Taylor Rule Recommends Raising Rates

• Over at Market Beat: WSJ.com's inside look at the markets, Mark Gongloff reports that Standard Chartered’s David Semmens says that “Based on a strict Taylor-rule calculation, the first effective fed-funds rate increase shouldn’t come until the first quarter of 2013.”


• And over at Business Insider, Art Cashin of UBS reports that Jim Brown of Premium Investor says that “the Taylor rule says the Fed funds rate should be -1.65%” suggesting the need for a QE 2.5.


• But no calculations are provided in either report.


• Over here at Economics One, I can report that the Taylor Rule says that the fed funds rate should now be 1 percent, and I can provide the calculations. Available data (through the 1st quarter) show that the inflation rate is about 1.6 percent (GDP deflator smoothed over four quarters) and the GDP gap is about 4.8 percent (average of San Francisco Fed survey). This implies an interest rate of 1.5 X1.6 + .5X(-4.8) + 1 = 2.4 - 2.4 +1 = 1.0 percent. I am not sure why other reports differ, but at least the coefficients and numbers are here to see and check. Perhaps they are using different coefficients, but David Papell writing at Econbrowser earlier this month showed why the coefficients reported here work well.


• So I think the economy would be better off if the Fed started moving to a higher funds rate now rather than later, and I certainly see no rationale for another round of quantitative easing. Unfortunately, it looks like the Fed will continue with its zero interest rate for a while longer, and traders will continue to debate whether or not there will be a QE3 adding volatility to the market.

Splitting Difference Would Reduce Federal Spending By $4 Trillion

When the Senate voted down the House Budget Resolution (the Ryan budget) by a vote of 40-57, it also voted down an Obama Administration budget (submitted in February) by a vote of 0-97. But the Obama Administration had already discarded that budget when President Obama outlined in general terms a new budget in his speech on April 13. The chart below shows the discarded budget and an estimate of the current budget based on the speech. (The chart is adapted from my April 22 Wall Street Journal oped)

The White House responded to last week’s votes by saying that “both sides will need to give some ground in order to reach a bipartisan agreement on meaningful deficit reduction.” That is, of course, true. But what should be the starting point for the negotiations? What would splitting the difference mean?

Currently there are two budgets on the table—the House budget proposal and the Administration’s April 13 outline of a proposal. The Administration’s outline proposal would reduce spending by $2 trillion over ten years, while the House would reduce spending by $6 trillion. Hence the bipartisan agreement should be to reduce spending by between $2 trillion and $6 trillion over ten years. Simply splitting the difference would be $4 trillion.

Speaking and Remembering on Memorial Day

This year I was honored to speak at Stanford’s Memorial Day military appreciation barbecue. There are now 51 enrolled Stanford students who are veterans. I was once a Stanford student veteran. In 1969 I temporarily left Stanford’s Ph.D. program in economics for a tour in the Navy. That year the Stanford Faculty Senate voted to remove ROTC from campus, and this year, I was pleased to remind everyone at the barbecue, the Faculty Senate reversed that decision.

But I mainly spoke about a Stanford student, Ryan McGlothlin, who did not return to complete his Ph.D. and whose memory inspires us on Memorial Day. In 2004 Ryan left the Stanford Ph.D. program in chemistry to join the Marines. In November 2005 he was killed in Iraq. He is now honored in Stanford’s Memorial Auditorium, built 74 years ago to honor alumni who lost their lives in World War I and later expanded for World War II, Korea, Viet Nam, and now Iraq and Afghanistan.

Ryan was serving in Anbar province, close to the Syrian border, where Al-Qaida terrorists were streaming through. He was a rifle platoon commander, part of Operation Steel Curtain, with the mission to clear terrorists out of the town of Ubaydi and to protect the Iraqi people. Ryan was posthumously honored with a Silver Star for his heroic acts, and I can do no better than read from the award citation. “Second Lieutenant McGlothlin's platoon was engaged by 21 enemy personnel. The enemy delivered frontal and flanking automatic fire from four well-fortified, mutually supporting positions.… With complete disregard for his own safety, Second Lieutenant McGlothlin maneuvered through the insurgents' strongpoint and immediately engaged the insurgents to secure and recover his embattled Marines…. While his last Marine was being evacuated from the building, Second Lieutenant McGlothlin shielded the recovery effort from grenade blasts and commenced a fierce exchange of small arms fire with the enemy until he was mortally wounded…. By his bold leadership, selfless act of bravery, and complete dedication to duty, Second Lieutenant McGlothlin reflected great credit upon himself and upheld the highest traditions of the Marine Corps and the United States Naval Service.”

