耶鲁大学金融市场英文文本Financial-MarketsLecture-16-Transcript.doc

Financial Markets: Lecture 16 Transcript Professor Robert Shiller: I want to talk today about monetary policy. First though, I wanted to just review some thoughts about Carl Icahn, who spoke on Monday. I thought he was very amusing. Im again happy that you asked questions because thats when you bring out a speaker really well. I thought you could have given him more trouble. He is a controversial figure. What he does, as you know, is takes over a company and shakes them up and, in some cases, is accused of stripping their assets. But, its all legal and you could make an argument that its in a general good of our society that people do that. If a company-if its stock sells for less than its assets are worth, then the company maybe should be broken up and the assets taken and given somewhere else because the low stock price indicates a problem. I dont know how to evaluate everything Icahn has done, but some corporate raiders have been unkind to employees. Maybe its not always the raider; its that some employees had trusted in an implicit contract that they were offered by their employer. For example, the employer may have said verbally-or suggested to an employee-that if you do well, well promote you up and you will have various advantages in the future. Then an outside raider comes in and just fires the employee, so naturally the employee feels wronged. There are instances of that sort of thing. Again, its like anyone who does important things, its hard to judge the whole picture and on that I am sure he has created value for the economy. Someone suggested that we should bring in corporate regulators as well. I think maybe in the next year Ill do that to offset-Im bringing in a lot of very successful finance practitioners and I dont have any regulators this year. Also, one of you asked, what literature do you read? He mentioned the Nicomachean Ethics, which I have never read-I dont know what that is. He also mentioned a poem by Rudyard Kipling called If. I didnt recognize what he was referring to immediately, but I looked it up and its a famous poem that you must have seen-written in 1910-an inspirational poem. I put it up on the ClassesV2, not as part of the reading list, but its under Resources, so you can read Kipling. Maybe he thought of that because its really a poem-seems to be a poem of advice for young people because it ends up-the last line is-do you know the last line? Can someone recite it? Whats the last line? If you follow these instructions, you will be a man my son. So, thats the mode of thought he may have been in when he talked. Anyway, we have our second mid-term exam on Monday and it will be like the first mid-term, but it will be less mathematical. This part of the course had less technical apparatus than the first part of the course, so it will concentrate on the middle third of the course, up to this lecture. You have to read Fabozzi, et al. again carefully because Im free to take anything from Key Terms and Key Concepts from the chapters that were assigned for this part of the course. Of course, every reading that is online-I dont expect you to go to the library-is something I might ask about. April eleventh, we have Stephen Schwarzman coming and Im looking forward to that. That will again be a Friday, but it will be at nine oclock and he will be here, so I think that will be a lot of fun also. I want to then start todays talklecture-which is about monetary policy and its really apropos right now. We are living in very unusual times and I am sure that Ben Bernanke and other central bank presidents are losing sleep right now because this is a time to challenge monetary policy makers. The thing that really emerged just in the last week or so is that-of course, monetary policy is about setting of interest rates. In the last week, the Treasury bill rate on the United States four-week Treasury bill, which is the standard, essentially-three-month-it fell to 0.2%. This is shocking. What is happening now? Interest rates have hit zero-0.2%; thats twenty basis points above zero. People have long thought that these kinds of things happen only in Japan, but thats not true at all; its happening right now in the U.S. Theres been a total crash in Treasury bill rates, so its not going to-one thing we know is that this crash is over. The Treasury bill-the three-month Treasury bill rate has crashed-its virtually zero-and the story is over because it cant go any lower. Well, it could go twenty basis points lower, but interest rates can never be negative. So, thats it; its over; weve just hit zero. This is the thing that worries central bankers. When interest rates hit zero, then they dont have-its a little bit like your steering system on your car freezing up or hitting a-youre hydroplaning on the highway; your steering wheel doesnt work anymore. Once interest rates hit zero, you cant cut them anymore and thats what the Fed wants to do. Im talking about four-week Treasury bills; the Federal Funds Rate is still at 2 %, but at least the more prominent three-month T-bill rate is at the end. What I want to do is talk about what the Fed in this country is doing and what other central banks are doing. I want to start by putting it in historical perspective. If youll allow me, I will talk first about just what is a central bank, such as the Federal Reserve, and what do they do. I want to first just go back-the story I told you in a recent lecture was the story of a goldsmith banker. This is how it started. There were people-goldsmiths were people who worked in the metal gold and made beautiful things for people-jewelry and other things. They had safes in their shop and some people would say to the goldsmith, I have some valuables. I dont have a safe-can I put it in your safe? The goldsmith would say, okay. Then hed write on a little note and hand it to the guy and say, just keep