effective do you think that they were? – Okay, so here’s the thing we noticed and were focused on. With lowered short-term interest rates to approximately zero, but even as late as 2012, long-term interest rates were
around three and 1/2 percent. And long-term interest rates
are probably more important in driving decisions about
whether to buy a house, whether to buy a car, whether to engage in investment in plant and equipment. Long-term interest
rates are more relevant. And we realized that there was scope to stimulate the economy if we could drive down
long-term interest rates. And so the purpose of quantitative easing was to drive down
long-term interest rates. Now normally monetary policy operates and this was true in
Japan until, I believe, until Governor Kuroda came into office. Japan did what was called
quantitative easing, and that’s where the
name I think came from. What they did was buy up
essentially short-term treasuries, very short-term government bonds. And that is standard monetary policy, buying short-term government bonds. But the yields on those bonds
were already close to zero, so money, the money that the Fed or the Bank of Japan would create and the short-term assets it was buying were essentially the same thing. So, we didn’t think that that
strategy had worked in Japan and theoretically the was no reason why buying short-term debt and paying for it by printing money that was a lot like
deciding you’re going to increase the number of
nickles in circulation by buying up dimes and
paying paying for them by issuing two nickels per dime. That really doesn’t do anything that’s not significant intervention. We didn’t think that would work. That’s really what
quantitative easing was. So our theory was we
have to go up and buy, go out and buy something different. We have to buy up long-term assets that were different and had
much higher interest rates in different risk properties and appeal to different investors and begin to remove those
from the hands of the public and substitute something
for them that was different. And if we thought, we thought if we did that and all we could buy up
were long-term treasuries and mortgage-backed securities backed by Fannie and Freddie, that’s all we were legally allowed to buy, we thought if did that that that was a different
kind of operation. Ben Bernanke did not wanna have this called quantitative easing. He wanted it to be called credit easing because it wasn’t the
same as what Japan did. And he didn’t succeed, and the world decided they would call it quantitative easing. So we bought three and 1/2
trillion dollars worth of assets. And people thought that’s a lot. And it is a lot. Now what did it do? You know there’ve been a lot of papers that have been written about this topic. It is very hard to tell. We’ll never know for sure. My own reading of the evidence is that it did help to push down long-term rates. I mean I would say probably something in the 80 to 110 basis points. – A basis point is 1/100 of a
percentage point by the way. – It’s a little bit more
than a percent maybe. I’ve read many studies. This is also been tried in Great Britain, in the Euro area, in Japan. More recently, looking at
all of that literature, I would say it’s had some impact on long-term rates and that was helpful. There is counter evidence and you know I don’t
feel certain about it. What I do think is that well, a lot of people were very unhappy about the Fed doing it. There was not a single
bad thing that happened to the country because we did it. And if it turns out that it was in and of itself ineffective, well, that’s not the worst
thing that can happen. I think nothing bad
came of having done it. There were people who
thought we will never be able to reverse it without causing another financial crisis. It will touch off some hyperinflation. None of that made any sense. – Yeah, it’s, there are some people, you probably, people who said actually the Fed should have done two or three
times as much as it did. That they think there was some effect, but it just wasn’t enough. Do you think that or what would be the argument for not doing
10 trillion instead of, I guess you would have
run out of eligible debt if you’d done that, right? Or not quite, enough federal debt out there. – We probably could’ve done more. – Okay. – So, I mean we did several programs. There were members of our committee who shared some of the
concerns of the public. One concern that some
members of our committee had was that if we had a balance sheet that was as leveraged
as you’re talking about, so we’re issuing essentially money or liabilities that at that time paid zero, and we’re buying up long-term assets that pay much higher interest, we were earning a great deal
of money from these programs. And in fact everything
we earned in the Fed above and beyond our expenses goes back to the Treasury and to the taxpayer. The consequence of doing
