BUnd, Bond e la bbband degli energumeni canuti VM13 (4 lettori)
- Creatore Discussione feliceanima
- Data di Inizio
gipa69
collegio dei patafisici
Ed infine la domanda che un po tutti ci facciamo....
http://www.debtdeflation.com/blogs/2009/01/11/bernanke-an-expert-on-the-great-depression/
http://www.debtdeflation.com/blogs/2009/01/11/bernanke-an-expert-on-the-great-depression/
shabib
Forumer storico
e allora , presto che e' tardi 
generali1984
Forumer storico
Un salutone a tutti 
gipa69
collegio dei patafisici
gipa69
collegio dei patafisici
Deutsche Bank warns of $6.4 billion loss in fourth quarter
By Simon Kennedy
Last update: 5:22 a.m. EST Jan. 14, 2009
DB 31.90, -0.60, -1.8%) said Wednesday that it expects to report a net loss of around 4.8 billion euros ($6.4 billion) for the fourth quarter of 2008 due to a weak performance in credit trading, higher provisions on its exposure to bond insurers and measures to reduce its exposure to risky assets. For the year as a whole, Deutsche Bank said it expects to report a loss of around 3.9 billion euros. The bank said it's made little use of accounting rules allowing it to revalue it own debt and said it could have booked an additional pretax gain of 5.5 billion euros if it had used the fair-value options. It also said it expects its Tier 1 capital ratio to be in line with its 10% target rate at the end of the year, reflecting a dividend accrual of 0.50 euros a share for 2008. Shares in Deutsche Bank fell 7.5% after the announcement.
By Simon Kennedy
Last update: 5:22 a.m. EST Jan. 14, 2009
DB 31.90, -0.60, -1.8%) said Wednesday that it expects to report a net loss of around 4.8 billion euros ($6.4 billion) for the fourth quarter of 2008 due to a weak performance in credit trading, higher provisions on its exposure to bond insurers and measures to reduce its exposure to risky assets. For the year as a whole, Deutsche Bank said it expects to report a loss of around 3.9 billion euros. The bank said it's made little use of accounting rules allowing it to revalue it own debt and said it could have booked an additional pretax gain of 5.5 billion euros if it had used the fair-value options. It also said it expects its Tier 1 capital ratio to be in line with its 10% target rate at the end of the year, reflecting a dividend accrual of 0.50 euros a share for 2008. Shares in Deutsche Bank fell 7.5% after the announcement.
gipa69
collegio dei patafisici
Ben Bernanke speech at LSE - 'The Crisis and the Policy
For almost a year and a half the global financial system has been under
extraordinary stress--stress that has now decisively spilled over to the
global economy more broadly. The proximate cause of the crisis was the turn
of the housing cycle in the United States and the associated rise in
delinquencies on subprime mortgages, which imposed substantial losses on
many financial institutions and shook investor confidence in credit markets.
However, although the subprime debacle triggered the crisis, the
developments in the U.S. mortgage market were only one aspect of a much
larger and more encompassing credit boom whose impact transcended the
mortgage market to affect many other forms of credit. Aspects of this
broader credit boom included widespread declines in underwriting standards,
breakdowns in lending oversight by investors and rating agencies, increased
reliance on complex and opaque credit instruments that proved fragile under
stress, and unusually low compensation for risk-taking.
The abrupt end of the credit boom has had widespread financial and economic
ramifications. Financial institutions have seen their capital depleted by
losses and writedowns and their balance sheets clogged by complex credit
products and other illiquid assets of uncertain value. Rising credit risks
and intense risk aversion have pushed credit spreads to unprecedented
levels, and markets for securitized assets, except for mortgage securities
with government guarantees, have shut down. Heightened systemic risks,
falling asset values, and tightening credit have in turn taken a heavy toll
on business and consumer confidence and precipitated a sharp slowing in
global economic activity. The damage, in terms of lost output, lost jobs,
and lost wealth, is already substantial.
The global economy will recover, but the timing and strength of the recovery
are highly uncertain. Government policy responses around the world will be
critical determinants of the speed and vigor of the recovery. Today I will
offer some thoughts on current and prospective policy responses to the
crisis in the United States, with a particular emphasis on actions by the
Federal Reserve. In doing so, I will outline the framework that has guided
the Federal Reserve's responses to date. I will also explain why I believe
that the Fed still has powerful tools at its disposal to fight the financial
crisis and the economic downturn, even though the overnight federal funds
rate cannot be reduced meaningfully further.
*The Federal Reserve's Response to the Crisis*
The Federal Reserve has responded aggressively to the crisis since its
emergence in the summer of 2007. Following a cut in the discount rate (the
rate at which the Federal Reserve lends to depository institutions) in
August of that year, the Federal Open Market Committee began to ease
monetary policy in September 2007, reducing the target for the federal funds
rate by 50 basis points.*1* As indications of economic weakness
proliferated, the Committee continued to respond, bringing down its target
for the federal funds rate by a cumulative 325 basis points by the spring of
2008. In historical comparison, this policy response stands out as
exceptionally rapid and proactive. In taking these actions, we aimed both to
cushion the direct effects of the financial turbulence on the economy and to
reduce the virulence of the so-called adverse feedback loop, in which
economic weakness and financial stress become mutually reinforcing.
