Grasping Reality on TypePad, by Brad DeLong

You heard about this house, whose mission has been about values that promote empathy, respect, moral courage. There is no question you could get some global perspectives taking an international course but nothing compares to the daily exchange here in this wonderful community. They live, study and dine. This makes these permanent bonds for -- forged here a hallmark for this institution for 90 years. It would not be possible for this to happen if there were people I need to recognize. They are from 150 different countries. They have 10 institutions across New York that represent 60 different fields of study. There is a lot of cross pollination. We are proud of our residents. I would like all of our residents to clap and make yourselves known. [applause] We also would like to thank our trustees who do so much to help this place to keep it alive and relevant. Could our trustees also stand and be recognized. [applause] We are grateful to our underwriters. Every dollar of their support will go to fellowships here that enable our students to sustain this wonderful community. Morgan Stanley three J.P. Morgan, Chase & co, BCG Henderson, UBS, and BNY Mellon. Thank you for your support. [applause]

I will say quickly, throughout our history, we have convene thought leaders on international affairs impacting our demographic. Tonight's event continues that legacy not just because of the panels of speakers. It is the inaugural event of the Paul Volcker program. We are grateful to Paul. This is the first inaugural Paul Volcker speaker program. I think we have done him justice with this turnout. [applause] I would like to turn quickly to what will happen on the stage. This conversation has less to do with interest rates, whether they rise and fall, and more to do with the Fed chair perspective on leadership and the values in their decision-making. This is a focus on values. We hope you will agree this conversation and many more like it to come in the future demonstrates the can be a beacon of international harmony and understanding proving humanity can surpass barriers of race, nationality, coulter and traditions that have divided the world. I would like to make an introduction to someone who I think embodies global leadership , James Gorman, the chairman and ceo of Morgan Stanley. He is a 1987 alumnus of International House. He will bring the bridge you have been waiting for to understand why we are hosting this event.

James Gorman: Thank you Calvin. Thank you. It is a terrific honor to be invited to participate in what is an historic event. I was humbled to be asked to come to the stage as something of a warm-up act before you get the real deal. The four great chairs of the Federal Reserve. I've been honored to work directly with three of the four chairs and I have tremendous admiration of their public service, intellectual capacity and careful stewardship of monetary policy in the financial system. Each has made a contribution to economic growth and stability of this great country into each we only dead of tremendous gratitude. Calvin asked me to reflect on my experience as a student of International House. Three decades ago, he asked me to reflect on how it helps develop the career I have been lucky to have here in the United States of america. I was accepted International House, lucky to be so and arrived here on the seventh of September, 1985. It was a harsh and humid day. Like so many other foreign students who lived here I was tremendously relieved to have such a safe and welcoming community to move to in New York city.

That week I began a tradition of writing a letter to my family in Australia, something I continued for many years. My father passed away several months ago. Before he did he gave me several shoeboxes filled with my letters. Each numbered, each kept in their original envelopes. Ror those of you, this is a letter with an envelope. [applause] I have a child in Berlin who has not in three months written the equivalent of one of these. I thought very briefly I would touch on five extracts from those letters. Of each capturing the essence of the wi-fi experience and was welcomed to. The first was arrival. I wrote: "Dear all." That may not feel personal but if you had nine siblings like I did you would not spell out their names every week. "I arrived after 36 hours of flying. The former tenant of my room is still asleep in my bed. Let's say the changeover was finely tuned. Everything is a little on the margin. My room is small. I discovered I can see the Empire State Building if I lean out my window far enough. International House reflects New York. Dirty and security conscious. [laughter] [applause]

"Life experiences. Sunday was a big event in this room. Suit, tie and entertainment. The president spoke. He mentioned australian sitcom from the farthest place for what I thought was a minor accomplishment, we were roundly applauded. Thereafter followed pno and jazz, it was great fun. Jesse Jackson is coming this week as is prime minister gandy and gerald ford. Where else in the world would you be so lucky as to have those people speak within one month? And then on friends, tonight I studied with a Spaniard, a Filipino, and a Frenchman. It sounds like the beginning of a joke. [laughter] The yanks are incredible. Loud, happy, friendly, buzzing with energy. They ask questions continuously. Many needlessly. [laughter] Participation is graded. I am forced to do the same, when in Rome put your hand up. money, I purchased a calculator today for $100. With books of $200, my finances are writing a storm." Not part of the letter, that was good practice for the financial crisis I would confront 25 years later. I was always short of money. I borrowed a student loan. 24% student loan. Along came Volcker. [laughter] [applause] Finally, International House was highly instrumental in pointing me toward a career in banking. I have been lucky to be assigned to a trustee. Each trustee match to one student. Mine is Shelby Davis, a legendary Wall Street banker. Mr. Davis was a tremendous support of I House. He took me to lunch at a fancy club in New York and at the end he pointed at me and said you should pursue a career in finance. So I did. [laughter]