this note. If it was a bearer note-if the note said, Ill pay-if it wasnt a unique object but just gold, the note would say that this goldsmith will pay to the bearer so many ounces of gold. And thats how banking got started. It emerged into an institution in which banks would have notes-bank notes-that circulated widely and we began to think of them as money. If you put your gold in the care of a goldsmith, initially you dont think-you think the money is there. But eventually, you have this bearer note that you start passing around to spend to other people and they start to think of them as money and thats the origin of banking. If you ask someone a couple hundred years ago, whats the essence of a bank? They would say, oh they print paper money-private banks print paper money, not just government banks. Well, there werent government banks; originally, they were all private. There is an institution called the gold standard-now totally and completely gone everywhere in the world. What it was-it began-the first country to adopt the gold standard officially was the United Kingdom and that was in 1717. What it meant was that the government of the U.K. committed that their paper money would always and at all times be redeemable in gold. It was gradually adopted by other countries through time and the United States didnt officially adopt it until 1900. Let me just go back to the way the thing worked. It used to be that it wasactually, the gold standard kind of came in by accident in England, originally; that was in the 1600s. The prominent coin was called the shilling and it was a silver coin. The British pound was twenty shillings, so effectively, the pound was on a silver standard. Then they started minting new coins out of gold and the government was issuing coins-they called them guineas. They started out as a-they just minted the amount in one coin, which they thought was equivalent to twenty shillings. So, they had a guinea, which they said was twenty shillings, and then there were two coins-either shillings or guineas-that was the money at the time. Then, the problem was that the price-relative price of those two-was not really fixed by the government. So, it started to drift and people started to think, I think a guinea is worth more than twentyshillings and the market price drifted up to twenty-oneshillings. So, the government was upset-of the U.K. We wanted this to be a twenty shilling coin, but now in the market its trading at twenty-one. Then they implemented a rule that the guinea is worth twenty-one shillings. Then, the relative price of gold versus silver shifted to the point that the gold with-at the twenty-one shilling exchange rate, the gold shilling was worth less-the gold guinea was worth less than twenty-one shilling. So, all the shillings disappeared and the only coin left was the guinea. So, England became on the gold standard. The Bank of England was founded in 1694 and that was the worlds first central bank. It was granted a monopoly on joint stock banking by Parliament in return for giving war loans to the government. It started out just a powerful bank. It did not have a government monopoly on note issue, but over the time, it became the prime issuer of U.K. notes. Now, what actually developed in the 1700s was that the Bank of England, being the most powerful bank in England, started to demand that other banks in the U.K., who were also issuing notes, would leave their-would keep a deposit with the Bank of England. The Bank of England-if you were a little bank somewhere in the U.K., the Bank of England would say, youve got to keep a deposit with us, otherwise well destroy you. Because the Bank of England could then demand all the-it could start accumulating notes from some issuing bank and then demand payment in gold. The issuing bank would be driven out of business if it didnt-They all were using fractional reserve banking, so if you have a big player thats demanding gold from you, youre in trouble. All the banks complied and kept deposits with the Bank of England. You see what the Bank of England emerged into was a bankers bank. You have lots of banks; the banks are taking in gold and issuing notes, but they are forced by the Bank of England to keep a deposit at the Bank of England. So, the Bank of England then became a kind of regulator of these banks and it would also loan to them when they were in trouble. They had a relationship, between the Bank of England. The Bank of England became the source of stability in the UK. The problem with private banks issuing notes is that there would periodically be banking crises when the banks failed to pay on their notes and they couldnt pay out the gold that was demanded-that was required. With a fractional reserve system, youre in an unstable equilibrium. If people start demanding payment on their notes, then they will destroy the system. If they start demanding, then were in trouble. So, the Bank of England effectively enforced that the banks in England kept adequate reserves and they would see some of these reserves in the deposits at the Bank of England. Englands money was more stable than other countries. In the United States, we did not have a central bank until 1913 when we created the Federal Reserve System. Before that, the United States went through repeated banking crises when people would start demanding the gold for their notes. When did we have-we had a severe banking crisis in the United States in 1797, in 1819, in 1837, in 1857, in 1873, in 1893, and in 1907. We just had one after another; the banking system kept collapsing. What would happen is there would be a panic; people would say, theyre not paying on the notes. So, everyone would run to the bank and demand their money. When that happened, it would destroy the economy. It was a subject of much discussion of what to do to prevent these bank runs. In the United States, in Massachusetts, a bank called