To some folks at Treasury (not Tim Geithner). I’m inclined to try to structure it as a discussion, since I may know less than many of the other attendees. Here is what I might contribute.

1. I predict that in the future the issue of financial stability will replace the issue of monetary control as the main issue in macroeconomics. The macroeconomics of the last thirty years will be discarded. The pseudo-physics of Taylor rules, dynamic stochastic general equilibrium models, and most of what macroeconomists have done since World War II will find its way to the ash heap of history.

2. What I learned at Freddie Mac:

–mortgages have embedded options. People who do not understand the option theory of mortgage default do not understand mortgage credit risk, mortgage securities, or related securities. Too many suits (top executives and regulators) fail to appreciate this.

–asking an honest person for documentation to support their income, assets, or employment is a waste of everyone’s time. But not asking for that documentation is a way to select for dishonest people, and there are plenty of dishonest people around, particularly in the mortgage broker industry.

–the competition among various financial institutions in the mortgage markets is won on the basis of capital requirements. When I was there, Freddie and Fannie had an advantage over banks in buying low-risk loans, because our capital requirements were lower.

3. Some questions to ponder going forward.

–How do you balanced market discipline with regulatory discipline? Too much of the latter may undermine the former (Tyler Cowen’s point in his column today). But Greenspan’s mea culpa is that market discipline failed.

–Is it better to have uniformity of regulation or diversity? Do we want to go so far as to have international uniformity?

–To the extent that regulations are determined by multinational bodies, what does that do to electoral accountability?

–Should we be trying for a system that is hard to break or one that is easy to fix?