Policy Conference Speakers Cite Hurdles on Way to “New Normal”

From top Obama administration and Fed policymakers to prominent private analysts, speakers at the March Economic Policy Conference offered generally optimistic views that the worst of the Great Recession is over and current risks do not indicate that another downturn is likely.  However, most speakers warned of significant roadblocks, especially in the political landscape, as new policies are debated and put in place to boost growth and reform the financial sector.

NABE’s Policy Conference was held March 7-9 at the Key Bridge Marriott in Arlington, Virginia.  More than 350 people attended the conference over two days of general and concurrent sessions.  A record number of media outlet representatives covered speakers and conducted interviews with NABE members.

Headliner speakers included: Sheila Bair, chairman of the Federal Deposit Insurance Corporation (FDIC); Christina Romer, chair of President Obama’s Council of Economic Advisers; Charles Evans, president of the Federal Reserve Bank of Chicago; Douglas Elmendorf, director of the Congressional Budget Office; Brian Sack, executive vice president of the Federal Reserve Bank of New York; Jurgen Stark, member of the European Central Bank’s Executive Board; and Jim Owens, chairman and CEO of Caterpillar, Inc.

Coverage of the Policy Conference in this issue includes separate reports on: “Policy Options Put In Context of Shifting Political Scene” by Susan Doolittle; “Chicago Fed’s Evans Focuses on Long-Term Jobless, Productivity” by Elizabeth Bernstein; “Analysts Watch for Small Business To Boost Hiring” by Chad Moutray; “Panel Explores Financial Reforms, Initiatives” by Eric Robins; “Hill Budget Committee Economists Assess Deficit Perils” by Eric Robins; and “Policy Conference Attracts Record Media Turnout” by Melissa Golding.

Results of NABE’s March policy survey added to the generally optimistic tone of the meeting with its findings that monetary policy is on target and fiscal stimulus has supported the expansion, but more stimulus is not warranted.  Survey panel members were virtually unanimous in supporting the continued independence of the Federal Reserve as the issue is debated as part of financial sector reform. 

Bair Proposes Resolution Mechanism for Financial Sector

Setting the stage for key elements of financial reform as it unfolded in April, FDIC Chairman Bair proposed to Policy Conference participants on March 8 that a new regulatory system include a “pre-funded resolution mechanism” similar to the system that gives the FDIC receivership authority for failed banks.  She drew on lessons of the recent crisis that helped send the economy into a deep recession, pointing out that “regulatory arbitrage” during the housing boom “undermined our financial stability by allowing risk to migrate toward gaps in our regulatory structure where oversight was minimal.”

Going forward, the administration and Congress need to agree on a package of reforms that includes “a clear mandate to close large, systemically important firms when they get into trouble and to quickly sort out the claims against them so that key financial relationships can be preserved and the taxpayer and can be protected.”

According to Bair, “the lack of a resolution mechanism for these companies is not some minor loophole that needs to be closed. On the contrary, it was a fundamental cause of the financial crisis and the enormous economic costs resulting from it.” During testimony before congressional committees and in public statements since early March, she has tried to assure lawmakers that the financial reform legislation headed for a vote eliminates “too big to fail” hazards that have required large federal expenditures.

Romer Touts Recovery Act Results, Return to Growth

Noting the sharp contrast from a year earlier when she addressed the NABE Policy Conference, CEA Chair Romer highlighted what she called strong evidence that the American Recovery and Reinvestment Act (ARRA) helped turn the economy around in recent months. “We are still in a very difficult situation, but the trajectory is vastly improved,” she said.

About one-third of the ARRA’s total budget impact of $787 billion was in tax cuts for individuals and businesses, she said, “another one-third went toward payments to help those directly harmed by the recession and to state and local government investments in everything form conventional infrastructure, to health information technology, to a smarter electrical grid.”  She added that the measure was temporary and most of the budget impact will be spread about evenly over 2009 and 2010.

Citing estimates from the CEA, the CBO and private firms, Romer said the recovery measure increased employment by between 1.5 and 2 million compared to what it would have been in the fourth quarter of 2009. But official unemployment data  “shows a labor market remains severely distressed” and the 9.7 percent jobless rate “is a terrible number by any metric.”

Romer also discussed long-term plans to bring down the record federal budget deficit, ticking off a list of key issues that must be addressed, such as steeply rising health care costs as they boost spending on Medicare and Medicaid programs. Obama supports the recent restoration of “pay as you go” (PAYGO) rules and he has appointed a bipartisan National Commission on Fiscal Responsibility and Reform, charged with making recommendations to Congress by December 1, 2010.

In his remarks at the March 8 luncheon, Jurgen Stark of the European Central Bank focused on lessons learned globally from the Great Recession, emphasizing his view that policymakers need to address reform challenges to correct global imbalances. In particular, he said governments need to address financial sector reform and oversight and institute more flexible exchange rate elements, as well as macroeconomic policies that foster growth.

“Only partial progress has been made so far, and the distortions that led to global imbalances are still present. If reform challenges are not met, there is a major risk that global economic activity will remain subdued, high public debt will become more persistent and unemployment will remain high,” Stark said.  “It is therefore crucial to make headway with our reform agenda, while taking care to ensure that our response to the crisis does not sow the seeds for renewed economic imbalances and financial excesses.

Caterpillar CEO Urges Engagement in Policy Debates

Addressing the March 9 luncheon session, Jim Owens, chairman and chief executive officer of Caterpillar, Inc., presented a generally positive view as the U.S. economy continues to strength and as policymakers search for exit strategies from policies that he agreed were needed to pull the country out of recession. “The best case scenario is for a slow but solid recovery over the next two to three years,” he said.

Owens, who rose through the ranks at Caterpillar starting in 1972 when he joined the company as a corporate economist, cited worries over the timing of the Federal Reserve’s exit from highly accommodative policies.   Acknowledging that the Fed must keep close watch on inflation, he said businesses also are concerned that keeping interest rates too low for too long could cause other problems.

Urging NABE members to be part of the process, Owens said that “we have an obligation to get engaged in this post-Enron world” by working through community organizations to help “shape public opinion, for we need to rally the troops to understand the difficult problems the country needs to confront.”

NABE President Lynn Reaser thanked conference organizers, led by Stuart Macintosh, executive director of The Group of Thirty, and members of his committee.  Other members of the committee include:  Douglas Duncan, Fannie Mae; William Strauss, Federal Reserve Bank of Chicago; Kevin Swift, American Chemistry Council; Kevin Kliesen, Federal Reserve Bank of St. Louis; Diane Swonk, Mesirow Financial; Christopher Banks, ITOCHU International; Nayantara Hensel, U.S. Naval Postgraduate School; and Sean Snaith, University of Central Florida and representing the Association for University Business and Economic Research (AUBER).

See the Policy Conference Session Pages for speaker presentations, papers, biographies, and links to websites of interest for topics covered in each of the sessions. Also, view video clips of conference sessions from the NABE Video page.

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