Introduction:
The SEPER Prize recognizes individuals who have made significant contributions to economic policy in writing and action. The inaugural recipient of the prize is Paul A. Volcker, former Chairman of the Federal Reserve.

Prize Nomination and Selection Process:
A committee led by George Shultz and including Kenneth Arrow, Gary Becker, and Jim Paterba reviewed nominations. Nominations are accepted every two years and can be submitted through the CEPR homepage.

The Impact of Economic Policy:
Economics aims to efficiently allocate resources to maximize individuals’ welfare and improve their standard of living. Economic policies, such as taxes, tariffs, regulation, market design, monetary policy, and transfer programs, can significantly impact the welfare of millions of people.

The Importance of SEPER’s Research:
SEPER’s research aims to influence policymakers to improve economic policies. The CEPR Prize recognizes individuals who have made a substantial difference in the lives of millions through their economic policy contributions.

Presentation of the Award:
George Shultz will formally present the first CEPR Prize to Paul A. Volcker after dinner.

Paul Volcker’s Qualifications and Experience:
Paul Volcker possesses a brilliant mind and an impressive academic background, graduating summa cum laude from Princeton University. He gained diverse experience working at the New York Fed, the Treasury, Chase Manhattan Bank, and as Undersecretary for Monetary Affairs at the Treasury. His expertise and judgment earned him immense respect among finance ministers and central bankers worldwide.

Volcker’s Role in International Monetary System Reform:
During a period of significant shifts in the international monetary system, Volcker collaborated with colleagues to develop a comprehensive strategy. Their efforts resulted in a plan that provided stability and reassured the world of the United States’ commitment to economic leadership. Volcker’s presence and wisdom played a crucial role in calming tensions and facilitating progress.

Volcker’s Contribution to Controlling Inflation:
As Chairman of the Federal Reserve, Volcker took bold steps to combat rampant inflation. He implemented necessary policies that brought inflation under control, leading to a period of economic stability and prosperity. President Reagan’s support was instrumental in shielding Volcker from political backlash during this challenging period.

Volcker’s Public Service and Investigations:
After leaving the Fed, Volcker continued to serve the public through challenging roles. He led two Volcker Commissions to address issues within the civil service and welfare programs. Volcker’s meticulous investigations and recommendations demonstrated his commitment to integrity and accountability.

Volcker’s Personal Life and Wisdom:
Volcker’s passion for fly fishing reflects his dedication and patience. He temporarily sacrificed his beloved hobby to prioritize his first marriage. Volcker’s recent marriage to Anka showcases his enduring love and appreciation for companionship.

Conclusion:
Paul Volcker’s exceptional intellect, unwavering dedication to public service, and wise decision-making have made him a respected and admired figure in the fields of economics and governance. His contributions have had a lasting impact on global economic stability and set an exemplary standard for future leaders.

Volcker’s Memorable Time as Undersecretary of the Treasury:
Volcker expressed gratitude for the opportunity to contribute to public service, recalling his fulfilling experience as Undersecretary of the Treasury for Monetary Affairs under George Shultz.

Loss of Zest for Public Service:
Volcker lamented the decline in enthusiasm for public service, emphasizing the challenges and satisfaction it offers.

Honored Recipient of SIPA Prize:
Volcker expressed his honor in receiving the inaugural SIPA Prize for Contributions to Economic Policy.

CIPRA Conference and Economic Imbalances:
Volcker referred to his participation in the CIPRA conference five years prior, where he highlighted the dangerous and intractable global economic imbalances.

Rapidly Growing Imports and Low Inflation:
Volcker noted the sharp increase in U.S. imports, particularly from China, and the low inflation rates resulting from cheap import prices.

Large Current Account Deficit and Easy Financing:
The U.S. current account deficit was financed by large inflows of short-term funds from abroad, accompanied by exceptionally low interest rates.

Housing Bubble and Lack of Action:
Volcker described the resulting housing bubble and rising home prices, reinforcing a sense of prosperity and high consumption.

Inaction by China and the United States:
Volcker emphasized the unwillingness of China and the United States to address the imbalances, such as balancing budgets or restraining consumption.

Financial Crisis as a Likely Result:
Volcker predicted that the imbalances would lead to a financial crisis rather than well-coordinated policy actions.

