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June 2, 2014
David Warsh, Editor


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Stack Arms!

PALO ALTO — Former Secretary of State George Shultz repeatedly stole the show last week at a Hoover Institution conference on central banking practices here, no time more decisively than when he pronounced a benediction on the conference dinner.

The meeting, Frameworks for Central Banking n the Next Century, was organized by Stanford economist John Taylor as a counterweight to a similar session organized last year by the National Bureau of Economic Research to mark the hundredth anniversary of the creation of the US central bank, in 1912.

The NBER meeting took for granted the role of the Fed in economic affairs and viewed its conduct with considerable sympathy. Former chairmen Paul Volcker and Ben Bernanke spoke and the symposium papers were published in the Journal of Economic Perspectives.

The Hoover Institution, home to Milton Friedman for thirty years, produced a conference whose tone was generally critical of the Fed and whose enthusiasm was for relatively strict rules governing monetary expansion, departures from which would have to be explicitly defended.

To that end topics ranged from John Cochrane, of the University of Chicago’s Booth School of Business, on “Monetary Policy with Interest on Reserves,” to Lee Ohanian, of the University of California at Los Angeles, on “Monetary Policy in the Midst of Big Shocks.” Niall Ferguson, of Harvard University, and Thomas Sargent, of New York University, differed in their interpretations of nineteenth-century central banking guru Walter Bagehot.

Allan Meltzer, of Carnegie Mellon University, author of a three-volume history of the Federal Reserve, wrote, “Federal Reserve chairmen are able to avoid serious oversight because they are able to talk round their mistakes. A rule would increase control by Congressional oversight committees.”

The best of the monetary policy press showed up to cover the meeting. So did the presidents of three regional Federal Reserve Banks who are known for their hawkish views – Esther George, of Kansas City, Mo.; Jeffrey Lacker, of Richmond; and Charles Plosser, of Philadelphia. The election of a Republican president could restore to influence the views that dominated the meeting.

Shultz, 92, a veteran of World War II, is something of a maverick among present-day Republicans. As Secretary of the Treasury under Richard Nixon he supervised the beginnings of financial deregulation. As Secretary of State under Ronald Reagan he oversaw the end of the Cold War (and negotiated the Montreal Protocol that banned the use of various substances threatening the atmosphere’s ozone layer). Recently he has argued for a revenue-neutral carbon tax.

Shultz attended all sessions, contributed frequently, as when he asked Ohanian how sure he was about his data (which showed union wages causing the Great Depression by steadily rising union wages despite the economic slack) or related why the Nixon administration felt it had to let Penn Central Transportation Co. fail in 1970 (the nation’s largest railroad heavy-handedly hired the president’s former law firm to represent it in negotiations with creditors and the government).

George, president of the Kansas City Federal Reserve bank, spoke at dinner to good effect about supervisors as the front line against risky banking practices. Among her first assignments as a young bank examiner was the emergency closing of the high-rolling Penn Square Bank, in Oklahoma City, in 1982.

After which Shultz stood up, denied the existence of any such thing as a former US Marine, and repeated the old drill field command, “Let’s stack arms and get the hell out of here!”

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EP has stacked arms. It is hard to produce anything worth reading while on the road. Coming up are plenty of weighty matters: the tenets of central banking; former Treasury Timothy Geithner’s account of the financial crisis; more on Thomas Piketty’s Capital in the Twenty-First Century; the new book by former Boston Globe Focus section contributor John Micklethwaite and Adrian Wooldridge; and much else.

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