these programs is that those transfers moved up from something like $20 billion a year to $100 billion a year. But suppose the economy
recovered really quickly and the Fed had to raise
short-term interest rates. Now to stop it from overheating, and of course the Fed is doing that now, the liabilities that we issued after the crisis began to pay interest that’s how we control interest rates, it is conceivable that we would end up paying more on our short-term liabilities than we would earn on
that big asset portfolio. And the Fed could potentially make losses. Now the purpose of the
Fed is not to make money, it’s to help the economy. You might say what difference does it make if the Fed makes losses and
if the economy is recovering even from the narrow fiscal standpoint, the amount of money that’s
coming into the Treasury through tax proceeds is huge. So this is something to be ignored. But I think people felt there could be a substantial political price. And we were doing something
that was unpopular possibly for bad reasons and it could threaten us as an institution. I think for some members, the Federal Open Market Committee, they were very reluctant to go to the extreme that you’re talking about. – This is actually quite something. I mean it’s saying that
the Fed was actually, it was asymmetrical. The Fed makes money. That doesn’t count. But if the Fed loses money, then suddenly it’s on
the hook politically. – Well, people worried that we might be on the hook politically. And we were doing something that was in many quarters a very unpopular thing to do and not well understood. – So actually I’m gonna
skip ahead on a question because it seems relevant. I was looking, at the things people said about the Fed including about you and your policies when you were Chair. Actually they matched my own experience. Nothing makes people crazier than the notion that easy
money can be a good thing except for criticizing Bitcoin makes them even crazier than that. And you faced constant snipping over inflation that never happened, claims that you’re playing politics. I was gonna say how much
did you feel under pressure and do you think that Fed
policy was affected at all by the external criticism? It sounds a little bit like the answer to the second part of that is yes that the external criticism
did somewhat restrain QE. – So, yes. – I–
– Quantitative easing. I’m falling into jargon myself here. – So yes at the margin. – Margin.
– I think that was something that concerned people about pushing asset
purchases a lot further. It was a worry that they had. – So in effect we’re saying that the people who hold Ben
Bernanke over the coals in 2011 over risk of saying that
he was debasing the dollar, that the hearings that Paul Ryan or the open letter from a bunch of right-of-center economists
warning against, all of this did at least somewhat color the Fed’s actions.
– But not much. – Not much.
– Okay. So I’ve given you an example of a concern that perhaps at the margin
made the difference. But I would say on balance we pushed to do almost
everything that we could think of in order to try to stimulate
the economic growth and to reduce unemployment. That was the overwhelming consideration. Maybe in QE, there were also people who felt it might have adverse impacts on market function. There was internal opposition
to doing more on QE. But certainly we did. We also used the tool of forward guidance which is what another talked about purchasing long-term assets
might push down long-term rates. Another factor that
impacts long-term rates is the public’s expectations about the path of short-term rates. How long would we stay, keep interest rates at zero. If the public thought that
would be a very long time, that would also tend to
push down long-term rates. And we used increasingly
aggressive forward guidance also as a tool to push
down interest rates. – I’ve seen a term for
that in other countries which I’m sorry to say
never caught on here which is those are open-mouth operations. – Yes (laughs).
– Just talk about what you’re gonna do and
hope that that’s, yeah. I’ve been running really long here. Okay. Does it worry you? I mean we’re talking
about all the difficulties when short-term rates hit zero. And here we are, the Fed has moved rates up some, but they’re still quite low
by historical standards. Are you worried about what
happens if another shock hits? – Yes, absolutely because interest rates are low. I believe they’re likely to remain lower than they’ve been in past decades that predates the financial crisis. It’s a developed country phenomena. It reflects a world where saving is in some sense plentiful and the demand for it for investment is relatively weak. In a typical recession the Fed in the past has cut interest rates by
five percentage points, 500 basis points. And if the normal level of
