A quarterly newsletter from Interim Dean Beverly Wendland
A Public Service Commitment in a Most Extraordinary Time
Knowledge for its own sake is a hallmark of the School of Arts and Sciences. But it is not unusual for our faculty to become well-known for research that matters in the world beyond the ivy walls (or in our case, the brick paths). Periodically, Krieger School professors are called on to advise government policymakers on critical issues impacting the nation as a whole, and when the country calls, we provide a “public service leave” so that they can lend their expertise to a national priority.
This is exactly what Jon Faust, the Louis Maccini Professor of Economics and director of our Center for Financial Economics has been up to for the past two years. Jon has been working closely with the out-going chair of the Federal Reserve, Ben Bernanke, and will continue to serve the incoming chair, Janet Yellen, until he returns to us full time in the fall of 2014. In between, his spring semester students will have the benefit of his “up close and personal” experience of monetary policy, as Jon is teaching a course called Financial Markets and Institutions.
As special adviser to the board, Jon was a critical voice in the implementation of groundbreaking monetary policy. In addition, Jon played a large role in drafting communications to members of Congress, the financial markets, and the public on the economic justifications for taking the unprecedented steps that have defined Federal Reserve Board policies over the past few years.
Chuck Clarvit ’78 is one of several financiers of note who guest lecture in the Department of Economics.
One doesn’t need a PhD in economics to know that under normal circumstances, monetary policy is all about raising and lowering interest rates to keep inflation muted and the economy humming. But we are not in the midst of a “business as usual” period. Instead, we have seen upheavals that rocked the financial markets in ways not seen since the Great Depression. In late 2008, in the aftermath of Lehman’s bankruptcy and collapse of stock markets around the world, the U.S. Federal Reserve Board lowered its target rate effectively to zero. Frustratingly high unemployment, disappointingly slow output gains, and/or swooning financial markets would usually lead Fed policymakers to lower overnight interest rates. They did so in the 1950s, 1960s, 1970s, 1980s, 1990s, and right through 2008. But over the past several years, any developments that invited Federal Reserve Board accommodations required newfound approaches and well-articulated explanations. Both in their creation and in their subsequent explanation, Jon Faust played an important role.
He helped to develop the policy by which the Fed began giving guidance about future monetary policy steps in an effort to lower long-term interest rates. Starting in late 2012, the Fed began giving “state contingent” forward guidance. They linked their biases about when they would raise rates to specific economic statistics. The Fed also instituted several long bond buying programs. These bond accumulation steps swelled the Fed’s balance sheet by several trillion dollars.
How did the Fed come to believe that these steps would substitute for lowering their target interest rate? And once they came to believe in their judgments, how would they best communicate their ideas to the Congress, to the financial markets, and to the populace at large? These challenges dwarfed traditional Fed responsibilities. And these challenges defined the day-to-day machinations of our Jon Faust.
No one person, to be sure, had an overwhelming influence on these policies. The chairman and vice chair, the board of governors, the Federal Reserve Bank presidents, and the Fed staff all contributed. But make no mistake about it, Jon Faust left us in late 2011, and was in the thick of this decision-making for the past two years. His contributions, though invisible to the public eye, are keenly appreciated at the Fed.
Robert Moffitt, the Krieger-Eisenhower Professor of Economics and chair of the Krieger School’s Department of Economics, said that Jon will have much to share with our students upon his return to the classroom. “Jon’s contributions to the nation were extraordinary and exceptional,” Robert told me. “His experience from the ‘inside’ on how monetary policy really works, acquired from his experience at the very top decision-making level of the Fed, will redound enormously to our undergraduates.”
In a recent interview, Jon said, “In 2011, I was asked to serve my country as a special adviser to the Fed. With many outstanding colleagues throughout the Federal Reserve System, I pitched in as the Fed navigated largely uncharted waters. The economy appears to be in a much better place than it was two years ago, and I believe that the Fed deserves some of the credit for this. It will be for future historians to judge whether the unprecedented actions that the Fed took in the face of unprecedented challenges over this period were appropriate or, as some critics suggest, were far too timid or far too aggressive. I am grateful to Johns Hopkins for granting me the time to serve.”
Robert Barbera Jonathan Wright
Meanwhile, back at Johns Hopkins, we needed someone to oversee our busy Center for Financial Economics (CFE) during Jon’s absence. Fortunately for us, two highly qualified economists stepped up to the plate: Robert Barbera, a graduate of the Krieger School, a nationally known financier, and a fellow in the CFE; and Jonathan Wright, a professor in the Department of Economics and an expert in econometrics, empirical macroeconomics, and empirical finance. I am grateful for the admirable job they have done managing the CFE.
In today’s global environment, understanding the world’s financial markets is more important and more challenging than ever before. That’s where the CFE comes in. Its unique approach illuminates real-world financial decisions on underlying economic principles. The world-class faculty members of the CFE offer a blend of academic insight and practical financial savvy to prepare the financial leaders of tomorrow.
Krieger School students visit the New York Stock Exchange as part of the Financial Literacy course.
The primary academic program of the CFE is a minor in financial economics, and we plan to expand to an undergraduate major and a doctoral degree. Students enrolled in the minor engage in dynamic classroom interaction as well as a broad array of opportunities outside of the classroom. They can get involved in the Financial Analysts Club and the Salant Investment Team, which gives them the chance to make actual investment decisions in managing a real money portfolio. They can also participate in the Financial Literacy intersession course, which includes a tour of the New York Stock Exchange and interviews with some of our alumni who work on Wall Street.
With our superb professors in the Department of Economics, the return of Jon Faust, and the growth of the Center for Financial Economics, the Krieger School is well-positioned to be a unique intellectual voice in this ever-changing field.
Katherine S. Newman
James B. Knapp Dean