These policy actions helped to support employment and incomes during the
first year of the crisis. Unfortunately, the intensification of the
financial turbulence last fall led to further deterioration in the economic
outlook. The Committee responded by cutting the target for the federal funds
rate an additional 100 basis points last October, with half of that
reduction coming as part of an unprecedented coordinated interest rate cut
by six major central banks on October 8. In December the Committee reduced
its target further, setting a range of 0 to 25 basis points for the target
federal funds rate.
The Committee's aggressive monetary easing was not without risks. During the
early phase of rate reductions, some observers expressed concern that these
policy actions would stoke inflation. These concerns intensified as
inflation reached high levels in mid-2008, mostly reflecting a surge in the
prices of oil and other commodities. The Committee takes its responsibility
to ensure price stability extremely seriously, and throughout this period it
remained closely attuned to developments in inflation and inflation
expectations. However, the Committee also maintained the view that the rapid
rise in commodity prices in 2008 primarily reflected sharply increased
demand for raw materials in emerging market economies, in combination with
constraints on the supply of these materials, rather than general
inflationary pressures. Committee members expected that, at some point,
global economic growth would moderate, resulting in slower increases in the
demand for commodities and a leveling out in their prices--as reflected, for
example, in the pattern of futures market prices. As you know, commodity
prices peaked during the summer and, rather than leveling out, have actually
fallen dramatically with the weakening in global economic activity. As a
consequence, overall inflation has already declined significantly and
appears likely to moderate further.
The Fed's monetary easing has been reflected in significant declines in a
number of lending rates, especially shorter-term rates, thus offsetting to
some degree the effects of the financial turmoil on financial conditions.
However, that offset has been incomplete, as widening credit spreads, more
restrictive lending standards, and credit market dysfunction have worked
against the monetary easing and led to tighter financial conditions overall.
In particular, many traditional funding sources for financial institutions
and markets have dried up, and banks and other lenders have found their
ability to securitize mortgages, auto loans, credit card receivables,
student loans, and other forms of credit greatly curtailed. Thus, in
addition to easing monetary policy, the Federal Reserve has worked to
support the functioning of credit markets and to reduce financial strains by
providing liquidity to the private sector. In doing so, as I will discuss
shortly, the Fed has deployed a number of additional policy tools, some of
which were previously in our toolkit and some of which have been created as
the need arose.
*Beyond the Federal Funds Rate: The Fed's Policy Toolkit*
Although the federal funds rate is now close to zero, the Federal Reserve
retains a number of policy tools that can be deployed against the crisis.
One important tool is policy communication. Even if the overnight rate is
close to zero, the Committee should be able to influence longer-term
interest rates by informing the public's expectations about the future
course of monetary policy. To illustrate, in its statement after its
December meeting, the Committee expressed the view that economic conditions
are likely to warrant an unusually low federal funds rate for some
time.*2*To the extent that such statements cause the public to
lengthen the horizon
over which they expect short-term rates to be held at very low levels, they
will exert downward pressure on longer-term rates, stimulating aggregate
demand. It is important, however, that statements of this sort be expressed
in conditional fashion--that is, that they link policy expectations to the
evolving economic outlook. If the public were to perceive a statement about
future policy to be unconditional, then long-term rates might fail to
respond in the desired fashion should the economic outlook change
materially.
Other than policies tied to current and expected future values of the
overnight interest rate, the Federal Reserve has--and indeed, has been
actively using--a range of policy tools to provide direct support to credit
markets and thus to the broader economy. As I will elaborate, I find it
useful to divide these tools into three groups. Although these sets of tools
differ in important respects, they have one aspect in common: They all make
use of the asset side of the Federal Reserve's balance sheet. That is, each
involves the Fed's authorities to extend credit or purchase securities.
The first set of tools, which are closely tied to the central bank's
traditional role as the lender of last resort, involve the provision of
short-term liquidity to sound financial institutions. Over the course of the
crisis, the Fed has taken a number of extraordinary actions to ensure that
financial institutions have adequate access to short-term credit. These
actions include creating new facilities for auctioning credit and making
primary securities dealers, as well as banks, eligible to borrow at the
Fed's discount window.*3* For example, since August 2007 we have lowered the
spread between the discount rate and the federal funds rate target from 100
basis points to 25 basis points; increased the term of discount window loans
from overnight to 90 days; created the Term Auction Facility, which auctions
credit to depository institutions for terms up to three months; put into
place the Term Securities Lending Facility, which allows primary dealers to
borrow Treasury securities from the Fed against less-liquid collateral; and
initiated the Primary Dealer Credit Facility as a source of liquidity for
those firms, among other actions.
Because interbank markets are global in scope, the Federal Reserve has also
approved bilateral currency swap agreements with 14 foreign central banks.
The swap facilities have allowed these central banks to acquire dollars from
the Federal Reserve to lend to banks in their jurisdictions, which has
served to ease conditions in dollar funding markets globally. In most cases,
the provision of this dollar liquidity abroad was conducted in tight
coordination with the Federal Reserve's own funding auctions.
Importantly, the provision of credit to financial institutions exposes the
Federal Reserve to only minimal credit risk; the loans that we make to banks
and primary dealers through our various facilities are generally
overcollateralized and made with recourse to the borrowing firm. The Federal
Reserve has never suffered any losses in the course of its normal lending to
banks and, now, to primary dealers. In the case of currency swaps, the
foreign central banks are responsible for repayment, not the financial
institutions that ultimately receive the funds; moreover, as further
security, the Federal Reserve receives an equivalent amount of foreign
currency in exchange for the dollars it provides to foreign central banks.