short-term interest rates were not at this level yet, but is estimated to be around 3%, That means there’s much less
scope to cut short-term rates than there has been historically
in the United States. – Okay, so now I have to ask. I mean I’m sure I have
to ask the question. Do you have candidates for
where the shock comes from? What, housing, real estate was obvious, should’ve been obvious a dozen years ago. What do you worry about now? – So I don’t see a shock in the offing that’s likely to cause that
kind of financial crisis. I worry about leverage lending, the kind of lending to
highly-indebted corporations. Corporate indebtedness is now quite high. I think it’s danger that if there’s something else
that causes a downturn, that high levels of corporate leverage could prolong the downturn and lead to lots of bankruptcies in the nonfinancial corporate sector. That’s something that I worry about. I think in the underwriting
of a lot of that debt is weak. I think investors hold it in packages like the subprime packages. – By the way, subprime loans were sliced
and diced and pureed into what were sold as being safe assets. And you’re saying this is happening with corporate debt.
– The same thing has happened. It’s called CLOs or
collateralized loan obligations. Investors may not know
how risky the loans are. Their underwriting
standards are very weak. But there’s much less leverage
in the financial sector now as far as I can see relative
to before the crisis. And I think that most of those risky loans are owned by investors
that are not leveraged, so they may suffer losses, but they’re unlikely to turn around and start selling other assets that can lead to fire sale contagion. So I do see some risk. I think asset prices are elevated. Commercial real estate
prices are very high. Rates of return are very low. But another financial crisis like we had, I don’t see what the
trigger for that would be. – I have to say that something
doesn’t have to be 2008 to be really bad. – Well that is true. – Okay, I have so much more, but we are going to the question period. So I’m gonna finish up this part. So this is now I’m
doing several interviews with eminent people and I’d like to ask sort of at the end. It’s actually the same
question I asked Nancy Pelosi. So you were, spent a long time there in one of the world’s most stressful jobs. Do you have something you do to unwind? (audience laughs) – So, Arianna Huffington wrote a book about how important it is
to get a good night’s sleep. And I think that’s a good piece of advice. It’s something I discovered when I worked in the White House. When things were very stressful and a lot of things happened
that were unpredictable that you couldn’t prepare for and I felt that was the kind of job where you had to be alert and you have to have your wits about you and be able to respond to developments that you couldn’t plan for or anticipate and I felt the same way
during the financial crisis. I always try to get a good night’s sleep so that I wake up with my wits about me and not be exhausted. Sometimes it didn’t happen, but that was one thing. I mean I always try to plan a night’s vacation with my family. I spend time with my family. I have a family of three economists. (audience laughs) – Having a nice times with that is almost a contradiction
in terms, but anyway. – My family understood what was going on and they were very supportive, and I found them very, very
good to talk things through. They gave me insights that
I found very valuable. – Okay, so we’ve got
the title of your memoir which is Sleeping Through
the Crisis, anyway. (laughing) – Thank you for that I hadn’t, – All right, so–
– Thought of a title. – Okay, so, we’re gonna start. A question from the audience. Can you, since it did come up, can you reflect on your role as the first woman chair of the Fed? Do you feel that that shaped your work? Did you face any constraints? Aside from the fact that newspaper stories insistently talked about what
you were wearing, but anyway. (laughing) – So I’d been in the Fed for a very long time.
– That’s right. – I had a lot of experience. And my first reaction to
being appointed Chair was it was a small step. I had been Vice Chair
before I had been President in San Francisco and a governor. I realized very quickly
from the standpoint of the outside world it
was not a small step. It was a huge leap that as Chair people perceive
you and identify you with the institution
in way that they don’t when you hold any other position. I found that it motivated
a lot of young women particularly in economics
and finance and business. They were really pleased to see a woman sort of crack the glass ceiling. That was important to me too. And you know I wanted to do my best not to louse things up.
– Right. – To show, yes women, there are a lot of capable women in economics and finance. You know I wanted to do
what I could possibly do through an example and also inside the Fed to promote women’s
