This Fed Challenge Readies New Class of Leaders: Caroline Baum

Commentary by Caroline Baum

Nov. 25 (Bloomberg) — It’s not every day that college students get to play policy maker. Nor would most of them want to, even in the best of times. The arcana of monetary policy is something that more typically appeals to Ph.D. economists.

Yet here they were, at ground zero in the war to contain the financial meltdown. Teams from seven colleges descended on the Federal Reserve Bank of New York last Friday to compete in the semifinal round of the Fed Challenge, a learn-by-doing program that’s the brainchild of Lloyd Bromberg, director of school programs at the bank.

The New York Fed is one of four district banks participating in the program, which began as a high school competition in 1995 with 14 schools participating. The college competition started in 2000 and had 125 entrants this year.

Dressed in suits, accompanied by faculty advisers and armed with elaborate PowerPoint presentations, teams of three to five undergraduate students present their analysis of current economic conditions, forecast for the economy, assessment of risks and recommendation for policy.

In other words, it’s just like a Fed meeting, without the refreshments and the headaches policy makers endure in their effort to stay no more than two steps behind the crisis.

Team members address one another as “Chairman Amin” and “Governor Cohen.” One team has a token hawk who argues against lowering the benchmark interest rate from its current 1 percent.

The students compose a statement to be released to the public at the conclusion of the meeting. One Fed chairman has taken it upon himself to draft the statement in advance, a Greenspan touch that was not lost on this observer.

Judge Judy

I am one of three judges evaluating three of the seven semi- finalists. (The teams’ affiliations aren’t known to the judges.) I have been pre-schooled in my judicial responsibilities and have studied the material Bromberg sent me.

Even so, I am not prepared for what I see and hear. I’m blown away by the students’ poise, presentation skills and wide- ranging knowledge as they deliver their 20-minute presentations and submit to 15 minutes of questioning from the judges.

We grade the teams on knowledge of the Fed, presentation skills, quality of research and analysis, and teamwork.

There are no slackers among them. The teams are well- prepared and well-versed, not just in the format of Fed meetings and the latest economic and financial developments but in Fed research and speeches from years ago.

One team, responding to a question on what the Fed can do (in addition to lowering the funds rate) to stimulate the economy, cited a 2004 paper by then-Fed Governor Ben Bernanke and then-Fed Director of Monetary Affairs Vincent Reinhart on conducting monetary policy when the overnight rate is close to zero. In it, the economists recommend quantitative easing, buying long-term bonds and influencing expectations about future short- term rates. Bernanke could dust off that paper and recycle it today.

Channeling Operation Twist

One student critiqued the recommendations, invoking the Treasury’s failed experiment in reshaping the yield curve in the 1960s, known as “Operation Twist.”

This isn’t the stuff one learns about in Econ 101 or from the chapter on the money multiplier in an Intro to Macro text. These kids live and breathe this stuff. Some past winners have gone on to internships and careers at the Fed. Participation in the Fed Challenge has become a “recognizable credential” on a student’s resume, Bromberg says.

The Chicago Fed, another participating bank, had a Fed Challenge summer camp. One high school held a pep rally to support the team it was sending into competition, with 500 students showing up.

Learning by Doing

At Friday’s Fed Challenge, the students demonstrate they have mastered the art of Fedspeak, tossing out well-worn phrases such as “uncertainty” in the outlook, the risks of a “negative feedback loop,” the importance of “anchoring inflation expectations,” and other staples. They are equally adept at discussing how monetary policy works.

When Bromberg came to the New York Fed in 1994 from the New York City school system, “the challenge was, what can we do to teach the kids about the Fed,” he told me over lunch last Friday. “What way do the students learn best? It doesn’t always work well with someone telling you about it. You have to do it.”

The Fed Challenge is doing in the extreme. The only thing missing is the outcome of policy decisions and the onus of living with them.

As the finals get under way Friday afternoon with the four teams that have made the cut, Bromberg emphasizes that it’s not about competing or winning. All the students are winners, he says, even if they don’t qualify for the monetary awards established by the Moody’s Foundation.

Pretend Meets Reality

The students don’t see it that way. They have worked long and hard and want to be selected to compete in the “nationals” at the Federal Reserve Board in Washington on Dec. 3. There, the winner of the New York Fed Challenge — New York University’s Stern School — will meet winners from the Boston, Chicago and Richmond Fed Districts.

At that time, the pretend policy makers will be judged by the real ones, who may just learn a thing or two in the process.

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