Unforeseen Crisis Complexity and Global Impact:
Volcker expressed surprise at the severity and global impact of the crisis, including the freezing of financial markets.

Official Funds for Rescue and Public Support:
Volcker highlighted the trillions of dollars in official funds used to rescue the broken system, supported by American taxpayers.

Residential Mortgage Market and Public Support:
Volcker cited the residential mortgage market as an example of continuing public support in financial markets.

Reevaluation of Financial Theory and Practice:
The financial crisis has shattered the illusion of returning to pre-crisis conditions and has raised profound questions about the understanding, response, and political feasibility of necessary changes in the financial system.

The Dominant Approach of Economic Theorizing:
The prevailing economic approach has emphasized free and open financial markets, supported by technology and financial engineering, as the most effective means of achieving market efficiency and stability. This approach relies on the efficient flow of investable funds to productive uses and the reallocation of inherent risks among those willing to bear them.

Attractiveness and Questioning of the Thesis:
The thesis of free and open markets has been appealing both in concept and in its apparent ability to generate substantial financial rewards. However, questions arise regarding the contribution of modern finance to economic growth, the justification of its high remuneration, and the benefits to average Americans, who have not experienced real income growth for a decade.

Private Debt and Financial Instruments:
Private debt relative to GDP has tripled over the past 30 years, accompanied by a surge in credit default swaps, reaching a $60 trillion market. The opacity and complexity of these instruments necessitate a reconsideration of basic tenets of financial theory and practice.

Role of Regulation and Supervision:
The role of regulation and supervision needs to be reexamined, including its necessity, methods, and difficulties. Existing regulatory structures, despite their complexity, largely failed to prevent cascading financial failures and severe economic damage.

International Efforts and Challenges:
International efforts are underway to review capital requirements, leverage restraints, liquidity practices, and other measures to enhance financial stability. These efforts face challenges in reaching operational consensus due to political and industry pressures.

Deep-Seated Structural Issues:
Deep-seated structural issues require legislative action to address the inherent difficulties of efficient and effective regulatory and supervisory authority at national and international levels.

Central Issue:
The doctrine of “too big to fail” and its corollary, moral hazard, have become major concerns due to the emergence of a vast shadow banking system and the excessive risk-taking of non-bank institutions.

Challenges:
Dealing with the moral hazard issue and preventing future financial crises is a significant challenge for financial reform.

Resolution Authority:
A new resolution authority would be established to supersede conventional bankruptcy procedures for systemically critical institutions. This authority would seize control of failing institutions, maintain continuity in the marketplace, and arrange for an orderly liquidation.

Liquidation Process:
Stockholders and management of failing institutions would be wiped out, and creditors would be at risk as in a normal bankruptcy. A “living will” or plan for liquidating the company would be developed to facilitate an orderly process.

Non-Bank Institutions:
For the first time, the largest non-bank institutions would be subject to integrated supervision regarding capital leverage and liquidity. These institutions would be allowed to compete, innovate, and make profits without heavy regulation but would also be subject to the possibility of failure without a bailout.

Impact on Non-Bank Institutions:
Non-bank institutions would face lower credit ratings, higher financing costs, and market-imposed restraints on leverage. Speculative activities within the protected, implicitly subsidized financial commercial banking sector would be restricted.

Other Elements of the Senate Bill:
Efforts to force trade and clearance and settlement of derivatives on organized exchanges and clearing houses. New responsibilities for a coherent oversight of the entire financial system. Clarification of regulatory authorities.

International Cooperation:
A high degree of international cooperation is necessary to achieve comprehensive financial reform. The United States can take a leadership role in promoting coherent reform efforts by passing the Senate bill and working with other major countries.

Urgent Need for Economic Adjustments:
Despite reforms, financial markets will still experience excesses and strain. The aim is to reduce their scale and frequency, improving efficient resource allocation.

Persistent Fiscal Deficits and Public Debt:
High fiscal deficits in the U.S. and other developed economies pose risks. Unprecedented public debt levels emerging from recessions raise concerns.

Learning from the European Experience:
European struggles to maintain common currency and rebalance the economy highlight potential threats. Financing can buy time, but underlying fiscal and economic adjustments are necessary.