Thank you International House on behalf of myself and so many others who have Benefited from your welcome, your warmth and your worldliness. It is now migrate pleasure to introduce Fareed Zakaria. He is at an extraordinarily decorated career from running Foreign Affairs at the tender age of 28 years old to hosting on cnn and writing to New York Times bestsellers among his many accomplishments. He is universally recognized for the quality, depth and inside of his commentary. He understands and appreciates the mission and he has a wonderful addition with his celebrated work we are about to hear from.

Fareed Zakaria: Thank you so much. That was a fantastic introduction. I love the letter. I hope it will be published one day. The letters of james gorman. Let me say a few things before we have our guests join us. This is being recorded for my show. Please turn your phones off and refrain from applauding until the end. In any case we don't want to create that sense that the Fed chairman has to pander to popular whims. It will interrupt the broadcast. I think that is all I have to say. This is such a special event. I'm going to -- Henry Kissinger said those who have need no introduction crave it the most. I think that is not true of the people i'm about to introduce.

I'm not going to give them much of an introduction other than to point out we have with us the four living chairman of the Federal Reserve, past and present. They comprise together 37 years of Federal Reserve history, which is one third of the history of the Federal Reserve. At some point perhaps somebody will make a musical out of all this in the style of 'Hamilton.' I would like to ask the current chairman of the Federal Reserve, it Janet Yellen to come in. Then we have Ben Bernanke, her predecessor. We have Paul Volcker, the legendary Fed chair. And from washington where he celebrated his 19th birthday, Alan Greenspan. Welcome all. Thank you. [applause]

Madam chairman. I have to begin with you. I think everybody is going to be interested in the things you are going to say. Let me ask you to start. You look at the economy carefully. Are we in an economic bubble? Is the economy as perilous as some people on the campaign trail are suggesting?

Janet Yellen: I was say the U.S. Economy is made tremendous progress in recovering from the damage from the financial crisis. Slowly but surely the market is healing. We have average 225,000 jobs a month. Unemployment stands at 5%. We are coming close to our assigned congressional goal of maximum employment. Inflation, which my colleagues spent much of their time as chair bringing inflation down from unacceptably high levels for a number of years, it has been running under our 2% goal. We are focused on moving it up to 2%. We think it is partly transitory, the strong dollars responsible for pulling inflation below the 2% level we think is most desirable. We are making progress as well.

This is an economy on a solid course. Not a bubble economy. We tried carefully to look at evidence of potential financial instability that might be brewing. Some of the hallmarks that clearly overvalued asset prices, high leverage, and rapid credit growth. We don't see those imbAlances. Although rates are low, it can encourage and reach for yield behavior, I went and described this as a bubble economy.

We have relatively weak global -- but the U.S. Economy has been doing well. In spite of the fact we are suffering a drag from the global economy.

Fareed: One of those statistics you cited, the unemployment rate. many people say it is not 5%, it is higher. People who say it is in the 20's. Do you think the unemployment rate is accurately reflecting the reality out there? Janet Yellen: There are different concepts of unemployment. The measure I cited is the most commonly used metric to judge the labor market. There are broader definitions. One definition that counts discouraged workers and part-time, one full-time job who can't find it, that is higher, closer to 9%. Broader definitions that count more people who may be underemployed are always higher. Any metric you look at shows broad improvement in the labor market. Part-time involuntary unemployment is higher than one would expect given where the standard unemployment rate is. There I see some additional slacker improvement we could have an suggest that the 5% understates the state of the economy. Overall whatever measures the market you look at, many other different kinds of measures suggest a labor market by this vastly improved.

Fareed: For most ordinary people, they must wonder, they have all this power over the economy. You have a mandate to provide, to keep inflation in check but to see people are employed. Why not take extraordinary measures to help boost employment, health wage growth so people's wages rise. That is not a ceiling. Why not take aggressive measures and overshoot the target by a little bit. You have undershot the target for several years now. People may wonder why not try to do something that would help ordinary working people?

