Speaking at the International Monetary Conference in Toronto, Canada, 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.
Drawing from three academic papers the Chairman published in 1999, 2011 and 2014 while working at the International Monetary Fund, the Bank of Israel and the FRB, respectively, 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.