the Suffolk Bank created a little Bank of England in the State of Massachusetts. They created what was called the Suffolk System, in 1819. What the Suffolk Bank did is it just, on its own, it just declared that it was the Bank of England for the State of Massachusetts and it required that all banks in the Boston area keep deposits with them. So, the Suffolk Bank became a bankers bank and it lasted until 1860. It then made Massachusetts the most stable state, or essentially the most stable state, in the country and it was widely-admired. The thing you have to understand is, if you could go back in a time machine to before 1860 in the United States, you would have real problems with paper money and you would be very much aware of the paper money. If you took out your wallet and looked at the paper money in your wallet, it would be issued by lots of different banks, not any one standard bank. If you went to a store to buy something with paper money, then the person at the-would it be a cash register? What did they have? Cash box would be-would have something called-it was called, Van Courts Bank Note Reporter and Counterfeit Detector sic. It was a magazine that would be-every retailer would subscribe to it. So, what the guy would do is he would say, okay youve got-if it was local money-if it was from this town-if it was New Haven money-there were New Haven banks-the guy would immediately know what its worth. But, if you were to make the mistake of trying to spend Boston money in New Haven, they would get out Van Courts and then they would read the discount. So, Boston money was probably pretty good because of the Suffolk System, but if you tried spending New York money in New Haven, they would get out the Bank Note Reporter sic and put a discount on it. Well, it was a messy system, so youd only get like ninety cents on the dollar. Thats because nobody trusted these banks, they could go under any day and so they tended to sell at a discount. Incidentally, the U.S. did create what sounded like central banks. They were The First Bank of the United States and The Second Bank of the United States. The First Bank of the United States was created in 1791 and they had a twenty-year charter, which expired in 1811. It wasnt immediately renewed because the United States got into a war that we call The War of 1812. It was the U.S. connection to the Napoleonic Wars. It wasnt until after the war that we created a new Bank of the United States in 1816 and gave it a twenty-year charter as well. But those were not central banks because they-there was-Speaker arrangementsIn the United States, we created the National Banking System in 1863 after a banking crisis and that worked fairly well. Instead of having a central bank, we decided that there would be a list of banks called the National Banks. The National Banks would be required to help bail out any bank that was failing. It was something like a central bank, but it was different essentially in that the National Banks really didnt have authority to run monetary policy. They merely were there in a time of emergency to prevent, hopefully, a banking crisis. They didnt succeed; we still had banking crises, so the system didnt seem to work very well. The 1907 banking crisis then led finally to the creation of the system that we have now-the Federal Reserve System. What it was was, in many ways, an effort to bring the Bank of England to the United States. They wouldnt have said that because it doesnt sound-we want to think that we invented this here, but it actually was a new invention in a way because the United States has a different philosophy, which the United States has been committed, since its beginning, to federalism. That is, they dont want-or more broadly-they dont want centralization of power in the government. Instead of setting up a central bank in the United States, as was done commonly in other countries, the United States instead created twelve banks; theyre the twelve Federal Reserve Banks. That was an effort to disburse power away from the center. The idea was that power to the people, rather than the central government. The Federal Reserve System that was created in 1913 was different in that it was independent, or much more independent than central banks in other countries. Other countries had set up central banks following on the Bank of England, but the U.S. didnt set up a central bank; it set up a system of twelve banks and they were regional. The idea was that this is better, its more democratic; each region of the United States has its own bank. The banks were not technically government institutions-well, theyre semi-government; its kind of strange set-up. The Federal Reserve Banks are owned not by the government but by the banks in the region where they operate; theyre called member banks. So, banks that become a member of the Federal Reserve System get shares and they become stockholders in the Federal Reserve Bank. They get dividends-does it work now? Can I walk away? Thank you.-but theyre not traded. Theres no price per share that you can observe and the banks cant do anything except passively receive the dividend. But they can also participate in choosing the directors and the president of the Federal Reserve Banks. Thats a very dispersed system, but it still works because member banks keep deposits at the Federal Reserve Banks and theyre required to keep these deposits. Moreover, they can also borrow from the Federal Reserve Banks when theyre in trouble and need money and thats supposed to help prevent banking crises. So, thats the Federal Reserve System. Incidentally, there are twelve banks and there are twelve districts. The districts back in 1913 represented the population distribution of the U.S. at that time. There are a lot more districts in the East Coast of the U.S. than the West Coast. There are also two Federal Reserve Banks in one-in the state of Missouri-the