Regulatory Capture and Reckless Endangerment

My review of the book Reckless Endangerment by Gretchen Morgenson and Joshua Rosner (published in yesterday’s Washington Post) gives examples of the many ways in which cozy relations between government and industry lead to reckless policies. Students of economics will recognize the problem as regulatory capture, which George Stigler introduced to economics many years ago.

How can we prevent regulatory capture and thereby avoid the harmful policy it causes? Studying economics is not enough, at least according to Reckless Endangerment: Amazingly, twenty-five economists appear in the book (if you count those with a PhD): Dean Baker, Ben Bernanke, Gerald Corrigan, William Dudley, Roger Ferguson, Phil Gramm, Alan Greenspan, Glenn Hubbard, Lawrence Lindsey, Rick Mishkin, Alicia Munnell, June O’Neill, Peter Orszag, Jonathan McCarthy, Robert Parry, Wayne Passmore, Richard Peach, Marvin Phaup, Robert Reischauer, John Snow, Gary Stern, Joseph Stiglitz, Larry Summers, Lawrence White, and Walker Todd. Yet only a handful of these are characterized as standing up to regulatory capture. I mentioned June O’Neill, John Snow, and Marvin Phaup in my review, and there are a few others, but many are criticized for not standing up. This isn’t proof, of course, and I am sure that many of those criticized did a good job.

Still, regulatory capture exists, and dealing with it is difficult. Lobbying per se can’t be avoided in a democracy, and industry should be able explain its case to the government. Some have suggested incentives for government officials so they can withstand pressures. Others have suggested more independence, or closing the revolving doors. Perhaps the best thing is to keep the regulatory rules simple and transparent so that it is clear if industry is getting favors. Reducing government subsidies to private firms will help. So will avoiding over-regulation.

In this regard, I am reminded of these lines from the latest Keynes-Hayek rap video:
Keynes: “Even you must admit that the lesson we’ve learned is that more oversight’s needed or else we’ll get burned”
Hayek: “Oversight? The government ‘s long been in bed with those Wall Street execs and the firms that they’ve led.”

Reckless Endangerment should make liberals and conservatives alike see the wisdom in Hayek’s reply to Keynes.

Opportunity Cost and the 20 Under 20 Prize

On PBS NewsHour yesterday Peter Thiel argued that the opportunity cost of college may be surprisingly high for many students, and indeed, as widely reported this past week, he raised the opportunity cost for some impressive 20 Under 20 prize-winning entrepreneurs. Economist Richard Vedder was on Peter's side of the argument, and not so surprisingly Wesleyan University President Michael Roth was not.

But the opportunity cost argument is worth taking seriously, and the entrepreneurship example is certainly a good one for the introductory economics course. Ever since Tiger Woods took my Stanford Economics 1 course in 1996, I’ve started my text book and first lecture with the story about how he dropped out of Stanford and joined the pro tour after learning about opportunity cost from me. But in the 7th Edition (out this fall) we are using examples closer to Peter Thiel's (who also was a Stanford student).

This photo is a great visual aid for discussing opportunity cost. It shows Barack Obama along with entrepreneurs and chief executives of top technology firms: Apple, Cisco, Facebook, Genentech, Google, Netflix, Oracle, Twitter, and Yahoo. They’re meeting over dinner to talk about the economy.