Liquidity provision by the central bank reduces systemic risk by assuring
market participants that, should short-term investors begin to lose
confidence, financial institutions will be able to meet the resulting
demands for cash without resorting to potentially destabilizing fire sales
of assets. Moreover, backstopping the liquidity needs of financial
institutions reduces funding stresses and, all else equal, should increase
the willingness of those institutions to lend and make markets.
On the other hand, the provision of ample liquidity to banks and primary
dealers is no panacea. Today, concerns about capital, asset quality, and
credit risk continue to limit the willingness of many intermediaries to
extend credit, even when liquidity is ample. Moreover, providing liquidity
to financial institutions does not address directly instability or declining
credit availability in critical nonbank markets, such as the commercial
paper market or the market for asset-backed securities, both of which
normally play major roles in the extension of credit in the United States.
To address these issues, the Federal Reserve has developed a second set of
policy tools, which involve the provision of liquidity directly to borrowers
and investors in key credit markets. Notably, we have introduced facilities
to purchase highly rated commercial paper at a term of three months and to
provide backup liquidity for money market mutual funds. In addition, the
Federal Reserve and the Treasury have jointly announced a facility that will
lend against AAA-rated asset-backed securities collateralized by student
loans, auto loans, credit card loans, and loans guaranteed by the Small
Business Administration. The Federal Reserve's credit risk exposure in the
latter facility will be minimal, because the collateral will be subject to a
"haircut" and the Treasury is providing $20 billion of capital as
supplementary loss protection. We expect this facility to be operational
next month.
The rationales and objectives of our various facilities differ, according to
the nature of the problem being addressed. In some cases, as in our programs
to backstop money market mutual funds, the purpose of the facility is to
serve, once again in classic central bank fashion, as liquidity provider of
last resort. Following a prominent fund's "breaking of the buck"--that is, a
decline in its net asset value below par--in September, investors began to
withdraw funds in large amounts from money market mutual funds that invest
in private instruments such as commercial paper and certificates of deposit.
Fund managers responded by liquidating assets and investing at only the
shortest of maturities. As the pace of withdrawals increased, both the
stability of the money market mutual fund industry and the functioning of
the commercial paper market were threatened. The Federal Reserve responded
with several programs, including a facility to finance bank purchases of
high-quality asset-backed commercial paper from money market mutual funds.
This facility effectively channeled liquidity to the funds, helping them to
meet redemption demands without having to sell assets indiscriminately.
Together with a Treasury program that provided partial insurance to
investors in money market mutual funds, these efforts helped stanch the cash
outflows from those funds and stabilize the industry.
The Federal Reserve's facility to buy high-quality (A1-P1) commercial paper
at a term of three months was likewise designed to provide a liquidity
backstop, in this case for investors and borrowers in the commercial paper
market. As I mentioned, the functioning of that market deteriorated
significantly in September, with borrowers finding financing difficult to
obtain, and then only at high rates and very short (usually overnight)
maturities. By serving as a backup source of liquidity for borrowers, the
Fed's commercial paper facility was aimed at reducing investor and borrower
concerns about "rollover risk," the risk that a borrower could not raise new
funds to repay maturing commercial paper. The reduction of rollover risk, in
turn, should increase the willingness of private investors to lend,
particularly for terms longer than overnight. These various actions appear
to have improved the functioning of the commercial paper market, as rates
and risk spreads have come down and the average maturities of issuance have
increased.
In contrast, our forthcoming asset-backed securities program, a joint effort
with the Treasury, is not purely for liquidity provision. This facility will
provide three-year term loans to investors against AAA-rated securities
backed by recently originated consumer and small-business loans. Unlike our
other lending programs, this facility combines Federal Reserve liquidity
with capital provided by the Treasury, which allows it to accept some credit
risk. By providing a combination of capital and liquidity, this facility
will effectively substitute public for private balance sheet capacity, in a
period of sharp deleveraging and risk aversion in which such capacity
appears very short. If the program works as planned, it should lead to lower
rates and greater availability of consumer and small business credit. Over
time, by increasing market liquidity and stimulating market activity, this
facility should also help to revive private lending. Importantly, if the
facility for asset-backed securities proves successful, its basic framework
can be expanded to accommodate higher volumes or additional classes of
securities as circumstances warrant.
The Federal Reserve's third set of policy tools for supporting the
functioning of credit markets involves the purchase of longer-term
securities for the Fed's portfolio. For example, we recently announced plans
to purchase up to $100 billion in government-sponsored enterprise (GSE) debt
and up to $500 billion in GSE mortgage-backed securities over the next few
quarters. Notably, mortgage rates dropped significantly on the announcement
of this program and have fallen further since it went into operation. Lower
mortgage rates should support the housing sector. The Committee is also
evaluating the possibility of purchasing longer-term Treasury securities. In
determining whether to proceed with such purchases, the Committee will focus
on their potential to improve conditions in private credit markets, such as
mortgage markets.
These three sets of policy tools--lending to financial institutions,
providing liquidity directly to key credit markets, and buying longer-term
securities--have the common feature that each represents a use of the asset
side of the Fed's balance sheet, that is, they all involve lending or the
purchase of securities. The virtue of these policies in the current context
is that they allow the Federal Reserve to continue to push down interest
rates and ease credit conditions in a range of markets, despite the fact
that the federal funds rate is close to its zero lower bound.