Janet Yellen: Maximum employment is the mandate congress gave to us. We take both parts of it seriously. We have had I would say very aggressive monetary policies over the last six or seven years when you contemplate the fact December of 2008, we took the short term overnight interest rate essentially down to zero and then engaged in large-scale asset purchases, communications for guidance policies to provide more stimulus with really done great deal to foster more rapid recovery. Most colleagues anticipate unemployment will actually dip somewhat below levels now with the policies we have in place and that they would see a sustainable in the long run. There is some overshooting in that sense.

We are not shooting for a target that is in excess of 2%. Extracting from energy prices and the dollar, a path like that service both of our goals, namely employment putting people back to work, progressing, moving up in job chains, moving at a faster pace back to 2%. We do not think to overshoot our objective but it is also the case 2% is our goal. It is not a ceiling. We do envision paths similar to what you described.

Fareed: In December you raised rates. many people including Larry Summers, felt it was a mistake. In retrospect, was it?

Janet Yellen: I don't regard it as a mistake. I feel the economy had made substantial improvement toward our goal.

Fareed: Alan Greenspan was registering agreement with that. If you can begin again.

Janet Yellen: So, we sit at two criteria's to boost the fund rate. It led to the December decision. We wanted to see substantial progress in the labor market. We felt that has been satisfied. Recognizing inflation is below are 2% objective, wanted to feel reasonably confident it would move up over the 2%. We also think those conditions were satisfied in December and justified taking a step. Monetary policy is not in any preset course. Although every three months my colleagues and I said out our individual projections of what we anticipate for the economy and also going along with that, what we think is a monetary policy path that would be appropriate. That gives a suggestion of where people think the economy is going but we try to make very clear there is not a preset course of rate increases.

We will watch carefully what is happening in the economy and adjust policies. We took one step. The U.S. Economy has continued to progress in a satisfactory way. We have continued to see good job performance, some evidence of inflation moving up. That was our expectation when we raised rates in December. We thought the path of rate increases would be gradual. That remains our best guess and expectation. That the economy continues on the path it is on of recovering. Rurther rate increases will be justified but for a variety of reasons, particularly the legacy of the financial crisis, weak global growth and the strong dollar that is gone with the level of rates, sometimes called the neutral rate, the level of short-term rates that would neither be particularly stimulating the economy or holding it back, that that level of neutral rates is quite low.

So, yes, there's accommodation in the monetary policy that we have, but we think a gradual path of rate increases would be appropriate depending on how our views of the economy evolved. I think we remain on a reasonable path and I don't think December was a mistake.

Fareed: The dollar has been weakening. Is that a positive trend or a negative one?

Janet Yellen: We don't have a goal for the dollar. What we are at is the economy as a whole, and the likely path for inflation and employment to achieve our goals. Rinancial conditions broadly speaking, the state of financial conditions, impacts our forecast for economic variables. The dollar is one of those. I would call it part of financial conditions along with longer-term interest rates, other asset prices, credit market spreads, so it is the case that appreciation of the dollar that we've seen over the last year and a half, along with slower global growth, has created a drag on the global economy in the sense that our net exports have been holding back growth. U.S. Consumer spending has been strong enough to offset that. We look at the bAlance between those two things. Taking that bAlance into account, the U.S. Economy is moving forward, and I think financial conditions are forecast to take everything into account. Thus prospect for continued growth look good.

Fareed: Neel Kashkari made a speech recently in which he said the big banks need to be broken up. Do they?

Janet Yellen: We have been very focused since the financial crisis and the Dodd-Frank act has directed us to pay attention and try to put in place policies that will deal with too big to fail. I certainly share president Kashkari's concern with too big to fail. I feel more positive on the progress that we've made. Rirst of all, we put in place policies through supervision and regulation that have greatly enhanced the safety and soundness of the banking system. So we have more capital, higher-quality capital, more liquidity. We do rigorous stress tests. I think the odds of failure of large financial institutions is lower. But we're also dealing with the issue of, how would we resolve such an institution if one were to fail?

I think we've also made considerable progress there as well. We are working internationally with other countries. We've identified strategy that could be successful in resolving a company. We've asked the firms to produce living wills that address a number of areas that could be problematic in a resolution. Ror example, under the bankruptcy code, I think the firms are working hard on the living wills, and simplifying their structure and identifying resolution strategies. We recently passed a rule that will require them to hold in addition to a substantial amount of capital, enough long-term debt that if a company were to encounter distress, there would be essentially resources that could be mailed in in a resolution to recapitalize that company. So I think we've made considerable progress and I certainly haven't arrived at the conclusion that my colleague has. I'm pleased with where things are going.