Everyone at the table has amazing stories about making choices. Mark Zuckerberg, sitting to President Obama’s right, faced a big choice when he was in college in 2004: whether to finish his degree or to drop out and devote all his time to transform a novel idea into a start-up firm. Doing both college and the start-up was not an option because time is scarce, only 24 hours in a day, not enough time to do both activities and sleep a bit. So he had to make a choice. In choosing one activity, he would have to incur the cost of giving up the other activity. Dropping out would mean passing up a college degree which would help him get a good job. Staying in college would mean he could not start up a new firm. Zuckerberg chose to drop out, and it looks like he made the right choice.

Steve Jobs, sitting to the left of the president in the photo, also dropped out of college, but it was because he felt the cost of tuition was too high compared to what he was getting out of the formal courses. Better, he thought, to let his parents keep the money. A couple of years later Jobs founded Apple computer, but he credits its success to the freedom he gained to explore new activities without the structure of a college degree. Larry Ellison of Oracle, sitting right across from the president, also chose not to complete a college degree.

But it is very important to point out that not every executive in the photo chose to drop out of college. Carol Bartz, at the far end of the table, graduated with a degree in computer science, earning tuition money as cocktail waitress. Years later, it seems clear that she made the right choice for her: the college degree prepared her to run tech firms like Yahoo. Dick Costolo of Twitter also finished college. Others not only chose to finish college, they chose to go on for more advanced degrees. Reed Hastings of Netflix chose to get a masters in business. President Obama chose to go law school. Eric Schmidt of Google and Art Levinson of Genentech chose to get a Ph.D.

So behind the people in the photo are many different stories of scarcity, choice, and opportunity cost. Of course, neither the people in this photo nor the 20 Under 20 prize-winners are a representative sample. Gary Becker provides data that may be more relevant to most students.

To the G8: Don’t Let Aid Perpetuate Barriers to Growth in Tunisia and Egypt

In this Bloomberg Echoes post, I argue that the United States should do whatever it can to promote economic freedom in the post-Jasmine Revolution Middle East and North Africa, and strongly support economic leaders who are committed to creating a private market economy. This is the lesson learned from the transitions from government control to market economies two decades ago in Eastern Europe, especially Poland and the Czech Republic. The U.S. government strongly supported those economic reforms—the removal of price controls, of barriers to new businesses, and of subsidies of old state enterprises, along with a restoration of the rule of law and property rights. And the United States also supported the reformers, including Leszek Balcerowicz in Poland, who carried out the reforms against much oppostion.

In this regard it is alarming to hear that the G8 support package for Tunisia and Egypt--being developed at the meeting in Deauville France today and tomorrow--may do just the opposite: encourage more government subsidies and controls. Indeed, a recommend list of actions in a recent letter to the G8 from top economists—mostly from France but including Joe Stiglitz and Nouriel Roubini from the United States—starts with the case for government subsidies. But as argued persuasively by Ned Phelps yesterday in an article in Le Monde (in English here), Tunisia needs an immediate and dramatic reduction in the barriers to entrepreneurship and job creation. It needs to open the economy, domestically and internationally, and the G8 can help in both as it implements a support package.

Are there new leaders in the Middle East and North Africa (MENA) who will support such economic changes? Of course there are. For example, it is very encouraging that the new Tunisian central bank Governor Mustapha Nabli, who obtained his Ph.D. in economics from UCLA in 1974, is a reformer. His recently published book Breaking the Barriers to Higher Economic Growth in MENA argues that “at its core, [economic growth] requires the region's public sector-dominated economies to move to private sector-driven economies, from closed economies to more open economies, and from oil-dominated and volatile economies to more stable and diversified economies.” His case is based on hard facts including a careful empirical comparison of Eastern European transitions with MENA, and an analysis of reform in practice, which strongly suggest a serious, relatively fast-paced reform worthy of strong support from the United States and the whole G8.

Causation From Base Money To The Multiplier: The QE2 Evidence

During the panic in the fall of 2008 some interpreted the explosion of the Fed's balance sheet and the monetary base (MB)—currency plus reserves of banks at the Fed—as an appropriate monetary policy response to a shift in the demand for the monetary base. That monetary policy should try to accomodate such shifts in demand is a classic monetary principle.

