Monetary Policy, Fiscal Policy, and the Efficiency of Our Financial System: Lessons from the Financial Crisis

I am enormously grateful to Rich Clarida and Jeff Fuhrer for their kind and thoughtful initiative, first in conceiving the idea for this conference and then in organizing it so successfully; to Eric Rosengren and the Federal Reserve Bank of Boston for the marvelous hospitality we have all enjoyed these past two days; to the many fine economists who devoted their valuable time to writing papers and preparing discussions; to everyone who offered such generous comments at last night’s splendid dinner; and to so many of my former students, and my colleagues and other friends, simply for being here. Barbara and I have fond memories, accumulated over more than four decades and still warmly treasured, revolving around every person in this room. It has been an extraordinary experience to be with so many of you, all in the same place and at the same time. Some of you have come here from the local area, and some from very far away; I thank you all. These past two days have been an experience I shall never ever forget. In June 1772, in the midst of the worst banking and economic crisis Scotland had suffered in two generations, David Hume wrote from Edinburgh to his closest friend, Adam Smith, who was then in London. After recounting the industrial bankruptcies, the bank closures, the widespread unemployment, and the other fallout from the banking crisis, Hume asked, “Do these Events any-wise affect your Theory”? Indeed they did. At the time, Smith was working on what became The Wealth of Nations. Published just four years later, Smith’s great book is replete with lessons he took away from