U.S. Sustainability and Global Challenges:
The U.S. is not immune to speculative attacks, but its currency and credit remain strong. Concerns exist about the sustainability of entitlement programs and growing fiscal challenges.

Global Warming, Energy Independence, and the Environment:
Critical challenges of global warming, energy independence, and environmental protection require consensus for effective action.

Intractable Problems and the Need for Action:
Despite economic problems being manageable, the U.S. faces a question of whether it will act to make necessary adjustments.

Ireland’s Response to Economic Lethargy and Conflicts:
Ireland’s progress in escaping economic lethargy and conflicts through free markets and stable European currency is an example of potential for change.

Ireland’s Current Economic Struggles:
Ireland’s speculative excesses and financial deficits led to economic decline. Public grumbling and political action reflect the understanding of the situation’s urgency.

Sense of Urgency in Ireland vs. the United States:
Ireland’s clear sense of urgency to restore fiscal and economic stability contrasts with the U.S.’s lack of the same.

Time is Running Out for the United States:
The U.S. needs to address fiscal issues, social security, healthcare, carbon emissions, and domestic energy production. These adjustments require a greater sense of common purpose and political consensus.

Key Takeaways:
In order to address economic issues, the School of International and Public Affairs (SIPA) needs to bring substance and prestige to the debate by combining academic and public policy perspectives. Volcker emphasized the importance of public consensus and willingness to take action during the fight against inflation in the 1980s. He believes that a similar attitude is needed in the current economic climate. Volcker criticized hybrid institutions that are partly government-owned and partly private, such as Fannie Mae, which he believes led to the mortgage market collapse. He advocates for a structure where banks are regulated, but not in great detail, allowing the market to self-regulate. Volcker acknowledged that deleveraging and reducing speculation could lead to a slowdown in economic activity and potentially a recession. He believes policymakers will need to strike a balance between reducing leverage and maintaining economic growth. Higher capital requirements for banks are seen as a necessary measure to achieve balance and prevent future financial crises.

Capital Requirements and the Financial System:
High capital requirements for commercial banks and big non-banks can ensure a fail-safe system, but it may not be profitable. Reduced leverage and capital requirements can have advantages, but they should not be the only solution. Regulation should aim to improve market operations through internal incentives, including the possibility of failure.

European Situation and US Economic Recovery:
The European situation should not derail the US economic recovery if the US is on a reasonable recovery course. The US economy is experiencing a subnormal recovery due to high consumption, low exports, and limited investment. The challenge lies in shifting consumption to exports and investment while Europe is in recession.

Combining Capital Ratio Standards and Risk Identification:
Combining capital ratio standards and identifying risk areas within the banking system is possible. Certain activities can be prohibited to avoid their negative impact on the economy.

Mixing Commercial and Trading Cultures in Banks:
Paul Volcker stresses the negative impact of combining commercial banking and trading mentalities in financial institutions. According to Volcker, the high-risk, high-reward, and bonus-driven culture of trading can infect commercial bankers, leading to reckless behavior and speculation. To address this issue, Volcker suggests implementing special capital requirements on activities that blend commercial and trading aspects.

Income Tax and Value-Added Tax (VAT)
Volcker notes that the U.S. tax system has consistently generated around 18-19% of GDP, despite changes in tax policies. He believes that it may be difficult to raise more revenue within the current tax structure, including income tax, payroll tax, and corporate tax. To address the projected increase in expenditures, Volcker suggests considering a carbon tax or a more general tax on energy as potential sources of revenue. He also acknowledges the need for a value-added tax (VAT) as a possible option, but emphasizes the importance of replacing existing taxes with a VAT to avoid additional burdens on taxpayers.

New Jersey’s Budget Deficit and Expenditure Cuts
Volcker highlights New Jersey’s budget deficit and the new governor’s drastic expenditure cuts as an example of the challenges in balancing budgets solely through spending reductions. The cuts in expenditures, including layoffs of school teachers and reduced salaries, address only a portion of the deficit, with the remaining covered by not paying into the pension system.

Recognition and Appreciation
The event organizers present Paul Volcker with a commemorative plaque in recognition of his contributions and service to the United States. Volcker expresses his gratitude and acknowledges the honor bestowed upon him.