Evidence offered in support of that interpretation was the sharp drop in the money multiplier (m)—the ratio of money (M) to the monetary base (m = M/MB). The claim was that the Fed offset the decline in the multiplier (m) by increasing MB, thus leaving the money supply (M = m times MB) comparatively unaffected by the drop in m. Indeed there is a striking negative correlation between the multiplier and the monetary base during the late 2008 and 2009 period, as shown in this graph.


However, I argued in a Business Economics article at the time that this striking correlation had another interpretation. It was due to a reverse causation: the increase in the monetary base caused the multiplier to decline as banks simply absorbed the inflow of reserves. The cause of the increase in the monetary base was the need for the Fed to finance its loans to bailout financial institutions, provide swaps to foreign central banks, and eventually make purchases of mortgage backed securities in its quantitative easing program—a strategy I called mondustrial policy in part to drive home this reverse causation.

But the very severity of the panic in 2008 makes it difficult to convince people that there was not a panic-driven increase in the demand for the monetary base at that time, and I frequently hear economists and economic students sticking to the original interpretation. In this respect QE2 provides more convincing evidence for the second interpretation. The months since the start of QE2 are not even close to the panic observed in the fall of 2008. So it is much more difficult to argue that the Fed was responding to a panic-driven or otherwise autonomous increase in the demand for the monetary base. Much more likely is that—as in the fall of 2008—banks simply absorbed the increased supply of the monetary base which the Fed used to finance QE2. In fact, if you look at the chart (which goes through April 2011), you can see the same inverse relationship between the money multiplier and the monetary base during QE2 as during 2008--2009

Regarding mondustrial policy, several new articles written this Spring expore its implications from an Hayekian perspective, raising concerns similar to the ones I mentioned when I coined the term, but with more emphasis on accountability, rules, and discretion.

Linking the Debt Limit Hike To Spending Cuts Is Good Economics

For months now top economic officials in Washington have been arguing that the Congress should vote to increase the debt limit without any reductions in the growth of spending—in other words a “clean debt limit hike.” Just last Thursday Ben Bernanke compared linking the debt limit and spending reductions to playing a game of chicken with U.S. credit worthiness, adding “I think using the debt limit as a bargaining chip is quite risky.” CEA Chairman Austan Goolsbee and Treasury Secretary Timothy Geithner have been saying much the same thing.

But these arguments do not take account of important economic advantages of linking the debt limit to spending reductions. Such a link is good economics in theory and in practice. It is essential to a credible return to sound fiscal policy and an end to the ongoing debt explosion.

Here’s why. In the current political and economic environment—where more people than ever in the United States and around the world are aware of, and paying attention to, the country’s debt problem—the decision about the debt limit will be precedent-setting. They also know that government spending has increased rapidly in recent years, rising from 18.2 percent of GDP in 2000 to over 24 percent now. If Washington does not change the budget game now, people will sensibly reason, it will never change the game. If politicians just increase the debt limit now when spending has been growing so rapidly compared to revenues without correcting that rapid growth of spending, then they will be expected to do so in the future. In contrast if they tie any increase in the debt limit to a halt in the explosion of spending, then people will be more likely to expect them to control spending in the future. Linking the debt limit vote with spending establishes a precedent and valuable credibility.

Another way to think about this approach is to contrast it with the debt failsafe mechanism that President Obama has proposed. Under the debt failsafe plan, if spending grows too rapidly in the future (after 2015) relative to forecast, and the debt thereby rises more than budgeted for, then there would be an automatic reduction in spending. In other words, debt increases and spending reductions are linked in future. But if there is no link in the present, as in a case of a clean debt limit increase, how can one expect one to be followed in the future? How can today’s politicians expect future politicians to adhere to such a policy if they can’t do so today? This is a common problem in economics, called the time inconsistency problem, covered from principles courses to Ph.D. courses.

The principle of linking the debt increase and spending reductions—put forth in a recent speech to the New York Economics Club by Speaker John Boehner—is therefore an important goal which is worth trying to achieve. True, it may run some risks as the deadline is approached, but those risks are far smaller than the risks caused by the debt explosion which is likely if the Boehner link is severed.

