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Peter Diamond lecture

Peter Diamond
3 defining events for macro
Build expectations
Supply shocks
Collapse of communism
Importance of institutions
Financial crisis
Now part of central banking aka financial stability goals
2. Consumer Protection
Was legalistic – were documents accurate?
CFBA set up to address this and incorporate behavioural factors
3. Mortgage modification
Lehman response was speedy and admirable
Europe’s response is dragging out the trouble
Fiendish Frankenstein monsters of financial engineering, says Paul Samueson
Need a serious overhaul of collateral rules. At the moment, when things go awry,
post more collateral. Collateral weakens financial situation. Creates death spiral.
Financial Institutions
Regulation to compensate for bank insurance. Bank insurance to ..
New model: Dodd Frank: look for financial stability. Arrange credit flows for
support of real economy. Anything that might interfere with financial stability is
fair game, whatever their legal structure.
Bank Regukation
Monetary policy
Inflation, unemployment
Consumer Protection
Safety & Soundness of banks  Financial stability
Micropru regulation + Macro Pru regulation
Deposit Insurance
Financial institutions (risk scenarios, video not snapshot)
Bank Runs (duration mismatch – is it right?)
Externalities and incentives -> in general the market won’t get it right
“There would be very large negative externalities associated with the disorderly
failure of any SIFI [systematically important financial institution], distinct from
the costs incurred by the firm and its stakeholders.” Tarullo, Fed.
Pollution and congestion are standard examples
Bubbles are human nature. Extrapolate. Simulations show bubbles again and
again. Case and Schiller are the guys I look to on bubbles.
Paul’s interpretation
Automatic stabilisers are a pre-commitment. Very different from discretionary
fiscal stimulus.
Some of your colleagues are drawing parallels to the 1930s, and I mean not only
the macroeconomy, but also current political process around discretionary fiscal
policy. Austerity vs stimulus. How to treat discretionary policy in macro?