success in these fields. – Oh that’s great. My sense is the Fed, note I mean economics as a profession is actually not good on these issues, but the Fed seems to be or
has a relatively strong, women play an important role in– – We try to be very attentive and especially at the most senior levels to try to make sure that
we’re doing what we can to promote the careers
of women in the Fed. – Okay. So this question which
actually seems really I think more relevant than
I would have thought before we started our conversation. So I wanna ask do you think
banks knew or suspected that they would be bailed out when they engaged in
increasingly risky loans ’cause you’ve given us a portrait of, that there was actually a lot
of outrageous stuff going on, and people knew it was outrageous. How much were people actually, what was their moral hazard? Were people actually thinking
that I’ll be bailed out? Or were they just kind of
caught up in the frenzy. – I think they were
caught up in the frenzy. You know I think that in cases where institutions were in trouble there were huge losses taken
by shareholders certainly. And it was always the case that whenever the government came in, the Fed or the Treasury came in, that there were attempts to impose severe losses on shareholders. So I don’t think that moral hazard was a huge part of what happened. – Yeah, so for our video, there’s a point of view which
we encounter quite often which is that basically the
root of all financial evil is the prospect of government intervention that people do all these silly things because they think that
it’s heads, they win, tails, the taxpayer loses. And you basically don’t think that that’s important.
– I don’t. I don’t agree with that. – I don’t either, but
it’s an influential view. You hear quite a lot.
– It is an influential view. I agree with you. – All right. Yeah, okay. Were crimes committed? Some people, so in the ’30s there
were some actual people went to jail over stuff that then, none of that happened. Do you think that there were crimes that, to what extent was it actual
not just bad judgment, but wrongdoing, a story behind the crisis? – So I mean, I knew that there are an awful lot of people who are very angry that almost no one ended
up in jail because of it. I believe that the Justice
Department over time has become less aggressive in attempting to prosecute individuals. But I also think that the kinds
of things that took place, you know, while in the
case of later scandals like the Libor scandal, foreign-exchange rigging, where some individuals have
gone to jail or lost their jobs that the prosecutors did not find that that many situations where they felt they could prosecute criminal activity that that wasn’t the nature
of the failings by and large. – Yeah, so the Libor scandal. Maybe it’s just, it’s the rate at which banks in London or international banks lend to each other overnight mostly or some more, but there’s not really a market. It’s actually, so they just self-report
what their lending rates. And they–
– There was a ring of insiders who talked to one another
and they manipulated the rates that they
reported to their advantage. – And those rates are used a lot. So lots of stuff keyed off the Libor rate. Actually floating-rate mortgages are. And so if they, if you can report it, yeah, so that was a, that was a clear– – That was a–
– Conspiracy and you could– – Conspiracy by individuals within firms and some people did go to jail or were certainly fired. – Yeah, but then, oh god, I’m trying to
remember what happened with Angelo Mozilo. There was a lot of
expectation that he would. – They never prosecuted him
to the best of my knowledge. – Countrywide was clearly a bad actor, but not apparently an illegal actor. – Apparently not criminal. – Yeah. All right. Wow. I think these are somewhat related. So given that we’re here, someone asks what you think about the view that high and rising inequality
contributed to this crisis? I mean I have to say, I used to, long before I used to, before the crisis I used to give to do the long, long sweep of income talk where I show the top 1% share and show that we had just reached levels not seen since 1929 and people would say, ah, 1929 that means another crisis. And I say, no it’s not. But there was. We did have that crisis. Do you think that it’s
causal or just a coincidence? – Well, I mean I’m certainly concerned about rising inequality, but I don’t see it as a
major cause of the crisis. – Okay. What about, there is a view. Closest I can come to
that is that there’s a, it’s actually a joint causation that deregulation and all these things have both fostered inequality, certainly top end and also
helped set us up for the crisis. I don’t know if you
have thought about that. I’m probably going too far. – The deregulation–