*Credit Easing versus Quantitative Easing*
The Federal Reserve's approach to supporting credit markets is conceptually
distinct from quantitative easing (QE), the policy approach used by the Bank
of Japan from 2001 to 2006. Our approach--which could be described as
"credit easing"--resembles quantitative easing in one respect: It involves
an expansion of the central bank's balance sheet. However, in a pure QE
regime, the focus of policy is the quantity of bank reserves, which are
liabilities of the central bank; the composition of loans and securities on
the asset side of the central bank's balance sheet is incidental. Indeed,
although the Bank of Japan's policy approach during the QE period was quite
multifaceted, the overall stance of its policy was gauged primarily in terms
of its target for bank reserves. In contrast, the Federal Reserve's credit
easing approach focuses on the mix of loans and securities that it holds and
on how this composition of assets affects credit conditions for households
and businesses. This difference does not reflect any doctrinal disagreement
with the Japanese approach, but rather the differences in financial and
economic conditions between the two episodes. In particular, credit spreads
are much wider and credit markets more dysfunctional in the United States
today than was the case during the Japanese experiment with quantitative
easing. To stimulate aggregate demand in the current environment, the
Federal Reserve must focus its policies on reducing those spreads and
improving the functioning of private credit markets more generally.
The stimulative effect of the Federal Reserve's credit easing policies
depends sensitively on the particular mix of lending programs and securities
purchases that it undertakes. When markets are illiquid and private
arbitrage is impaired by balance sheet constraints and other factors, as at
present, one dollar of longer-term securities purchases is unlikely to have
the same impact on financial markets and the economy as a dollar of lending
to banks, which has in turn a different effect than a dollar of lending to
support the commercial paper market. Because various types of lending have
heterogeneous effects, the stance of Fed policy in the current regime--in
contrast to a QE regime--is not easily summarized by a single number, such
as the quantity of excess reserves or the size of the monetary base. In
addition, the usage of Federal Reserve credit is determined in large part by
borrower needs and thus will tend to increase when market conditions worsen
and decline when market conditions improve. Setting a target for the size of
the Federal Reserve's balance sheet, as in a QE regime, could thus have the
perverse effect of forcing the Fed to tighten the terms and availability of
its lending at times when market conditions were worsening, and vice versa.
The lack of a simple summary measure or policy target poses an important
communications challenge. To minimize market uncertainty and achieve the
maximum effect of its policies, the Federal Reserve is committed to
providing the public as much information as possible about the uses of its
balance sheet, plans regarding future uses of its balance sheet, and the
criteria on which the relevant decisions are based.*4*
*Exit Strategy*
Some observers have expressed the concern that, by expanding its balance
sheet, the Federal Reserve is effectively printing money, an action that
will ultimately be inflationary. The Fed's lending activities have indeed
resulted in a large increase in the excess reserves held by banks. Bank
reserves, together with currency, make up the narrowest definition of money,
the monetary base; as you would expect, this measure of money has risen
significantly as the Fed's balance sheet has expanded. However, banks are
choosing to leave the great bulk of their excess reserves idle, in most
cases on deposit with the Fed. Consequently, the rates of growth of broader
monetary aggregates, such as M1 and M2, have been much lower than that of
the monetary base. At this point, with global economic activity weak and
commodity prices at low levels, we see little risk of inflation in the near
term; indeed, we expect inflation to continue to moderate.
However, at some point, when credit markets and the economy have begun to
recover, the Federal Reserve will have to unwind its various lending
programs. To some extent, this unwinding will happen automatically, as
improvements in credit markets should reduce the need to use Fed facilities.
Indeed, where possible we have tried to set lending rates and margins at
levels that are likely to be increasingly unattractive to borrowers as
financial conditions normalize. In addition, some programs--those authorized
under the Federal Reserve's so-called 13(3) authority, which requires a
finding that conditions in financial markets are "unusual and exigent"--will
by law have to be eliminated once credit market conditions substantially
normalize. However, as the unwinding of the Fed's various programs
effectively constitutes a tightening of policy, the principal factor
determining the timing and pace of that process will be the Committee's
assessment of the condition of credit markets and the prospects for the
economy.
As lending programs are scaled back, the size of the Federal Reserve's
balance sheet will decline, implying a reduction in excess reserves and the
monetary base. A significant shrinking of the balance sheet can be
accomplished relatively quickly, as a substantial portion of the assets that
the Federal Reserve holds--including loans to financial institutions,
currency swaps, and purchases of commercial paper--are short-term in nature
and can simply be allowed to run off as the various programs and facilities
are scaled back or shut down. As the size of the balance sheet and the
quantity of excess reserves in the system decline, the Federal Reserve will
be able to return to its traditional means of making monetary
policy--namely, by setting a target for the federal funds rate.
Although a large portion of Federal Reserve assets are short-term in nature,
we do hold or expect to hold significant quantities of longer-term assets,
such as the mortgage-backed securities that we will buy over the next two
quarters. Although longer-term securities can also be sold, of course, we
would not anticipate disposing of more than a small portion of these assets
in the near term, which will slow the rate at which our balance sheet can
shrink. We are monitoring the maturity composition of our balance sheet
closely and do not expect a significant problem in reducing our balance
sheet to the extent necessary at the appropriate time.
