Greatest Moral Hazard, Says Paul McCulley, Is Austerity Here And Now (Mauldin)

Well, if one thing’s not in short supply —

Yes, but let’s not go there. We should close this interview on a note of optimism. Ask me a question I can give you an optimistic answer to.

That’s tough—

You can ask me about fishing, about my plans for the next three months.

Okay, so tell me what you’re focusing on for the Global Interdependence Center —

We are focused on creating content for the GIC.

Isn’t that kind of circular?

Not really. The GIC has been around since 1976. Larry Klein [Nobel Laureate, founder of Wharton Econometric Forecasting Associates and emeritus professor of economics at the University of Pennsylvania] was one of the first people involved with it, along with one of the major banks in Pennsylvania. The organization, long most active in the Philadelphia area, has been a convener of conferences on global issues, especially free trade and international cooperation, for a long, long time. But we wanted to branch out from being a convener of conferences featuring international authorities to having conferences from time to time that spotlight original economic research produced by the fellows that I am going to ask to join the GIC’s Society of Fellows. It doesn’t mean that the existing mission of the GIC will not continue. We are going to expand it, by adding new conferences that are content driven, focusing on the original work of the Society of Fellows. The architecture we’re working with now is that the fellows will partner with a rising-star academic in the economic or financial field or even some other academic field. What we are driving at is having gray bearded practitioners as fellows partnered up with rising-star young academics to write original papers on relevant topical issues that connect to global interdependence. In other words, the fellows will be not people who have the title as an honorific, they are expected to actually work.

Actually do something? That’s novel.

Right. But we’re planning on that framework producing a major paper from our fellows and their rising-star partners every two to three years.

That’s pretty ambitious.

Yes, which is why I don’t really have too much leisure time. We will have an annual event. Our first will be in Paris in March of next year.

Not bad. I like your thinking on where to hold GIC conferences, by the way. Even if my expense account has only stretched to ones in Philly.

Banques de France has graciously invited us. Christian Noyer, its governor, will personally be hosting this event. The first two papers, the inaugural papers kicking off the Society of Fellows output, if you will, will be presented at that time. I’m writing one of them.

I should hope so, as the first fellow.

And the soon-to-be-announced fellow No. 2 is writing the other. We don’t anticipate getting beyond maybe 8 to 12 fellows over time because as I said, we expect it to be a job. “Job” is probably not the right word, but I’ll use it anyway because being a fellow actually involves work.

You keep insisting it’s not just an honorific.

That’s because it’s not a matter of having your name on the masthead of a piece of bond paper. Not that there’s anything wrong with that, particularly. But we actually anticipate it over time becoming an active collaborative effort between people who really want to contribute at the fellow level and to collaborate with up-and-coming members of the academic community, such that being asked to participate will be a very attractive proposition for young academics. In addition to the prestige, there will be a very nice stipend involved for the academic.

That should be an effective hook.

Right, for young academics on the path toward tenure, a stipend matters.

And so does publishing—

They’ve got to publish. And what they’ll be doing with the Society will be the kind of research that will get them noticed. We are effectively creating a new place for them to publish on topical issues along with prominent economic practitioners. I’ve found so many academics write to impress—

Other academics—

Exactly. So they take wonk and make it wonk squared. We’re not going to be either wonk or wonk squared. Well, we may be wonk because I can’t deny having some of that in my personality. Certainly, I bring some of that to the game, because I strongly believe if you don’t have an analytical framework for analyzing a problem, maybe you should stop until you have one. It’s a nasty habit of mine, one that’s only been reinforced by my experiences over the last 30 years. I cannot tolerate — I don’t have a lot of patience for those who have opinions and can’t explain to you the framework from which they drew those conclusions. Whether I agree with you or don’t agree with you, I can appreciate your analytical framework. But if you give me conclusions with no intellectual architecture, then I am less-than-satisfied — unless you’re inspired by God.

Spoken like a preacher’s son.

Well, that is a framework. But we’re not walking in those shoes in economics. “It came to me while I was shaving this morning,” is not something that constitutes an intellectual framework. “It came from a higher power,” is a framework, I concede. But “it came to me while I was shaving this morning,” doesn’t quite do it for me. Anyway, we want to create an opportunity for young academics to get to have their day in the sun. It’s going to be a oneyear assignment working with a fellow to produce the paper. We will have two – probably eventually three papers a year — but the inaugural year will be two. That’s where the work for the fellows will come in, co-authoring papers with the academics at that rate. That’s why I’m thinking in terms of appointing maybe nine fellows on a three-year rotation. So you can see it will be a significant commitment for our fellows to work with, mentor and learn from the young academic stars we choose to involve. And I stress learning from the academics!

