Emmons, Kliesen and Stackhouse answer more questions from the audience, particularly on political realities and how sustainability can be achieved in a democracy.
Julie Stackhouse: Question right there. Yes, sir?
Q: Bill, you've talked a lot about the problems of getting the political system to work. And Kevin, your first slide said something about the democratic system. What exists in history that suggests that democracies can solve this kind of problem? And the second part of the question is what enabled democracies to solve it at these times in history?
William Emmons: That's a tough question. I think...
Kevin Kliesen: Well, you know, there's a quote by Adam Smith in The Wealth of Nations which he talked about how rising debt levels were eventually going to be the ruin of all European countries. So this is something we've seen for quite some time. Bill talked about Spain. My favorite from the Reinhart and Rogoff book is Greece. Since 1860 they've been in default roughly 50 percent of the time, so this is not anything new. I just think, you know, going back, it's the old Churchill idea: democracy is the worst form of government except for the alternative. I just think at the end of the day we as Americans are pretty good at solving things. It may take a crisis, and that's kind of my baseline forecast, but I think at the end of the day we will solve this.
William Emmons: I think that's kind of the question though. What kind of a crisis is it—you would have...
Q: What kind of crisis would qualify?
William Emmons: Maybe you would have thought that what we just went through would qualify. And as we see the deficits expand—and I think a lot of people did expect this at the last election, to kind of break the gridlock and then we would be making a lot of progress on this by now. And it hasn't happened.
Kevin Kliesen: Yeah. But, you know, when the Treasury can issue $1 trillion in bonds every year and half of them are purchased by foreign investors, you know, there's such a great willingness now to hold Treasury securities. So as long as we can continue to do this, we can roll over our debt, no problem.
Julie Stackhouse: But isn't that the point?
Kevin Kliesen: Yeah.
Julie Stackhouse: That confidence is there today for the interest rate on debt is very low?
Kevin Kliesen: Yeah.
Julie Stackhouse: If that confidence wanes, the interest rate will escalate and we will have a crisis.
Kevin Kliesen: I mean, Greece flowed along debt to GDP above 100 percent for a long time, and then something happened. People refused to roll over their debt. That's what happened to Lehman Brothers. Same thing. They couldn't attract short-term funding.
Julie Stackhouse: One of the points I'll add that I think was really helpful was pointing out the demographic changes in front of us. So there have been decades where, hey, you get a little luck, the demographics are in your favor. And that helps, whether it's new entrance into the workforce, women returning to the workforce or the baby boomers entering the workforce. Those demographics are working against us this time, and so that really suggests we're going to have a more planful approach.
William Emmons: Hm-hmm.
Julie Stackhouse: Yes, sir?
Q: Thank you. You mentioned then basically one resolution would be to make the general population and the Congress understand for the political system they're spending our political realities. Is there any way that this conversation could be taken to I suppose the Congress? We know what happened with the Congress, of course. But is there any way then this conversation could be taken to the Congress or to the political parties with this kind of stress at this point so the majority of the Congress members would know or be aware of what is the reality if they want to win more re-elections?
William Emmons: I don't know what the number would be. Everybody would have a different number. But I think there are a substantial number of people in Congress who understand this. And I think for whatever reasons, we have just gotten into a very bad kind of, as economists would say, equilibrium or just this gridlock. And as I said, I think people thought the last election would maybe break the gridlock, and I don't think it did. Maybe there will be an election that breaks it. And I'll just throw this out as a possibility. We were talking about economic crises. You could have a political crisis. You could have in the sense of whether it's one branch of the government asserting its authority or one of the political parties could collapse, I think there is some potential that you could have a significant realignment of the political landscape.
Julie Stackhouse: I think we might have time for two quick questions. Oh, gosh, I should call on my husband, but, eh, go ahead.
William Emmons: Aw, come on, Julie.
Q: When you talk about the political situation and having people vote for representatives that are supposedly going to lead us out of the crisis, you know, you could just take a look at the recent Italian election where Monti was probably the best choice economically and fiscally for Italy but the electorate doesn't want to hear his message of increased taxes and lower spending. Isn't that pretty much the same that is here based on the poll results? And how do you really get the American public to change? Because that's what it's going to take to get a different set of people—to get leaders that actually react to these realities.
William Emmons: Yeah, this is beyond an economist. But I just think that there is a chance. I agree with Kevin that the United States has responded to a lot of these challenges in the past that we could have some reconfiguration of the political calculus or some leadership. But as I said, this is what this whole thing is about, this discussion, is it also can come from the people. As I always say, people need to have the back of a courageous politician who will stand up and say we have to make sacrifice, we have to have a multi-pronged approach to the problem.
Kevin Kliesen: Yeah. So going back to my presentation, my part of it, I just believe that the incentives are so skewed that we need to put in place some sort of rules-based framework. I think we've all understood as economists, as people working in the Fed, that a rule-based policy for monetary policy works best. And I think the same thing at the end of the day would work best for fiscal policy, too. Some sort of rule-based framework that addresses this problem makes it very difficult.
Julie Stackhouse: Sir, in the blue sweater?
Q: Yes. I have a question about the attractiveness of Treasury securities. Is it correct that the Fed has been purchasing a higher portion of total securities issued? Why is that and will it continue?
William Emmons: I happened to make this chart and send it to Kevin. Do you remember this? About five days ago we had a discussion about that. In fact, the share of the outstanding Treasury debt the Fed owns...
Julie Stackhouse: New issues or...
William Emmons: No, this was total ownership of the debt.
Julie Stackhouse: Ownership, okay.
William Emmons: It is now back to historical norms.
Julie Stackhouse: How about the new issues, I think was the question?
Kevin Kliesen: Yes. So a large percentage of new issues is being purchased by the Fed.
Julie Stackhouse: And for those that may not be familiar with that, that is part of the current monetary policy often called quantitative easing, which is really what the Fed is using to stimulate the economy is this very, really zero short-term interest rate environment. And that is a whole other session to talk about how quantitative easing works and how it's reversed when it's necessary.
William Emmons: Well, and exactly right, the relationship between monetary policy and fiscal policy, which one is sort of forcing the other's hand? That would be a very good other session.
Julie Stackhouse: I know we have a lot of questions. What I'd like to do for those that have questions is offer to have these guys stay and answer your questions. But I know everyone else does need to leave. I'd like to thank Kevin and Bill for their time tonight. And for those that are interested, I think we have information on our next Dialogue with the Fed session. And it's an area of research that the St. Louis Fed is just embarking on to look at what happened to the household following the financial crisis and what happened to the households' balance sheets. So for many of us in this room, we're probably very fortunate in that even though we may have suffered through the financial crisis, we're doing well. Our household balance sheet is healthy. But there were many, many people who were hurt, particularly because of the decline in housing prices that occurred. So we've been exploring that issue and what it means—what it means both to the household and to the economy. And in our next session we're going to talk about that, so we hope you can join us.