Importantly, the management of the Federal Reserve's balance sheet and the
conduct of monetary policy in the future will be made easier by the recent
congressional action to give the Fed the authority to pay interest on bank
reserves. In principle, the interest rate the Fed pays on bank reserves
should set a floor on the overnight interest rate, as banks should be
unwilling to lend reserves at a rate lower than they can receive from the
Fed. In practice, the federal funds rate has fallen somewhat below the
interest rate on reserves in recent months, reflecting the very high volume
of excess reserves, the inexperience of banks with the new regime, and other
factors. However, as excess reserves decline, financial conditions
normalize, and banks adapt to the new regime, we expect the interest rate
paid on reserves to become an effective instrument for controlling the
federal funds rate.
Moreover, other tools are available or can be developed to improve control
of the federal funds rate during the exit stage. For example, the Treasury
could resume its recent practice of issuing supplementary financing bills
and placing the funds with the Federal Reserve; the issuance of these bills
effectively drains reserves from the banking system, improving monetary
control. Longer-term assets can be financed through repurchase agreements
and other methods, which also drain reserves from the system. In considering
whether to create or expand its programs, the Federal Reserve will carefully
weigh the implications for the exit strategy. And we will take all necessary
actions to ensure that the unwinding of our programs is accomplished
smoothly and in a timely way, consistent with meeting our obligation to
foster full employment and price stability.
*Stabilizing the Financial System*
The Federal Reserve will do its part to promote economic recovery, but other
policy measures will be needed as well. The incoming Administration and the
Congress are currently discussing a substantial fiscal package that, if
enacted, could provide a significant boost to economic activity. In my view,
however, fiscal actions are unlikely to promote a lasting recovery unless
they are accompanied by strong measures to further stabilize and strengthen
the financial system. History demonstrates conclusively that a modern
economy cannot grow if its financial system is not operating effectively.
In the United States, a number of important steps have already been taken to
promote financial stability, including the Treasury's injection of about
$250 billion of capital into banking organizations, a substantial expansion
of guarantees for bank liabilities by the Federal Deposit Insurance
Corporation, and the Fed's various liquidity programs. Those measures,
together with analogous actions in many other countries, likely prevented a
global financial meltdown in the fall that, had it occurred, would have left
the global economy in far worse condition than it is in today.
However, with the worsening of the economy's growth prospects, continued
credit losses and asset markdowns may maintain for a time the pressure on
the capital and balance sheet capacities of financial institutions.
Consequently, more capital injections and guarantees may become necessary to
ensure stability and the normalization of credit markets. A continuing
barrier to private investment in financial institutions is the large
quantity of troubled, hard-to-value assets that remain on institutions'
balance sheets. The presence of these assets significantly increases
uncertainty about the underlying value of these institutions and may inhibit
both new private investment and new lending. Should the Treasury decide to
supplement injections of capital by removing troubled assets from
institutions' balance sheets, as was initially proposed for the U.S.
financial rescue plan, several approaches might be considered. Public
purchases of troubled assets are one possibility. Another is to provide
asset guarantees, under which the government would agree to absorb,
presumably in exchange for warrants or some other form of compensation, part
of the prospective losses on specified portfolios of troubled assets held by
banks. Yet another approach would be to set up and capitalize so-called bad
banks, which would purchase assets from financial institutions in exchange
for cash and equity in the bad bank. These methods are similar from an
economic perspective, though they would have somewhat different operational
and accounting implications. In addition, efforts to reduce preventable
foreclosures, among other benefits, could strengthen the housing market and
reduce mortgage losses, thereby increasing financial stability.
The public in many countries is understandably concerned by the commitment
of substantial government resources to aid the financial industry when other
industries receive little or no assistance. This disparate treatment,
unappealing as it is, appears unavoidable. Our economic system is critically
dependent on the free flow of credit, and the consequences for the broader
economy of financial instability are thus powerful and quickly felt. Indeed,
the destructive effects of financial instability on jobs and growth are
already evident worldwide. Responsible policymakers must therefore do what
they can to communicate to their constituencies why financial stabilization
is essential for economic recovery and is therefore in the broader public
interest.
Even as we strive to stabilize financial markets and institutions worldwide,
however, we also owe the public near-term, concrete actions to limit the
probability and severity of future crises. We need stronger supervisory and
regulatory systems under which gaps and unnecessary duplication in coverage
are eliminated, lines of supervisory authority and responsibility are
clarified, and oversight powers are adequate to curb excessive leverage and
risk-taking. In light of the multinational character of the largest
financial firms and the globalization of financial markets more generally,
regulatory oversight should be coordinated internationally to the greatest
extent possible. We must continue our ongoing work to strengthen the
financial infrastructure--for example, by encouraging the migration of
trading in credit default swaps and other derivatives to central
counterparties and exchanges. The supervisory authorities should develop the
capacity for increased surveillance of the financial system as a whole,
rather than focusing excessively on the condition of individual firms in
isolation; and we should revisit capital regulations, accounting rules, and
other aspects of the regulatory regime to ensure that they do not induce
excessive procyclicality in the financial system and the economy. As we
proceed with regulatory reform, however, we must take care not to take
actions that forfeit the economic benefits of financial innovation and
market discipline.
Particularly pressing is the need to address the problem of financial
institutions that are deemed "too big to fail." It is unacceptable that
large firms that the government is now compelled to support to preserve
financial stability were among the greatest risk-takers during the boom
period. The existence of too-big-to-fail firms also violates the presumption
of a level playing field among financial institutions. In the future,
financial firms of any type whose failure would pose a systemic risk must
accept especially close regulatory scrutiny of their risk-taking. Also
urgently needed in the United States is a new set of procedures for
resolving failing nonbank institutions deemed systemically critical,
analogous to the rules and powers that currently exist for resolving banks
under the so-called systemic risk exception.