It sounds like it should be a brilliant opportunity for young academics to actually work with real world practitioners in economics and finance.

It should be a two-way street. We want it over time to be recognized in academia and more generally as a great honor to be selected to work with GIC, quite frankly as a fellow, but even more importantly as an academic coauthor. That will only be a one-year assignment for the academics, but it will be a significant one. The payoff will be that they get to publish in a global forum with an established name in the business. That should be pretty attractive in itself, but when you add the notion of an all-expense-paid-trip to Paris and getting to hobnob with household names— Anyway, we want to institutionalize the selection process for both the fellows and the academics. For the fellows, it’s easier. We want to be quite rigorous in designing how we pick the academic co-authors, so that we draw from a wide array of universities and colleges. Coauthors could be grad students working on their dissertations or young assistant professors looking for a fast track toward tenure. Obviously, we don’t have a fully baked idea of their qualifications yet; we want to cast a wide net. Bill Dunkelberg and his wife, Sharon, are working on creating our co-author selection process now, because they both come from the academic arena. My idea is that we want to find the most promising young academics that nobody knows yet to be our co-authors. In effect, we want to create a prestigious competition over time. It’s going to be fun. That said, in the first year, with me doing one paper and our soon-to-be-announced Fellow No. 2 doing the other, we will not be able to cast an enormously wide net for co-authors because we haven’t institutionalized this process yet.

How are you going to find them?

Well, we’re going to have to use a more informal selection process to find co-authors this time around because of our time constraints. I have not yet selected who is going to be my academic co-author, and neither has my fellow-to-be, but we are both searching on a bespoke basis to find our partners. I’ve been doing some sounding out of various people, whom I actually plan to visit since I have time. So I’ll see who would be willing to work with this old gray-bearded guy.

Can you give away the topics you are planning to write about?

The topic I’m taking on is, Does Central Bank Independence —

Does it exist?

No, not quite. That’s almost a metaphysical question; whether or not central bank independence exists. It shouldn’t be, if you take the question literally, because the central bank is independent within the government. But it is not independent of the government. Anyway, the topic I’m taking on is, Does Central Bank Independence Interfere With Pursuing An Optimal Monetary/Fiscal Policy Mix In A Liquidity Trap?

Gee, no controversy there.

Well, a liquidity trap is what I think we’re in. And the doctrine of central bank independence in many respects requires a temporary suspension when in a liquidity trap because, by definition, a liquidity trap is a place where monetary policy is ineffective.

No argument, monetary policy seems to have met more than its match in this sorry economy.

It’s completely ineffective in a liquidity trap. I start with the presumption that if you religiously maintain central bank independence when you’re in a liquidity trap you will get a sub-optimal monetary/fiscal policy mix. That’s because if you want to increase aggregate demand and output in a liquidity trap, you have to do it with fiscal policy. You can’t do it with monetary policy alone, so fiscal and monetary policymakers have to work together. I’ve been preaching this for quite some time. Actually, when I go back and read Ben Bernanke’s work of a decade ago about Japan, it’s clear that he has the same questions as I do about the sanctity of central bank independence in the context of a liquidity trap. But he’s obviously in a different situation now because he actually is the head of an independent central bank. It’s a very rich area for research, first, on a time series basis, looking at it over time — including during the period when we were on the gold standard, in which the gold standard could dominate fiscal policy and lead you into a liquidity trap, in other words, into a deflationary phenomena. Then we’ll also be looking at it on a cross-sectional basis in various countries. We’re going to try to pick topics you can look at historically and also across countries. That’s what my academic co-author will be doing: A great deal of old-fashioned shoe-level work in the library. Although I guess “library” is an old-fashioned term now. Most academic research is in front of the computer these days. Back in the day, we literally had to go to a library.

You’re dating yourself. Have you decided what your fellow fellow will be writing about?

His topic is “Are Central Banks Innocent Bystanders In Wealth and Income Distribution Outcomes?”

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