More on Seniors, Guns And Money

Paul Krugman returned to the debate with me about federal spending in his New York Times column yesterday. He says that federal spending cannot be brought back from its current high levels to the 19 to 20 percent range as a share of GDP, which we saw as recently as 2007. His argument consists of two points.

He declares that military spending as a share of GDP cannot go down. Why? Because, he says, “Republicans, needless to say, oppose.” But as I wrote when he first made this point, defense spending as a share of GDP can come down. And it could come down by an especially large amount as the size of GDP increases with higher economic growth. Krugman is taking defense off the table, not me, and not Republicans who are part of the budget debate in Washington. And he does not mention economic growth.

Krugman also points out that the number of retirees is projected to grow at a more rapid rate than the number of workers paying taxes. This point should not come as a surprise to anyone. But the implication is not that we should tax working people more. Rather the implication is that we should insist that programs like Medicare be reformed to improve their efficiency and deliver improved outcomes for future retirees for each tax dollar spent.

There is a good reform plan on the table which does just this. It would bring federal spending as a share of GDP to the 19-20 percent range and it would improve health care for Medicare recipients; it is none other than the House Budget Resolution of 2012; yes, the Ryan plan. Like the Obama Administration’s proposal, it aims to bring down the growth rate of future Medicare spending from the unsustainable levels under current law. Indeed, depending on economic projections, the Obama Administration’s new plan (presented by President Obama on April 13) proposes to bring the growth rate of future Medicare spending per beneficiary to about the same rate as the House budget plan, which has Medicare payments increasing faster than the CPI as people age.

But by reforming Medicare and thereby avoiding the destructive price controls needed to limit spending in the Administration’s proposal without reform, the House plan would make Medicare recipients relatively better off. The Ryan and Obama plans both propose to reign in the explosive future growth of Medicare spending. The difference is that the Ryan plan does so in a way that is much more beneficial for seniors.

The One Hundred Trillion Dollar Note and Other Visual Aids

Patrick McGroarty and Farai Mutsaka have a great article in the Wall Street Journal about this famous one hundred trillion dollar note from Zimbabwe,including the fact that I carry one around in my wallet everywhere I go. Whenever someone says inflation is not caused by central banks printing too much money, I pull out this note and tell the story of Zimabwe’s hyperinflation. Although Paul Ryan and I collaborated on an oped on monetary policy recently, we did not coordinate on this use of the famous note.

If you are interested in relating this story to the Fed, I recommend adding a couple of other pictures including this photo of a QEIII license plate in Washington DC and the photo of $5 a gallon gasoline. I think these may have helped Fed rethink the idea of going beyond QEII.

Bringing Gadhafi’s Money to Rebels Recalls Bringing Saddam’s Money to Iraqis

The plan to use Moammar Gadhafi’s frozen assets to fund the Libyan rebels faces legal obstacles according to this weekend’s Wall Street Journal story "Obstacles Loom on Path To Funding Libyans." This reminds me of the plan to use Saddam Hussein’s frozen assets to fund payments to the Iraqi people in 2003. The plan was developed before the military invasion and was part of an overall plan for financial stability. I was Under Secretary of Treasury with responsibility for the plan. Legal obstacles arose then too, and we had to develop legal procedures to deal with them.

Treasury lawyers determined early on that the President of the United States could legally issue an executive order calling on U.S. banks to vest Hussein’s frozen funds with the Treasury, which would then transfer them to the Iraqis. But an obstacle was the risk of law suits from Saddam’s victims, who could make claims on the funds, prevent their transfer, and thus threaten the financial stability plan. To deal with this risk, we recommended that the executive order contain an exception for such victims—but only if they had already made claims—and that the order state that using the frozen funds for the Iraqi people was in the interest of the United States.

