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Better Policies — Not Regulation — Key To Stemming Economic Instability, Say Tepper School Economists


Fall Issue of Tepper Magazine Features Interview With Leading Monetary Policy Experts Allan Meltzer and Marvin Goodfriend

PITTSBURGH—In the midst of increasingly panicked calls for a government bailout for and greater regulatory oversight of the U.S. financial system, two world-renowned economists at the Tepper School of Business at Carnegie Mellon University strongly believe that more consumer-driven incentives and a greater focus on inflation control are the keys to market stability and growth.

Esteemed monetary policy experts Allan Meltzer, University Professor of Political Economy and author of “A History of the Federal Reserve, Volume I” — recognized as the definitive book on the Fed — and Professor of Economics Marvin Goodfriend, chairman of the Gailliot Center for Public Policy and former senior vice president and policy advisor at the Richmond Federal Reserve Bank — considered among the world’s leading academic “Fed watchers” — detailed their prescient viewpoints in an interview that appears in the latest issue of Tepper Magazine.

The discussion compares and contrasts market conditions and government attitudes Marvin Goodfriendduring the Great Depression with those leading to the current market crisis. As opposed to the liaise-faire policies of the 1930s, Meltzer foresees that a modern crisis is likely to be met with public calls for the government to intervene and protect investors — a prediction realized in recent bailout proposals.

Goodfriend and Meltzer remain wary of calls for government intervention and further regulation to stem the global economic downturn, asserting that such an approach would be counter-productive. “One solution would be for The Federal Reserve to move away from short-term policymaking that focuses on unemployment now and inflation later,” Goodfriend said.

The policy of inflation targeting adopted by Canada, Australia and many European countries is perhaps a better model that puts a discipline into the system and supports longer-term stability and growth, according to Meltzer, who is also a founder of the Shadow Open Market Committee and visiting scholar with the American Enterprise Institute. “What we need are long business expansions with inflation under control so that markets learn to price assets and manage asset price increases,” he said. “We should not give people the impression that they can count on regulation alone to provide product protection.”

Consumer Activism and Altered Compensation Structure Most Critical

Instead of relying on regulation to cure the market ills, Goodfriend maintains that the consumer needs to play a more important role in establishing incentives to foster transparency and efficiency in the markets. “Americans are sheepish in financial matters compared to their decisiveness in, say, consumer markets ... but as people become more demanding, financial firms will respond,” he said.

Moreover, Meltzer suggested that firms should move toward a model that pays its managers based on the “average of their performance over five years, not quarter by quarter” to avoid some of the problems related to the short-term, transactional “buying and selling of pieces of paper that everybody has to know are not worth much.”

The professors give mixed reviews to the leadership of Federal Reserve Chairman Ben Bernanke thus far. “Bernanke’s very active, imaginative and creative in finding new ways to help the financial system, but he’s giving too little attention to the prospect that we’ll have inflation,” Meltzer said.

In addition, Bernanke’s efforts to make the Federal Reserve more collegial and to give greater importance to the other members of the Open Market Committee have been minimally effective. “It’s true that the market will always want to know more it can be told,” Meltzer said, but “much more information could be provided, and this would reduce uncertainty ... which is a cost to the people in the market, and it’s also a cost to the rest of us.”

The Tepper Magazine article is an edited excerpt from an extended video interview with Meltzer and Goodfriend, which is available at


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