*Conclusion*
The world today faces both short-term and long-term challenges. In the near
term, the highest priority is to promote a global economic recovery. The
Federal Reserve retains powerful policy tools and will use them aggressively
to help achieve this objective. Fiscal policy can stimulate economic
activity, but a sustained recovery will also require a comprehensive plan to
stabilize the financial system and restore normal flows of credit.
Despite the understandable focus on the near term, we do not have the luxury
of postponing work on longer-term issues. High on the list, in light of
recent events, are strengthening regulatory oversight and improving the
capacity of both the private sector and regulators to detect and manage
risk.
Finally, a clear lesson of the recent period is that the world is too
interconnected for nations to go it alone in their economic, financial, and
regulatory policies. International cooperation is thus essential if we are
to address the crisis successfully and provide the basis for a healthy,
sustained recovery.
*Footnotes*
1. A basis point is one-hundredth of a percentage point. *Return to text*
2. Board of Governors of the Federal Reserve (2008), "*FOMC Statement and
Board Approval of Discount Rate Requests of the Federal Reserve Banks of New
York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco*," press
release, December 16. *. <A%20href=" #f2?Return to text*
3. Primary dealers are broker-dealers that trade in U.S. government
securities with the Federal Reserve Bank of New York. The New York Fed's
Open Market Desk engages in trades on behalf of the Federal Reserve System
to implement monetary policy. *Return to text*
4. Detailed information about the Federal Reserve's balance sheet is
published weekly as part of the *H.4.1 release*. For a summary of Fed
lending programs, see *Forms of Federal Reserve Lending to Financial
Institutions** (229 KB
PDF)*<http://www.newyorkfed.org/markets/Forms_of_Fed_Lending.pdf>.
For almost a year and a half the global financial system has been under
extraordinary stress--stress that has now decisively spilled over to the
global economy more broadly. The proximate cause of the crisis was the turn
of the housing cycle in the United States and the associated rise in
delinquencies on subprime mortgages, which imposed substantial losses on
many financial institutions and shook investor confidence in credit markets.
However, although the subprime debacle triggered the crisis, the
developments in the U.S. mortgage market were only one aspect of a much
larger and more encompassing credit boom whose impact transcended the
mortgage market to affect many other forms of credit. Aspects of this
broader credit boom included widespread declines in underwriting standards,
breakdowns in lending oversight by investors and rating agencies, increased
reliance on complex and opaque credit instruments that proved fragile under
stress, and unusually low compensation for risk-taking.
The abrupt end of the credit boom has had widespread financial and economic
ramifications. Financial institutions have seen their capital depleted by
losses and writedowns and their balance sheets clogged by complex credit
products and other illiquid assets of uncertain value. Rising credit risks
and intense risk aversion have pushed credit spreads to unprecedented
levels, and markets for securitized assets, except for mortgage securities
with government guarantees, have shut down. Heightened systemic risks,
falling asset values, and tightening credit have in turn taken a heavy toll
on business and consumer confidence and precipitated a sharp slowing in
global economic activity. The damage, in terms of lost output, lost jobs,
and lost wealth, is already substantial.
The global economy will recover, but the timing and strength of the recovery
are highly uncertain. Government policy responses around the world will be
critical determinants of the speed and vigor of the recovery. Today I will
offer some thoughts on current and prospective policy responses to the
crisis in the United States, with a particular emphasis on actions by the
Federal Reserve. In doing so, I will outline the framework that has guided
the Federal Reserve's responses to date. I will also explain why I believe
that the Fed still has powerful tools at its disposal to fight the financial
crisis and the economic downturn, even though the overnight federal funds
rate cannot be reduced meaningfully further.
*The Federal Reserve's Response to the Crisis*
The Federal Reserve has responded aggressively to the crisis since its
emergence in the summer of 2007. Following a cut in the discount rate (the
rate at which the Federal Reserve lends to depository institutions) in
August of that year, the Federal Open Market Committee began to ease
monetary policy in September 2007, reducing the target for the federal funds
rate by 50 basis points.*1* As indications of economic weakness
proliferated, the Committee continued to respond, bringing down its target
for the federal funds rate by a cumulative 325 basis points by the spring of
2008. In historical comparison, this policy response stands out as
exceptionally rapid and proactive. In taking these actions, we aimed both to
cushion the direct effects of the financial turbulence on the economy and to
reduce the virulence of the so-called adverse feedback loop, in which
economic weakness and financial stress become mutually reinforcing.
These policy actions helped to support employment and incomes during the
first year of the crisis. Unfortunately, the intensification of the
financial turbulence last fall led to further deterioration in the economic
outlook. The Committee responded by cutting the target for the federal funds
rate an additional 100 basis points last October, with half of that
reduction coming as part of an unprecedented coordinated interest rate cut
by six major central banks on October 8. In December the Committee reduced
its target further, setting a range of 0 to 25 basis points for the target
federal funds rate.