So when the military operation began, President Bush issued Executive Order 13290, “Confiscating and Vesting Certain Iraqi Property,” saying that “All blocked funds held in the United States in accounts in the name of the Government of Iraq, the Central Bank of Iraq, Rafidain Bank, Rasheed Bank, or the State Organization for Marketing Oil are hereby confiscated and vested in the Department of the Treasury, except for the following....” The exception was for funds already claimed in a legal suit. The executive order also stated that “I [George W. Bush, the President of the United States of America] intend that such vested property should be used to assist the Iraqi people and to assist in the reconstruction of Iraq, and determine that such use would be in the interest of and for the benefit of the United States.”

Once the order was issued we opened an account at the New York Fed where Bank of America, JP Morgan Chase, and other banks transferred about $2 billion of Saddam’s previously frozen funds. The Treasury then withdrew the funds as needed. Cash was removed from the Fed’s warehouse in New Jersey, placed on armored trucks, shipped to Andrews Air Force Base, loaded on planes, flown to Iraq, and paid to Iraqis. I recall how Treasury staff went down to Andrews to inspect the first cash transfers. When they returned to report that the cash was airborne, they radiated well-deserved pride at their accomplishment. The picture shows David Nummy (blue shirt) of Treasury dispersing the cash (in the black box) to the Iraqis in Baghdad.

There are differences today—Saddam Hussein’s funds were frozen years before during the first Gulf war, but the legal procedures remain relevant. To overcome such obstacles, President Obama would have to say something like “I determine that using the funds to assist the Libyan rebels is in the interest of the United States.”

New Study Questions Justification For Quantitative Easing

Proponents of Quantitative Easing frequently cite—inappropriately in my view—the Taylor Rule as support, saying that the rule calls for a federal funds rate as low as minus 6 percent, well below the zero bound. But in various pieces over the past year, such as Taylor Rule Does Not Say Minus 6 Percent, I have argued the contrary. If you simply plug in current inflation and output (gap) you will find that the interest rate is above zero with the policy rule coefficients I originally derived. But QE II proponents change the coefficients. Frequently they use a higher coefficient on output (around 1.0) rather than the lower coefficient (0.5) which I originally recommended. The higher coefficient on output gives a much lower interest rate now and is thus used by proponents of quantitative easing.

A new paper by Alex Nikolsko-Rzhevskyy and David Papell provides important evidence relevant to this debate. They show that, if history is any guide, the higher coefficient would lead to inferior economic performance compared with the original coefficient I recommended.

First, they look at the 1970s when monetary policy was too easy: in much of this period the interest rate was too low creating high inflation and eventually high unemployment. They show that the higher coefficient on output would have perpetuated the bad policy while the lower coefficient would have prevented it.

Second, they look at years in the 1990s when monetary policy is widely viewed as good, helping to create a long expansion. Here they show that the higher coefficient would have prevented this good policy. Actual policy was more consistent with the lower coefficient which I had proposed.

In sum, they find no reason to use a higher coefficient, and that the lower coefficient works better. David Papell’s guest blog yesterday on Econbrowser nicely puts these new results into the context of today’s policy debate and provides more details. He emphasizes that his paper with Nikolsko-Rzhevskyy does not endeavor to estimate the impact of QEII, but rather shows that the typical policy rule rationale for this discretionary action is flawed. In my view it is an example of “discretion in policy rule’s clothing.”

How to Avoid the New Bailout Authority

Title II of the Dodd-Frank bill, which creates a new orderly liquidation authority for financial institutions, has recently come under fierce attacks from a variety of perspectives. Paul Ryan writing in the Wall Street Journal on April 5 argues that we should get “rid of the permanent Wall Street bailout authority that Congress created last year.” Then, after reading an FDIC report on how Title II would have worked in the case of Lehman, Simon Johnson in effect agrees with Ryan arguing that any Treasury Secretary, at least one in the Paulson-Geithner mold, would go right around Title II and simply bail out the creditors of large financial firms as in 2008. Recently Stephen Lubben has piled on in The FDIC’s Lehman Fantasy and Michael Krimminger (FDIC General Council) finally replied.

