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source: http://www.youtube.com/watch?v=KYpVzBbQIX0

I am very glad for the opportunity to be here. I had an occasion to speak some years ago about Stan's remarkable accomplishments at the IMF, when he left the IMF; and I had an occasion some months ago to speak about his remarkable accomplishments at the Israeli central bank, when he left the Israeli central bank. So I will not speak about either of those accomplishments this afternoon. Instead, the number that is in my mind is a number that I would guess is entirely unfamiliar to most of the people in this room, but is familiar to all of the people on this stage, and that is 14462. That is the course number that Stan Fisher's course in monetary economics at MIT for graduate students was. It was an important part of why I chose to spend my life as I have -- as a macroeconomist -- and I strongly suspect that the same is true for Olivier, and for Ben, and for Ken. It was a remarkable intellectual experience, and it was remarkable also because Stan never lost sight of the fact that this was not just an intellectual game: getting these questions right made a profound difference in the lives of nations and their people. So I will leave it to others to talk about the IMF and Israel and I will say to you, Stan, thank you on behalf of all of us for 14462 and all you have taught us ever since.

I agree with the vast majority of what has just been said -- the importance of moving rapidly, the importance of providing liquidity decisively, the importance of not allowing financial problems to languish, the importance of erecting sound and comprehensive frameworks to prevent future crises. Were I a member of the official sector, I would discourse at some length on each of those themes in a sound way, or what I would hope to be a sound way. But I'm not part of the official sector, so I'm not going to talk about that. I'm going to talk about something else that seems to me to be profoundly connected; and that is the nagging concern that finance is too important to leave entirely to financiers. We have all agreed -- and I think our agreement is warranted -- that a remarkable job was done in containing the 2007-2008 crisis; that an event that in the Fall of 2008 was by most of the statistics -- GDP, industrial production, employment, world trade, the stock market -- worse than the Fall of 1929 and the Winter of 1930, ended up in a way that bears very little resemblance to the Great Depression. That is a huge achievement for which we rightly celebrate Ben and many others. [Recording skips] when there is a panic -- and that time will surely come, somewhere and some place.

But there is, I think, another aspect of the situation that warrants our close attention, and tends to receive insufficient reflection, and it is this: the share of men, or women, or adults, in the United States, who are working today, is essentially the same as it was four years ago. Four years ago, the financial panic had been arrested. The TARP money had been paid back; credit spreads had substantially normalized; there was no panic in the air four years ago. That was a great achievement, how rapidly that happened. But in those four years, the share of adults who are working has not increased at all. GDP has fallen further behind potential, as we would have defined it in the Fall of 2009. And the American experience is not completely unique in this regard, and this experience is not completely unique, as Ken and Carmen's work has documented, in the wake of financial crises. I remember, at the beginning of the Clinton administration, we engaged in a set of long-run global economic projections. Japan's real GDP today is about half of what we believed it would be, what the IMF believed it would be at that time, what the World Bank believed it would be. It is a central pillar of both classical models and Keynesian models that it is all about fluctuations: fluctuations around the given mean, and that what you need to do is have less volatility. I wonder if a set of older ideas -- that I have to say were pretty firmly rejected in 14462, Stan -- a set of older ideas that went under the phrase "secular stagnation" -- are not profoundly important in understanding Japan's experience, and may not be without relevance to America's experience.

Let me say a little bit more about why I'm led to think in those terms. If you go back and you study the economy prior to the crisis, there's something a little bit odd. Many people believe that monetary policy was too easy. Everybody agrees that there was a vast amount of imprudent lending going on. Almost everybody believes that wealth, as it was experienced by households, was in excess of its reality. Too easy money, too much borrowing, too much wealth. Was there a great boom? Capacity utilization wasn't under any great pressure. Unemployment wasn't under any remarkably low level. Inflation was entirely quiescent. So somehow, even a great bubble wasn't enough to produce any excess in aggregate demand.

Now think about the period after the financial crisis. You know, I always like to think of these crises as analogous to a power failure, or analogous to what would happen if all the telephones were shut off for a time. The network would collapse, the connections would go away, and output would of course drop very rapidly. There'd be a set of economists who'd sit around explaining that electricity was only four percent of the economy, and so if you lost eighty percent of electricity you couldn't possibly have lost more than three percent of the economy, and there'd be people in Minnesota and Chicago and stuff who'd be writing that paper... but it would be stupid. It would be stupid. And we'd understand that somehow, even if we didn't exactly understand in the model, that when there wasn't any electricity there wasn't really going to be much economy; and something similar was true with respect to financial flows and financial interconnection, and that's why it's so important to get the lights back on, and that's why it's so important to contain the financials.

But... imagine my experiment, where for three months, or two months, eighty percent of the electricity went off. GDP would collapse. But then ask yourself, what do you think would happen to the GDP afterwards? You'd kind of expect that there'd be a lot of catch-up: that all the stuff where inventories got run down would get produced much faster, so you'd actually kind of expect that once things normalized, you'd get more GDP than you otherwise would have had -- not that four years later, you'd still be having substantially less than you had before. So there's something odd about financial normalization, if that was what the whole problem was, and then continued slow growth.

So what's an explanation that would fit both of these observations? Suppose that the short-term real interest rate that was consistent with full employment had fallen to negative two or negative three percent sometime in the middle of the last decade. Then what would happen? Then even with artificial stimulus to demand coming from all this financial imprudence, you wouldn't see any excess demand; and even with a relative resumption of normal credit conditions, you'd have a lot of difficulty getting back to full employment. Yes, it has been demonstrated, absolutely conclusively, that panics are terrible, and that monetary policy can contain them when the interest rate is zero. That has been demonstrated absolutely conclusively. It has been demonstrated, less conclusively, but presumptively, that when short-term interest rates are zero, monetary policy can affect a constellation of other asset prices in ways that support demand, even when the short-term interest rate can't be lowered. Just how large that impact is on demand is less clear, but it is there. But imagine a situation where natural and equilibrium interest rates have fallen significantly below zero. Then, conventional macroeconomic thinking leaves us in a very serious problem; because we all seem to agree that, whereas you can keep the Federal funds rate at a low level forever, it's much harder to do extraordinary measures beyond that forever -- but the underlying problem may be there forever. It's much more difficult to say, well, we only needed deficits during the short interval of the crisis if aggregate demand, if equilibrium interest rates, can't be achieved given the prevailing rate of inflation.

And most of what would be done under the auspices -- if this view is at all correct -- would be done under the aegis of preventing a future crisis would be counterproductive, because it would in one way or other raise the cost of financial intermediation, and therefore operate to lower the equilibrium interest rate that was necessary. Now this may all be madness, and I may not have this right at all; but it does seem to me that four years after the successful combating of crisis, with really no evidence of growth that is restoring equilibrium, one has to be concerned about a policy agenda that is doing less with monetary policy than has been done before, doing less with fiscal policy than has been done before, and taking steps whose basic purpose is to cause there to be less lending, borrowing and inflated asset prices than there was before. So my lesson from this crisis is -- and my overarching lesson, which I have to say I think the world has under-internalized -- is that it is not over until it is over; and that is surely not right now, and cannot be judged relative to the extent of financial panic; and that we may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back below their potential.

Thank you very much.