Wednesday, October 15, 2008

Bloomberg on Fed policy

This is completely unbelievable! From Bloomberg:
”Federal Reserve Chairman Ben S. Bernanke said the central bank will consider discarding its long- standing aversion to interfering with asset-price bubbles and warned that the banking business may be concentrated in too few companies.

Officials should review how supervision and interest rates can minimize the ``dangerous phenomenon'' of bubbles in housing, stocks and other assets that risk bringing the financial system and economy down with them when they burst, Bernanke said.

``There is no doubt that as we emerge from the current crisis that we are all going to look very hard at that issue and what can be done about it,'' he told the Economic Club of New York in his broadest remarks on future regulatory changes since the credit crisis deepened last month.

The comments signal that the 54-year-old chairman, while trying to quell the worst market turmoil since the 1930s, is crafting an agenda for greater oversight. Policy makers will toughen their response to ``excessive leverage,'' give more weight to financial stability in economic analysis and examine ways to strengthen the system of trading and settlement behind complex derivative securities, he said.

The U.S. faces ``a very serious too-big-to-fail problem,'' in which the insolvency of a large financial company could threaten a market collapse, Bernanke said in reply to an audience question. ``There are too many firms that are in some sense systemically critical.''
RW: Whether or not a monetary entity (the Fed) should use policy tools to target a directional shift in a certain asset market – the stock or bond market, the housing market, etc. – has been a point of serious debate. In 2001, William Poole gave a talk about asset market targets; he said:
“Asset markets play a central role in a market economy. Policymakers cannot and ought not to ignore these markets. Making effective use of information from asset markets and offsetting, to the extent possible, adverse effects on the general economy flowing from asset price changes are important ingredients of a successful monetary policy.

For reasons I've tried to explain with some care, I believe it is very important that the Federal Reserve not take a position per se on the level of prices in asset markets, especially the stock market. It is very easy to be wrong about the appropriate level; this judgment ought to be left to the market. That is the kind of judgment that markets excel in making, at least relative to the judgments made by public officials.”
RW: I see the Federal Reserve targeting asset prices when pigs fly. There is no way such a drastic change in monetary policy would come from this financial crisis. It’s like rewriting the constitution – or in this case, the Federal Reserve Act – and just ain’t gonna happen.

However, it is likely that the Fed will move forward in protecting consumers. Perhaps a new oversight entity – that exists under the umbrella of the Fed – will be added, and the Federal Reserve Act amended to include this institution. Basically, such an institution would certainly not target housing prices, but oversee the mortgage markets directly…remember, when pigs fly.

Rebecca Wilder

1 comment:

  1. Part of the trouble could be averted by having complete transparency in all publically traded companies. The hidden debt in many of the major corporations has been an underlying problem in the present crisis. All this government interference will probably not help anyway. Look for the October numbers to send markets into an even deeper swoon in November. Yuck. Then what, Bernanke and Paulson??