Fareed: One more question before I open it up to a larger conversation. Lawrence Summers, who some thought was one of the contenders for the job you hold, says that there is no question that Bernie Sanders is right on one central point, which is the financial industry has too much influence over the structure and governance of the Federal Reserve. Do you think that is true?

Janet Yellen: I don't think it is true. I think we are charged by congress with regulating financial institutions and we take that mission seriously, and our tough supervisors and regulators, we talk to bankers, of course, on a regular basis. We are actually required, and we have bodies like the federal advisory council that Jamie Gorman has served on, where we meet to exchange views and understand the perspectives of bankers. But we are very focused on regulating the banking system in a way that will achieve congress' goals. Fareed: Chairman Bernanke, can I ask you about something that I suspect if I ask Janet Yellen, she would be even more evasive than she has been in the last few minutes, which is of course entirely what you are supposed to do, and I respect and admire it. [laughter]

About every seven years, there is a recession. That is roughly how long these recoveries last. We're about seven years since the last recovery. Statistically, we are due for a recession. nobody has ever been able to predict these. The Fed has not. The cbo has not. If there is a recession, traditionally the Federal Reserve cut interest rates by about 3%. 300 basis points. What is it going to do now, given that there aren't 300 points to cut?

Ben Bernanke: Excellent question. Let me just say first that as Janet has pointed out, there's no sense in which expansions die of old age. The risk of recession is more or less constant every year. Though we can't forecast them, there's no reason to think that just because we've been in seven years of recovery, doesn't mean we are due for another recession. We are facing, and I agree with a lot of Janet's early analysis, we are facing some risks like developments globally, which are creating headwinds in the United States. Productivity growth is only modest, which is a problem. The domestic U.S. Economy is moving toward. Households are pretty strong. Housing sectors continue to expand. I don't see any particular reason to think a recession is more likely in 2016 than it was in 2015 or 2014. It is true that if a recession were to begin, we were starting for a lower level than is normally the case. The extent to which the Fed could cut would be less.

My reaction to that, one, is that there are some other tools. One of the things we've learned over the last decade is that central banks do have a set of tools besides cutting short-term interest rates. There is communication, forward guidance, which can be a very helpful easing policy. Quantitative easing was helpful. We're seeing some experiments in Japan and Europe. There are other tools. The site is not out of ammunition. That being said, also, I think we have learned that it is a mistake to put all of the burden on central banks and monetary policy. A more bAlanced policy with a greater fiscal component or a broader set of policies would no doubt work, even in a situation where central banks are pushed to the limit. We do have a range of policies we can use. I think it is unfortunate that around the world, central banks have carried so much of the burden. We've gotten the wrong impression that only central banks can respond to downturns.

Fareed: Are you saying that you think that there's been too much emphasis on austerity and that governments should spend more money to boost the economy?

Bernanke: Under appropriate circumstances, yes. In 2013, the United States, the Congressional Budget Office estimated that in that year, fiscal policy was taking 1.5% of growth off of what otherwise would have been the case, which is something we couldn't afford. I'm not saying that the government should always be spending. We are looking at longer-term fiscal sustainability, but at certain times, particularly in a recession when the central bank is out of ammunition, the fiscal policy does have a role to play.

Fareed: Alan Greenspan, may I ask if you would agree with Ben Bernanke, that this is a moment at which governments around the world should be spending. If there is another recession, which presumably at some point there will be, in

Alan Greenspan: Let me just say this. I thought I had run out of time with my sneeze. I appreciate -- [indiscernible] no, in fact, I think the major problem that exists is essentially the issue that productivity growth, pretty much across the spectrum of all economies, has been under 1% per year for the last five years. This is true in the OECD. It is true in the United States. I think our major problem as I see it is, how do we create a GDP growth rate which enables us to get all the values we get out of growth without getting productivity? The GDP growth rate is essentially output per hour effectively times the expansion in the labor force. We have, as Janet has correctly and accurately pointed out, our good labor force, our slack in employment is gradually dissipating. The unemployment rate is going to reach a level below which it cannot get realistically. unless we come to grips with the issue of productivity, then we have no major advance in the future. I think the data that I see is that the productivity slowed down pretty much across the globe as a function of the fact that capital investment pretty much everywhere has slowed down to a significant extent and as a percent of GDP, has been dramatically lower than it has been historically. Power function --

I certainly agree that monetary policy should not have the whole load of getting us out of this phenomenon -- it is fundamentally a fiscal problem, and spending money only increases the debt. I think the data very importantly showed that what we're facing with demographics that we have in this country is a major expansion of debt under existing policy. I think until we address that issue, we're going to have problems that are not going to get resolved. I agree with Janet and everyone else that if there's a bubble, it is not a major problem, and I doubt very much if they recession is what our problem is. I think it is fundamentally the issue of economic growth over the long run.