Missing from the recent debate is the role of a possible amendment to the bankruptcy code to deal with large financial firms. An amendment could supplement—or even replace—the orderly liquidation authority of Dodd–Frank and deal with the problems raised by Paul Ryan and Simon Johnson. One such amendment has been proposed by a group of lawyers, economists and financial institution experts sponsored by Stanford University’s Hoover Institution. The amendment is called “Chapter 14,” because this is currently an unused chapter number in the U.S. Code on Bankruptcy. Last week we (I'm a member of the group) presented the idea to Michael Krimminger at the FDIC and to the legal staff at the Fed which is responsible for a mandated study of the bankruptcy code. The idea is explained here.

In brief, the problems with the new orderly liquidation authority, at least in the absence of a new bankruptcy process, is that it increases uncertainty, raises constitutional due process issues, increases the probability of bailouts, and creates moral hazard. Chapter 14 would give the government a viable alternative to Title II and thereby avoid these problems. We argue that government officials would likely find Chapter 14 more attractive than Title II, or a more direct bailout, and thereby choose this option. So with such an alternative, bailouts would be less likely. As George P. Shultz puts it, "Let's write Chapter 14 into the law so that we have a credible alternative to bailouts in practice." Compared with Title II, Chapter 14 would more predictable and rules-based and it would minimize spillovers to the economy. It would also permit people to continue to use the company’s financial services—just as people continue to fly when an airline company is in bankruptcy.

Chapter 14 would differ from current bankruptcy law in Chapter 7 and Chapter 11. It would create a group of “special masters” knowledgeable about financial markets and institutions; a common perception is that bankruptcy is too slow to deal with systemic risk situations in large complex institutions, but under the proposal there would be capacity to proceed immediately. In addition to the typical bankruptcy commencement by creditors, an involuntary proceeding could be initiated by a government regulatory agency, and the government could propose a reorganization plan—not simply a liquidation. An advantage of this approach is that debtors and creditors negotiate with clear rules and judicial review throughout the process. In contrast, the orderly liquidation authority is less transparent with more discretion by government officials and few opportunities for review.

A Morale Booster for the Financial Front Too

Anyone who has served in the military during the nearly ten years since 9/11 must feel a sense of closure with Bin Laden’s death. As Lindsay Wise writes in the Houston Chronicle “Bin Laden's death is a dramatic morale booster for those who served in the war on terror, now aptly dubbed The Long War.” The demise of Bin Laden marks an important victory to which all who served contributed in one way or another. A Marine who signed up just after 9/11 said this to me just after President Obama’s announcement: “It feels kind of like I can come home again,” but then, after a pause, “I guess we have a few more things to do.” An email was circulating around Stanford yesterday saying: “Congratulations to all Stanford veterans who laid the groundwork for this momentous occasion. Thank you for your service and your sacrifice.”

I think thanks are also due to the people who served in the financial front of the war on terror during these ten years—many in the United States Treasury. President Bush announced the terrorist asset freezing operation in the Rose Garden on September 24, 2001. It was before military actions in Afghanistan. It was the first shot in the war on terror. The announcement sent an important message to the terrorists and to the people at Treasury who were just entering to the fight. He said,

“Today, we have launched a strike on the financial foundation of the global terror network. Make no mistake about it, I’ve asked our military to be ready for a reason. But the American people must understand this war on terrorism will be fought on a variety of fronts, in different ways. The front lines will look different from the wars of the past….It is a war that is going to take a while. It is a war that will have many fronts. It is a war that will require the United States to use our influence in a variety of areas in order to win it. And one area is financial.”

Soon thereafter the G7 finance ministers released a statement pledging to work together to “freeze the funds and financial assets not only of the terrorist Usama bin Laden and his associates, but terrorists all over the world” setting off what turned out to be the most impressive effort in international coordination in the finance area in history. Soon financial intelligence networks were set up to get information about the terrorists, and new financial tools began to be used as a weapon against proliferation. To solidify these efforts a new position of Under Secretary of the Treasury for Terrorism and Financial Intelligence was created in 2004, and Stuart Levey was appointed to the position by President Bush. Stuart was asked to continue by President Obama, and only recently stepped down. Senator Kaufman’s praise on the Senate floor for Stuart and others in the Treasury shows why thanks are in order.