– Financial deregulation. A lot of very high incomes in America are connected with the financial industry one way or another. At the same time, the deregulation or failure to expand regulation as the financial system changed kind of, I don’t know– – Well, I absolutely believe that that was important in the crisis. I mean there were huge failings in supervision and regulation that was important to the crisis. Now you know what’s the
link of that to inequality? There may be a link there. But that was certainly
important in causing the crisis. – Okay. Question. This was actually, there was a little bit, I’m losing track of my shuffle here. We’ve been talking very
much a US-centric view. But in a lot of ways this crisis was a North Atlantic crisis. Lots of stuff happened in Europe. And Europe has had its own problems. And now a whole new set. I have to say I didn’t see
the yellow jackets coming. Do you have any view on, is there, were you thinking about Europe at all during your time and do you worry about, ’cause their situation
is quite different now. They have negative interest
rates and all that. Do you worry at all about the European? Obviously, you must worry, but do you have a view about
what’s likely to happen there? – You mean going forward?
– Yeah. – Well they suffer from
some of the same problems that we suffer from in the United States of rising inequality
and the disappearance of decent jobs for less-skilled people. So Brexit, the yellow jackets, problems in the United States I think it reflects those longer run sort of structural trends
that have given rise to that, and then were exacerbated
by a huge financial crisis that threw so many people out of work and came on top of long-term trends that were already so very adverse. But I think Europe is recovering, but behind the United States in terms of its recovery, but I think is basically recovering from the financial crisis. But my sense is that the European financial system is not as strong. There were problems in the
design of the Euro area that still need to be addressed. There are problems with its functioning, countries like Italy with
very high debt-to-GDP ratios. – So last question here. It’s, do you, have we learned enough to prevent a similar crisis. And I think also are we likely
to act on what we’ve learned? What’s your view on both the economics and the political economy
of the crisis next time? – So I guess I have a glass half-full, glass-half
empty view of this. In the aftermath of the crisis I think we took important steps to strengthen the financial system and our system of regulation
in the United States, but also we coordinated globally so that there are reforms in almost all major financial centers. I think the core banking system has more and higher quality capital, more liquidity, is safe for derivatives, are traded in a safer way. Many of them now have what’s
called central clearing. There are higher margin requirements on uncleared derivatives. We now have a way, one problem during the crisis is that while a failing bank could be put in receivership with the FDIC and resolved in an orderly way, any non-bank, even an investment banking subsidiary of a bank holding company, there was no way to resolve such an entity outside of bankruptcy. Dodd-Frank created a way to
now resolve such an entity, so I think that’s–
– I remember this. I was saying to use the Corleone strategy and make them an offer
they couldn’t refuse. That did not go down well, anyway. But yeah. – So I think things have improved, but then I think there are
gigantic holes in the system. The tools that are available to deal with emerging problems are not
great in the United States. Take leverage lending
which I talked about, I don’t think the banking
agencies have sufficient tools. We can deal with that if it’s a safety and soundness problem for a bank. But if it’s a question of selling risky things into the market that can undermine financial stability, we don’t have a set of
tools to deal with that. We’re also seeing a lot of
pushback against regulation. And to some extent look after eight years of writing thousands
of pages of regulation, it probably should be
adjusted around the margins, particularly smaller institutions. But we’re seeing more than that happen now and we’re entering again really only a decade after the crisis an era when there’s a huge
focus on deregulation. Plus, I’d say there was an
agenda of unfinished work. So we made some progress. There was a big to-do list of things that still needed to be worked on. I’m not sure we’re working on those things in the way we should. And then there remain holes, and then there’s regulatory pushback. So I do worry that we could
have another financial crisis. – So the message, yeah wow. I think maybe I’ll just stop it there. (audience laughs) Thank you so much, that’s been great. – Thank you.
(audience applauds) (muffled speaking) – [Janet G.] That needed
my thank you, thank you.