Fareed: Paul, what do you think the economy looks like in this conversation fundamentally?

Paul Volcker: I agree with everybody.

I would supply a little historic perspective. We used to have recessions before we had a Federal Reserve. There are other factors that work in the economy that proves up and downs. I wouldn't worry too much about the present situation.

Fareed: You don't think we are in a bubble economy?

Paul Volcker: I certainly don't think we are in a bubble economy. I think there are aspects of the financial world that have extended and are conducting unduly risky activities. There's a lot of reliance on very short-term borrowing to make a liquid investments. A large part of it in the financial system itself. Without contributing, increasing risks in the economy.

Fareed: You said you thought the last financial sector innovation that added productivity was the ATM. Do you still feel that way?

Paul Volcker: There may be some others, but I can't think of any others. I can think of some that have contributed to uncertainty and complexity and problems area and -- and problems.

Fareed: Ben Bernanke, when you took over the Federal Reserve, it had about -- you had assets of about $900 billion. You ramped that up to about $4 trillion. Over $4 trillion. There are a lot of people, as you know, on the right, who look at that with horror, and say, 'how will that end?' how will you unwind that asset portfolio?

Ben Bernanke: Fortunately, I don't have to do it. >> [laughter] Let me just say, I think there was an enormous amount of understanding and the media advanced a lot of very uninformed views on this subject. Ror example, if you went back a few years and listened to media, congressmen, variety of media, they said this would cause dollar collapse, bubbles, and none of that has happened. Those policies -- maybe they were not by themselves efficient, but they were helpful. They helped our economy recover. Our economy is, even though it is not perfect, it certainly has made a lot of progress in monetary policy has helped there. And many, if not all, of the things that some people were afraid of -- some people were. Informed people were not afraid. They have not come to pass. That is simply a fact.

In terms of the unwinding, it actually is a very straightforward process at this point. The Fed has been very clear, and we discussed this when I was there as well, at some point, the Fed will simply stop reinvesting securities as they mature, step back, and say, for now on -- from now on, we are going to let things mature. Over a period of years, it will just go down. In the end, all we have to show for it is, over the last five years, from those securities, besides the fact that they helped our economy recover, the Fed has sent profits to the Treasury of $500 billion, which has reduced the burden on the taxpayer by $500 billion approximately. It has been a pretty successful policy and one where the roll-off has already been planned. I don't think it's going to be terribly problematic.

By the way, it should be noted that even today, the size of the bAlance sheet is roughly the same as other major central banks, like the European Central Bank and the Bank of England. The main counterexample is the Bank of Japan, where relative to GDP, the assets held by the Bank of Japan are three times the size of the Fed's. So, it's obvious that many of the concerns people had have simply not manifested. not to say that those policies are panaceas. Central banks need help from other policymakers. But so far, many concerns have not come to pass.

Fareed: It's worth pointing out that, Japan, with three times the size of the bAlance sheet, has not experienced hyperinflation or the devaluation of its currency. Ben Bernanke: They would like a bit more inflation, I think, then they have now.

Fareed: Since you have to run this operation, are you comfortable with what he said?

Janet Yellen: I certainly am. We have laid out a strategy for how we will wind down our bAlance sheet. We have made clear we want, eventually, a substantially smaller bAlance sheet. And at the present time we hold a large quantity of mortgage-backed securities, Fannie and Freddie, mortgage-backed securities. Eventually, we would like to go back to an all-Treasury portfolio, but we will do it in a manner that Ben just explained. We have shown -- the move in December showed we have the tools and ability to successfully manage short-term interest rates. We moved them up not a lot, but 25 basis points. That occurred smoothly, in spite of the fact that we had this very large bAlance sheet. So, we have tools to tighten monetary policy as we think is appropriate for the economy. And we would like to, you know, get a little bit further underway in terms of moving short-term interest rates toward more normal levels before we let -- follow the strategy Ben outlined of allowing assets to run off our bAlance sheets.

If we do have another adverse shock, if there is a recession, we would wait to start the process of having assets roll off our bAlance sheet until short-term rates are a little bit higher. The economy has gone to a point where that is appropriate. That creates a little more scope for us to cut interest rates if we need to. But it has all gone quite smoothly. I completely agree with Ben. There are a lot of fears around this. I think people didn't really understand the economics of this properly. nothing terrible -- none of these terrible things have happened.