The Committee's aggressive monetary easing was not without risks. During the
early phase of rate reductions, some observers expressed concern that these
policy actions would stoke inflation. These concerns intensified as
inflation reached high levels in mid-2008, mostly reflecting a surge in the
prices of oil and other commodities. The Committee takes its responsibility
to ensure price stability extremely seriously, and throughout this period it
remained closely attuned to developments in inflation and inflation
expectations. However, the Committee also maintained the view that the rapid
rise in commodity prices in 2008 primarily reflected sharply increased
demand for raw materials in emerging market economies, in combination with
constraints on the supply of these materials, rather than general
inflationary pressures. Committee members expected that, at some point,
global economic growth would moderate, resulting in slower increases in the
demand for commodities and a leveling out in their prices--as reflected, for
example, in the pattern of futures market prices. As you know, commodity
prices peaked during the summer and, rather than leveling out, have actually
fallen dramatically with the weakening in global economic activity. As a
consequence, overall inflation has already declined significantly and
appears likely to moderate further.
The Fed's monetary easing has been reflected in significant declines in a
number of lending rates, especially shorter-term rates, thus offsetting to
some degree the effects of the financial turmoil on financial conditions.
However, that offset has been incomplete, as widening credit spreads, more
restrictive lending standards, and credit market dysfunction have worked
against the monetary easing and led to tighter financial conditions overall.
In particular, many traditional funding sources for financial institutions
and markets have dried up, and banks and other lenders have found their
ability to securitize mortgages, auto loans, credit card receivables,
student loans, and other forms of credit greatly curtailed. Thus, in
addition to easing monetary policy, the Federal Reserve has worked to
support the functioning of credit markets and to reduce financial strains by
providing liquidity to the private sector. In doing so, as I will discuss
shortly, the Fed has deployed a number of additional policy tools, some of
which were previously in our toolkit and some of which have been created as
the need arose.
*Beyond the Federal Funds Rate: The Fed's Policy Toolkit*
Although the federal funds rate is now close to zero, the Federal Reserve
retains a number of policy tools that can be deployed against the crisis.
One important tool is policy communication. Even if the overnight rate is
close to zero, the Committee should be able to influence longer-term
interest rates by informing the public's expectations about the future
course of monetary policy. To illustrate, in its statement after its
December meeting, the Committee expressed the view that economic conditions
are likely to warrant an unusually low federal funds rate for some
time.*2*To the extent that such statements cause the public to
lengthen the horizon
over which they expect short-term rates to be held at very low levels, they
will exert downward pressure on longer-term rates, stimulating aggregate
demand. It is important, however, that statements of this sort be expressed
in conditional fashion--that is, that they link policy expectations to the
evolving economic outlook. If the public were to perceive a statement about
future policy to be unconditional, then long-term rates might fail to
respond in the desired fashion should the economic outlook change
materially.
Other than policies tied to current and expected future values of the
overnight interest rate, the Federal Reserve has--and indeed, has been
actively using--a range of policy tools to provide direct support to credit
markets and thus to the broader economy. As I will elaborate, I find it
useful to divide these tools into three groups. Although these sets of tools
differ in important respects, they have one aspect in common: They all make
use of the asset side of the Federal Reserve's balance sheet. That is, each
involves the Fed's authorities to extend credit or purchase securities.
The first set of tools, which are closely tied to the central bank's
traditional role as the lender of last resort, involve the provision of
short-term liquidity to sound financial institutions. Over the course of the
crisis, the Fed has taken a number of extraordinary actions to ensure that
financial institutions have adequate access to short-term credit. These
actions include creating new facilities for auctioning credit and making
primary securities dealers, as well as banks, eligible to borrow at the
Fed's discount window.*3* For example, since August 2007 we have lowered the
spread between the discount rate and the federal funds rate target from 100
basis points to 25 basis points; increased the term of discount window loans
from overnight to 90 days; created the Term Auction Facility, which auctions
credit to depository institutions for terms up to three months; put into
place the Term Securities Lending Facility, which allows primary dealers to
borrow Treasury securities from the Fed against less-liquid collateral; and
initiated the Primary Dealer Credit Facility as a source of liquidity for
those firms, among other actions.
Because interbank markets are global in scope, the Federal Reserve has also
approved bilateral currency swap agreements with 14 foreign central banks.
The swap facilities have allowed these central banks to acquire dollars from
the Federal Reserve to lend to banks in their jurisdictions, which has
served to ease conditions in dollar funding markets globally. In most cases,
the provision of this dollar liquidity abroad was conducted in tight
coordination with the Federal Reserve's own funding auctions.
Importantly, the provision of credit to financial institutions exposes the
Federal Reserve to only minimal credit risk; the loans that we make to banks
and primary dealers through our various facilities are generally
overcollateralized and made with recourse to the borrowing firm. The Federal
Reserve has never suffered any losses in the course of its normal lending to
banks and, now, to primary dealers. In the case of currency swaps, the
foreign central banks are responsible for repayment, not the financial
institutions that ultimately receive the funds; moreover, as further
security, the Federal Reserve receives an equivalent amount of foreign
currency in exchange for the dollars it provides to foreign central banks.
Liquidity provision by the central bank reduces systemic risk by assuring
market participants that, should short-term investors begin to lose
confidence, financial institutions will be able to meet the resulting
demands for cash without resorting to potentially destabilizing fire sales
of assets. Moreover, backstopping the liquidity needs of financial
institutions reduces funding stresses and, all else equal, should increase
the willingness of those institutions to lend and make markets.
On the other hand, the provision of ample liquidity to banks and primary
dealers is no panacea. Today, concerns about capital, asset quality, and
credit risk continue to limit the willingness of many intermediaries to
extend credit, even when liquidity is ample. Moreover, providing liquidity
to financial institutions does not address directly instability or declining
credit availability in critical nonbank markets, such as the commercial
paper market or the market for asset-backed securities, both of which
normally play major roles in the extension of credit in the United States.
