Earlier this year, bank stocks were delighted when Daniel Tarullo tendered his resignation to Donald Trump.
Tarullo was a key figure in crafting the post-crisis financial regulations that sought to guard against another meltdown by keeping banks on a short leash. Tighter capital requirements, stress tests, and an effort to centralize regulatory authority in Washington are all part and parcel of his legacy.
Needless to say, none of that made him a good fit for the Trump era, defined as it will likely be by aggressive deregulation. As WSJ wrote at the time, “Tarullo’s announcement came exactly a week after Mr. Trump signed an executive order instructing regulators to review the rules implemented since the 2010 Dodd-Frank financial overhaul.”
Tarullo’s roll as chief enforcer was actually never official. Dodd-Frank created the job but Tarullo never formally held the position of vice chairman in charge of bank oversight. De facto, but not de jure. Whatever.
Well now, that job will be officially filled by Randal Quarles, who was of course approved by the Senate this week over the objections of – guess who? – ‘Liz, who said this:
Quarles is taking another spin through the revolving door and has demonstrated no independence from the bankers he’ll oversee. His motto seems to be: ‘Whatever the big banks want, give it to them.’
Here’s a fun video of Warren absolutely embarrassing Quarles earlier this year:
The problem with @realDonaldTrump nominee Randy Quarles? He's never stood up to the big banks in his 30-year career. pic.twitter.com/bPcWqeQ10Z
— Elizabeth Warren (@SenWarren) July 31, 2017
Ok anyway, getting back to Tarullo, he’s written himself a working paper and the title is pretty amusing: “Monetary Policy Without A Working Theory Of Inflation.”
So that speaks for itself in terms of the overall thrust. It’s a great read and what we’re going to do here is excerpt the introduction (with the most hilarious bit bolded and underlined) before embedding the entire paper for those who might be inclined to take 15 minutes to read the whole thing. Enjoy…
Excerpted from “Monetary Policy Without A Working Theory Of Inflation,” by Daniel K. Tarullo
My appointment to the Board of Governors of the Federal Reserve in January 2009 came about principally because of my academic work in financial regulation and, to some extent, because of the experience I had as a White House economic policymaker during the Asian Financial Crisis. Although I had picked up some macroeconomics in that and other policymaking jobs over the years, and had worked on labor market issues both in and out of government, I was far from immersed in monetary policy theory or practice.
Needless to say, this relative unfamiliarity was a handicap in the early period of my service on the Fed, particularly since the extra hours I wanted to devote to background reading were at a premium, given the realities of an ongoing financial crisis and my new responsibilities in financial regulation and supervision. But the handicap turned out to be smaller than I might have thought. In part, this was because of then Chairman Bernanke’s generosity in providing what was in effect a monetary policy tutorial on Saturday mornings, when the two of us were usually at the Board. Another part was because the crisis and ensuing recession had called forth a range of “unconventional” policy responses that meant even monetary policy veterans were travelling through unknown policy regions.
In fact, by the time I left the Fed after more than eight years, I had come to believe that my lack of prior involvement in monetary policy had proven in one respect to be something of an advantage for my participation in FOMC deliberations. Coming fresh to a place where much of the discourse was accepted or assumed by the very smart economists on the FOMC and the Fed staff helped me to see where some of that received wisdom was not holding-up well in the circumstances we were facing. That perspective also led me to see how some well-worn tools or concepts in monetary policy that rely on unobservable variables had perhaps been less useful even before the onset of the financial crisis. The most important of these — which I will discuss at some length later — is the concept of inflation expectations, which has played a central role in mainstream monetary policy thinking and practice.
In this paper, I will explain two conclusions that I drew from my experience. One is a substantive monetary policy point, and the other is more of a sociological observation relevant to the monetary policymaking process. The substantive point is that we do not, at present, have a theory of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policy-making. The sociological point is that many (though certainly not all) good monetary policymakers who were formally trained as such have an almost instinctual attachment to some of those problematic concepts and hard-toestimate variables.
To be clear up front: This is not an emperor-has-no-clothes story. My macroeconomist colleagues on the FOMC were hardly impervious to the problems with some of the models, correlations, curves, and laws that are the analytic equipment of monetary policy. Many were themselves asking questions and contributing significantly to efforts to develop new explanations for what we were seeing, rather than just trying to force the data into pre-existing concepts. Moreover, of course, much of that analytic equipment, as well as the technical expertise that lies behind it, is both sound and essential for formulating intelligent monetary policy. But at times, the macroeconomists seemed to display an almost paradoxical coincidence of intellectual doubt and continued affirmation of the utility of some unobservables.
In the last section of the paper, I will suggest some implications of my two observations. As to substance — my own sense is that many of the concepts invoked in monetary policy, at least in the present state of knowledge, are more directional indicators in assessing the economy than guides to individual policy decisions. Going forward, monetary policy decisions will need to be made with as much, if not more, emphasis on the constellation of observable indicators with which the FOMC is confronted. As to process — I think my experience argues for a conscious effort to assure some diversity of experience and intellectual background on the FOMC. But it also argues for macroeconomists continuing to play a decidedly leading role.