Fareed: Let me switch gears a little and just ask you all about what it's like to have this much concentrated power.

Alan Greenspan: When you were running the Federal Reserve, people would sometimes described your performance there as 'god on a good day.'

Fareed: I think senator john mccain said that his strategy to succeed you was to have a dummy made up of Alan Greenspan and put him in the Federal Reserve chair like 'Weekend at Bernie's.' At Wall Street, they show less text

would celebrate your birthday with cakes and things like that. Did that go to your head?

00:49:16

Alan Greenspan: No, but it sure enough embarrassed me. I very much appreciated that. I got past the embarrassment very easily.

Fareed: Paul Volcker, you had a slightly different situation. You were hung in effigy when you raised interest rates, because people thought that you had single-handedly plunged the american economy into a recession. How difficult was it to deal with that?

Paul Volcker: I thought they were cheering me.

Fareed: You thought they were cheering you?

Paul Volcker: To answer your basic question, you have a board, you have a public, you have Reserve Bank Presidents. You can't quite do exactly what you want without a lot of people being encouraged to agree with you, and someone sometimes disagreed, so it's not quite so absolute as you suggest. But, look, I always get asked this question about the farmers circling the Federal Reserve and so forth. We would not have survived without public support. People thought there was a big problem, and they didn't know all the answers, but people were unhappy with malaise. The inflation rate going up a couple percent every quarter. They were unhappy. They gave us some rope to hang ourselves. They felt we were doing something. They were going to be patient for a wild.

Fareed: Did you feel like -- because inflation was very high, you raised rates to break the back of inflation. Did you worry that you would run out of time, that the public would lose show less patience?

Paul Volcker: We had a longer period than I would have anticipated. Did I worry? I worried all the time. The floor of the Federal Reserve office, it shows where I was walking all the time. Is that still there?

Fareed: Ben Bernanke, when you adopted your extraordinary measures to save the american economy through this global recession and crisis, you faced a lot of people from what was, in a sense, your own party. You were appointed by a republican president. You had republican congressmen, republican senators. You had a Republican Governor of Texas saying that you were engaging in treason. How did that make you feel?

Ben Bernanke: It didn't make me happy. You described the job as powerful. I think more of the responsibility. We had very huge responsibilities, all of us, in different contexts, different events to try to use the power of the Federal Reserve, along with our colleagues and the staff. It's a wonderful institution. It's not a single-person organization. There are a lot of people working together. We had tremendous responsibilities to try to address these terrible risks. I think it is a good thing that, within reason, the Federal Reserve does have some independence and some room to operate, so that, you know -- their critics can say with -- the critics can say what they wanted to say, but we could do what we needed, as long as we could maintain the broad support. And that was our strategy.

So, you know, I didn't take the job for adulation. Certainly if I had, it would not have worked. really, there was no alternative to doing what has to be done, in your best judgment, to try to address whatever problem you see.

Fareed: And then there is the issue of communication. How do you communicate the views you want? You want to communicate, but, at the same time, you want to leave things -- you want to get yourself room to maneuver.

Alan Greenspan: I recall once in a senate hearing, I think it was, the senator said, 'I think I heard you say clearly --' and you interrupted him and said, 'If I said it clearly, senator, I must have misspoken.' were you trying to be deliberately incomprehensible at times?

Alan Greenspan: I thought I had succeeded marvelously. That is where Fed speak comes from.

**Fareed: Is that part of the goal, that you don't want to say something too definitive? because that constrains you?

Alan Greenspan: Well, I think the real problem is that monetary policy is very largely economic forecasting, and our ability to forecast is significantly limited. And we have to keep the context of what we say in the context of what we know. And this is a very serious problem that has always existed, and I think Janet has mentioned she is confronting this all the time. And the four of us have had to live through all of that. So, how do you convey what you know and what is clear without going into the area of forecasting beyond our knowledge?

Fareed: You have a reputation, just work habits -- you have a reputation of being very prepared. I read in one of the profiles that you always get to the airport so early that you are the first person on a plane. How does that translate into the way you approach this job?

Janet Yellen: I think that's a lifelong habit that is probably accurate about me. I am prepared, like Ben, in managing, for example, the FOMC, -- we have a very thorough process in the run-up to meetings, of trying to prepare materials that will generate useful, productive discussions, that will reach closure over time on complicated matters. I confer regularly with my colleagues to try to understand their points of view.

Fareed: If Alan Greenspan is right, there is a lot of uncertainty. no matter how much you prepare, do you think that there is some level of just intuition?

Janet Yellen: I think that is absolutely true. I don't disagree in any way with what Alan said. But I think Ben and I encountered a very unusual situation when, at the end of 2008, short-term interest rates came down to 0%, and we still felt the need to add accommodation. And we had to think about what could we do that would provide more accommodation. We focused on longer-term interest rates. They were still several hundred basis points -- there did seem to be scope to there did seem to be scope to move them down. Since one of the factors that influences long-term interest rate is the public expert expurgation about how to appropriately think to communicate to the public our expectation that would be keeping short-term interest rates at rock-bottom interest rates for a very long time. So communication became a tool of policy. Improbably the most potent tool that we have, along with asset purchases, that we could use in a situation where we really have no scope to move short-term rates.

So we experimented over time. At one point, we said -- I think it was in 2011 -- that we did not expect to raise short-term rates at least until may 2013. We put that data out. And we became more inventive in trying to provide some conditions with which we said that we could not see raising rates untold the unemployment -- until the unemployment rate got about 6%. We tried to communicate as clearly as we could to shape expectations that that was a policy tool in and of itself.

Fareed: Pne more question to Paul Volcker. Then I will open it up to all of you. The one question raising here, William Martin, the great Fed chairman from the 1950's, once defined the role of the Federal Reserve chairman. He said I am the guy meant to take the punch ball away -- punch bowl away as soon as the party began. I have to raise rates. You have tended to adopt that approach when you were Fed chairman. You feel that some of your successes put the vodka in the punch bowl? [laughter]

Paul Volcker: I look at my successes with great awe.

Fareed: That is a very diplomatic answer. I think we have questions from the floor. The lights are not great. I think -- yes, they are ok. If you introduce yourself and ask your question, and I hope it is brief. [laughter]

My name is Ross. I go to Columbia Journalism School. In my question is about the international economy. When the Fed makes the decision they can have drastic effects in other countries, especially through the foreign exchange rates. What is the Fed response of the with regard to minimizing international economic blunders or turmoil in other countries?

Fareed: Let me ask Alan Greenspan to take this. There is this dual function. You faced it in your term, the central banker of the United States? or the central maker of the world? in 1998 there was the pressure Russians. It might've been the right for the world economy, but the U.S. Was growing at 6%. How did you resolve that tension?

Alan Greenspan: Well, at the time and need I think even now -- and indeed I think even now, you cannot dissociate what is happening in the rest of the world. In that particular instance in the late 1990's, we have a situation in which if we did not endeavor to stem some of the problems that were going on elsewhere, it would be just a matter of time before impacted on the United States. So even though statutorily and legally we are responsible only for the of monetary poli monetary of the policy of United States, it is fully to think we can act isolated from the world. There is no way that can happen. And especially in recent years, where the integration globally has been so extraordinary. I think I make that distinction.

Fareed: Madam chairman, you faced the opposite situation. Where the bank of india as public we criticize the Bank of the U.S., saying that you're not taking into account the effect of the policies are having on us.

Janet Yellen: We do look very carefully and try to minimize adverse spillovers of our policy. One thing we can do that tends to minimize volatility around policy changes is to communicate as clearly as we can how we are framing policy, to attempt to avoid surprises. We have raised these with other central bankers to make sure that we are explaining how we are thinking about policy. We do have a domestic mandate. We recognize how important the influences are from the global economy. The U.S. economy, we recognize that if we impact foreign countries that will in turn impact us. That is a key part of our analysis. But you know, when the U.S. is doing well and growing, and when our job market is good and we are growing in a healthy way, it tends to be a plus for the global economy. And I think we have experienced in that way.

Fareed: Thanks.

I studied economics at Columbia Business School. My question would be, the political effect of the economic increase of the past years. And the association of governors and the Clinton campaign recently, my question would be, so I just find that decision-making process will do more political and less technical, as we have seen in the U.S. Supreme court.

Fareed: Ben, do you want to take that? it is interesting. I think you have 30 senators vote against your confirmation, the highest ever. And Janet Yellen, roughly 30 people vote against you. Has the Fed become more politicized?

Ben Bernanke: Well I sit here next to Paul Volcker, the Fed has always had little pressures at various times. The Fed is trying to do the right thing. And sometimes the right thing is not what everybody agrees on. So yeah, I know that I understand that there is political pressure out there. People aren't happy with the economy. Obviously, they were very unhappy with the economy a few years ago. I think all the Fed can do is try to do the right thing for the economy and help them better economy will make people, you know, more open. And also to be as transparent as possible. One of the important goals -- we talked about communication, many purposes to the clarity of the market and the like. But one of the purposes is to explain why you are doing what you're doing. And hope that people who are paying careful attention will understand and appreciate the decisions you take and why you are taking them.