13 Comments on "Janet Yellen in Conversation with Paul Krugman"


  1. Krugman and Yellen…..enemies of the state….YELLEN HOW CAN YOU SIT THERE AND SAY NO HARM HAS CAME FROM YOUR POLICIES???? ARE YOU INSANE??? PASSIVE SAVERS HAVE BEEN DESTROYED …UTTERLY DESTROYED …FORCED TO PLACE THEIR HARD EARNED SAVING IN THE HIGH RISK EQUITIES MARKET FOR ANY RETURN AT ALL ….THE US EQUITIES MARKETS ARE GROSSLY OVERVALUED DUE TO CORPORATE BUYBACKS FUELED FROM ZERO COST CORPORATE BORROWING STEMMING SOLELY FROM THE FEDERAL RESERVE BANK AND ALL CENTRAL BANKS ILL-BEGOTTEN POLICIES >>>THIS IS ECONOMIC INSANITY….NOW DEBT LOADS ARE TOO HIGH AND YOU EDUCATED IDIOT CAN'T NORMALIZE RATES WITHOUT IT CREATING A MASSIVE DISRUPTION OR OUTRIGHT CRASH…YOU ARE CRAZY LADY, DOWN RIGHT INSANE AND NOBODY IS CALLING YOU OUT ON IT …WELL I AM DAMN YOU, I AM !!! Your modern monetary policy will eventually blow our economy up ..but that is what you Globalist banker scum want. You are lucky the American people are complete Dolts or you an your ilk at the Fed would be TARRED AND FEATHERED years ago! REMEMBER MS YELLEN "A CURRENCY ONLY HAVE VALUE AS LONG AS A CITIZENRY BELIEVES IT HAS VALUE'!!!

    Reply

  2. There is contradictory news about the reference to global inflation 14 billion years ago
    1-There is news that the Big Bang echo is evidence of inflation
    2-But the second news says there is no evidence of inflation
    Because the gravitational waves are the dust of those galaxies only
    The first news contradicts the second news.
    We ask you to remove the annoying contradictions

    My question is whether the first news is true or the second news?
    Please space scientists verify the correct news

    Please send this question to space scientists

    .

    Reply

  3. So i've got a question; where there any securities added to the balance sheet which where not treasuries or fanny/freddy or another similar firm?

    Reply

  4. When we talk about no inflation as a result of QE and low short term interest rates to what extent are we leaving out the subsequent inflation of stock and real estate markets. I know that has nothing to do with the CPI figure.

    Reply

  5. Was there a possibility that the Bush administration had to pump up the housing sector to create more construction jobs by having more houses built to make the economy look good after the twin shocks of the dot com bubble burst, and the 9/11 attack, so that Bush can win a second term to continue the Iraqi war against the Democratic peace promoter Dean, who advocated pulling out. Was there a tacit understanding that the government will provide bail outs, when the call was giving out to pump up the economy via pumping up the housing market by pumping up demand for houses via low interest rates, and via making it super easy for even subprime buyers to get financing to buy houses, so that many new houses needed to be built creating a lot of new construction jobs. When Lehman Brothers did not get the government bailout help, the financial sector froze for some deep shock. What this unusual deep shock the result of bankers realizing that the govern reneged on some tacit promise to help any financial institutions which helped pumped up the economy via like creating new construction jobs via pumping up demand for new houses via creative financing via any means via any risk via any unsound schemes in order to pump up the economy so that Bush can win a second term. The strategy may not have created the mess it did if Lehman Brothers was not denied some guarantee and assistance by the government of a relative modest sum as compared to the cost of what occurred when Lehman was denied any governmental help based on some crazed libertarian/tea party dogma of letting the invisible hand of the private sector market to take care of problems like Lehman, and based on some suspected bias of the Treasury Secretary who was a former CEO of a competitor of Lehman Brothers bank.

    Reply

  6. Feckless cunt who believes Hillary's Dossier…LOL! He believes the dossier ha ha. Can you imagine a person so stupid they belive Putin has a pee pee tape LOL!

    Reply

  7. Enormous amount of respect for Krugman's capacity to Listen. A noble prize winner who understands the value of listening. Of course listening to Yellen isn't tolerance but enlightenment.

    Reply

  8. Paul predicted the economy would crash after trump. He also said the internet would not have a major economic impact on the economy. The internet would be similar to fax machines, according to paul. (Mark Dice) 11/6/2019.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *