Marvin Goodfriend: What You Get

Author: Robert Eisenbeis, Ph.D., Post Date: December 1, 2017

Marvin Goodfriend’s nomination represents what will be a welcomed and outstanding addition to a depleted Board of Governors of the Federal Reserve System.[1] He brings a lot to the table. First, he is a first-rate economist with a truly international reputation. He has held visiting, consulting, and evaluative positions at numerous central banks and international organizations including the Riksbank (Sweden), Bank of Japan, De Nederlandsche Bank (Amsterdam), Bank of India, Norges Bank (Norway), Swiss National Bank, ECB, Saudi Arabian Monetary Agency, and IMF, just to name a few. Additionally, he has been actively involved with the Federal Reserve System itself since joining the faculty at Carnegie Mellon in 2005 and has been a member of the Shadow Open Market Committee. So he knows central banking and the workings, culture, and staffs of the Board of Governors and the Federal Reserve system more generally; and he has participated in policy evaluations of the performance of several non-US central banks.

Second, his academic credentials are extensive. He has published in the best journals in both the areas of monetary policy and international trade. He has served on the editorial boards of most of the major economics journals and is a research associate at the National Bureau of Economic Research.

Third, when it comes to policy, he understands the models employed. During Marvin’s long tenure at the Richmond Fed, the policy positions taken by then President Broaddus evidenced a concern by both men for inflation and keeping it low. This belief is also reflected in some of Marvin’s writings and transcends his time at the Richmond Fed. However, as was noted in a recent WSJ article summarizing his likely approach to policy, there are also times when one must also be concerned about deflation and how policy might best be conducted in a world where interest rates are zero or perhaps even negative. For example, Marvin proposed policy options for dealing with the so-called “zero lower bound” problem in 2000, long before it became a real issue in the wake of the financial crisis.[2] This demonstrates that he thinks ahead about problems and how to solve them before they become a reality.  At the same time, he has also argued recently for modifications in the Fed’s approach to inflation targeting, suggesting that he is critically concerned about communications and policy credibility.[3]  All of this this means that he will be pragmatic when it comes to policy, but his writings also reflect a keen understanding of alternative theories.

Fourth, less well appreciated but equally important is Marvin’s approach to supervision and regulation. When writing about the zero lower bound, he notes that there are practical problems in using monetary policy, as some have suggested, to moderate extreme and potentially unsustainable movements in asset prices. Here he argues that the better way to deal with such problems is through judicious use of supervision and regulation designed to prevent problems from adversely affecting financial stability.

Fifth, Marvin may have views on Fed credit policies and lending that might not necessarily represent Fed orthodoxy. Based upon his writings, he is likely to be cautious when it comes to both emergency lending and credit expansion, such as took place following 2008. His concern is maintaining Fed independence and reckoning with the potential for such Fed policies to exacerbate economic fluctuation and create moral hazard. His proposed solution is to focus on stable inflation, with Congressional oversight to hold the Fed to its 2% inflation target and to limit the Fed’s asset purchase programs to Treasury debt only.[4]

Finally, Vice Chairman Quarles may find an unexpected supporter when it comes to Fed regulatory policy. Marvin testified last year on the proposed new US liquidity coverage ratio contained in both Dodd–Frank and Basel standards. He argues forcefully that the proposed LCR is complex and fraught with implementation problems when it comes to setting the correct level. The requirements may actually worsen liquidity management by financial institutions and constitute a poor substitute for monetary policy in providing needed market liquidity. In keeping with the Shadow Financial Regulatory Committee’s reactions to such requirements, Marvin’s response is to advocate for a simple leverage ratio as a better alternative. He concludes: “… rules and regulations should… be simple enough so that bankers can manage banks without being expert in complex financial regulations…. [I]f the required leverage ratio can be pushed high enough, then banks could be allowed to choose their risk assets with minimal regulations in return for commensurably higher return on equity.”[5]
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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