Fareed: Paul?

Paul Volcker: A comment about congressional reactions. I had votes against me. When I was reappointed, I had the perfect situation. 12 right wing Republicans were against me. And 12 left wing Democrats were against me. [laughter] So I figured I was in pretty good terrain. [laughter]

Fareed: Sir.

I'm a third-year Ph.D. student in economics. They are usually conditional statements. Should the Fed be more discreet in the announcements in order to avoid ambiguity that might have cause for high volatility, how is this reconciling with the potential of raising of credibility?

Fareed: I will have to ask the man who created the taper tantrum. It is you.

Ben Bernanke: The basic principle of trying to be clear and transparent is a very important one. It is for you have to keep things relatively simple. If there are too many conditional parts of your statement, and sometimes it can be less well understood. In the case of the following, if you go back and see what we said, it was very straightforward. We said what we thought we were going to do. We ended up doing that. Also, the effects of the U.S. Economy were pretty much nil. The economy continued to recover. There was essentially no discernible effects of the bond market volatility on the economy. I do not view it as being a really bad episode. But I do think it illustrates that communication is very difficult. It is much harder than the textbooks would suggest, if I may say so. But it is so important to be clear and to communicate. And as Janet understand as well, and as al was saying, because we can only make conditional statements essentially, because we have to respond to what is happening in the economy, there is really no way to avoid that conditionality -- data dependence as you talk about policy.

I studied journalism and peers isaac lumia. I want to follow-up -- at Columbia. I want to follow-up, the same effects that the banks are too big to fail, how do you support -- these comments and what you think about them. Fareed: both questions there, how can this guy who is a regional Fed governor make a speech that seems to contradict what you are saying?

Janet Yellen: Still, when congress decided on the structure of the Federal Reserve, I think they purposely chose a decentralized structure, with Reserve Banks and Presidents of Reserve Banks who would be able to take views now on regulation and supervision. The responsibility is invested in the Board of Governors. Where the Presidents do participate in our monetary policy decisions. But they all engage in research, on topics that are of interest to them that they think are important. And we have encourage that in the Federal Reserve system. That people have different interests and different points of view. And that diversity of opinion is a positive attribute. We do not want to fall into groupthink. And I think it is within his purview to look at these issues.

Thank you. My name is Alaielaine. My question is related to china. It is becoming increasingly important, the currency in the economy. Ror example, a new establishment of the chair of infrastructure investment bank. And the IMF and the reserve currency, with the special crawling rate, so my question is would you comment on the challenges of the currency, versus the U.S. Dollar. And to respond how do you like the changes in the coming monetary policy to maintain this dominant position of the U.S. Dollar?

Fareed: Each of you very quickly, but the question is -- is China's currency likely to be in the next 15 years the single greatest challenge to the reserve currency status the dollar currently holds? Alan, do you want to start us off?

Alan Greenspan: Indeed, it is fairly evident that the yuan is getting close to a floating currency. But it has not been cut to a point where it is accepted internationally. And the total amount of holdings of the yuan and international reserves privately is really very small. So they have a long way to go. And I don't think that the yuan is a significant threat to the dollar, as of yet. But it obviously could be. If in doubt it changes its overall structure, which it is doing very slowly.

Fareed: Paul, the you have any --

Paul: What are they threatening?
Paul Volcker: Threat of the dollar? [laughter] The dollar will be an international currency as long as we have stability at at home. I do not follow all the advice of increasing the inflation rate and so on. [laughter] China is very big. How big are you looking? 20 years ahead? It will be a lot bigger than the United States, economically and as well as population. If you look that far ahead. If the currency becomes an international currency, it probably will affect an opening of the Chinese economy, which will be good for the world.

Ben Bernanke: I don't see why it will hurt us.

Fareed: But then they say that the United States enjoys great privileges with the dollar as a reserve currency.

Ben: I don't think that is all true. There are modest Benefits. But in any case, the Chinese have taken this as a very big symbolic issue. Ror example, I think the actual economic implications are not very large in the basket, but is a very symbolic step. To the extent that the symbolic steps motivate china to reform financial markets to increase liquidity and improve regulation and the like, these are positive things. Not things we should be worried about.

Fareed: Is there anything you could say?

Janet: I think my colleagues have covered it. Thanks. [laughter]

Fareed: Inscrutable, as is appropriate. This is a fascinating conversation. And a great great honor, for everyone here at International House and for everyone watching. Thank you very much.