To address these issues, the Federal Reserve has developed a second set of
policy tools, which involve the provision of liquidity directly to borrowers
and investors in key credit markets. Notably, we have introduced facilities
to purchase highly rated commercial paper at a term of three months and to
provide backup liquidity for money market mutual funds. In addition, the
Federal Reserve and the Treasury have jointly announced a facility that will
lend against AAA-rated asset-backed securities collateralized by student
loans, auto loans, credit card loans, and loans guaranteed by the Small
Business Administration. The Federal Reserve's credit risk exposure in the
latter facility will be minimal, because the collateral will be subject to a
"haircut" and the Treasury is providing $20 billion of capital as
supplementary loss protection. We expect this facility to be operational
next month.
The rationales and objectives of our various facilities differ, according to
the nature of the problem being addressed. In some cases, as in our programs
to backstop money market mutual funds, the purpose of the facility is to
serve, once again in classic central bank fashion, as liquidity provider of
last resort. Following a prominent fund's "breaking of the buck"--that is, a
decline in its net asset value below par--in September, investors began to
withdraw funds in large amounts from money market mutual funds that invest
in private instruments such as commercial paper and certificates of deposit.
Fund managers responded by liquidating assets and investing at only the
shortest of maturities. As the pace of withdrawals increased, both the
stability of the money market mutual fund industry and the functioning of
the commercial paper market were threatened. The Federal Reserve responded
with several programs, including a facility to finance bank purchases of
high-quality asset-backed commercial paper from money market mutual funds.
This facility effectively channeled liquidity to the funds, helping them to
meet redemption demands without having to sell assets indiscriminately.
Together with a Treasury program that provided partial insurance to
investors in money market mutual funds, these efforts helped stanch the cash
outflows from those funds and stabilize the industry.
The Federal Reserve's facility to buy high-quality (A1-P1) commercial paper
at a term of three months was likewise designed to provide a liquidity
backstop, in this case for investors and borrowers in the commercial paper
market. As I mentioned, the functioning of that market deteriorated
significantly in September, with borrowers finding financing difficult to
obtain, and then only at high rates and very short (usually overnight)
maturities. By serving as a backup source of liquidity for borrowers, the
Fed's commercial paper facility was aimed at reducing investor and borrower
concerns about "rollover risk," the risk that a borrower could not raise new
funds to repay maturing commercial paper. The reduction of rollover risk, in
turn, should increase the willingness of private investors to lend,
particularly for terms longer than overnight. These various actions appear
to have improved the functioning of the commercial paper market, as rates
and risk spreads have come down and the average maturities of issuance have
increased.
In contrast, our forthcoming asset-backed securities program, a joint effort
with the Treasury, is not purely for liquidity provision. This facility will
provide three-year term loans to investors against AAA-rated securities
backed by recently originated consumer and small-business loans. Unlike our
other lending programs, this facility combines Federal Reserve liquidity
with capital provided by the Treasury, which allows it to accept some credit
risk. By providing a combination of capital and liquidity, this facility
will effectively substitute public for private balance sheet capacity, in a
period of sharp deleveraging and risk aversion in which such capacity
appears very short. If the program works as planned, it should lead to lower
rates and greater availability of consumer and small business credit. Over
time, by increasing market liquidity and stimulating market activity, this
facility should also help to revive private lending. Importantly, if the
facility for asset-backed securities proves successful, its basic framework
can be expanded to accommodate higher volumes or additional classes of
securities as circumstances warrant.
The Federal Reserve's third set of policy tools for supporting the
functioning of credit markets involves the purchase of longer-term
securities for the Fed's portfolio. For example, we recently announced plans
to purchase up to $100 billion in government-sponsored enterprise (GSE) debt
and up to $500 billion in GSE mortgage-backed securities over the next few
quarters. Notably, mortgage rates dropped significantly on the announcement
of this program and have fallen further since it went into operation. Lower
mortgage rates should support the housing sector. The Committee is also
evaluating the possibility of purchasing longer-term Treasury securities. In
determining whether to proceed with such purchases, the Committee will focus
on their potential to improve conditions in private credit markets, such as
mortgage markets.
These three sets of policy tools--lending to financial institutions,
providing liquidity directly to key credit markets, and buying longer-term
securities--have the common feature that each represents a use of the asset
side of the Fed's balance sheet, that is, they all involve lending or the
purchase of securities. The virtue of these policies in the current context
is that they allow the Federal Reserve to continue to push down interest
rates and ease credit conditions in a range of markets, despite the fact
that the federal funds rate is close to its zero lower bound.
*Credit Easing versus Quantitative Easing*
The Federal Reserve's approach to supporting credit markets is conceptually
distinct from quantitative easing (QE), the policy approach used by the Bank
of Japan from 2001 to 2006. Our approach--which could be described as
"credit easing"--resembles quantitative easing in one respect: It involves
an expansion of the central bank's balance sheet. However, in a pure QE
regime, the focus of policy is the quantity of bank reserves, which are
liabilities of the central bank; the composition of loans and securities on
the asset side of the central bank's balance sheet is incidental. Indeed,
although the Bank of Japan's policy approach during the QE period was quite
multifaceted, the overall stance of its policy was gauged primarily in terms
of its target for bank reserves. In contrast, the Federal Reserve's credit
easing approach focuses on the mix of loans and securities that it holds and
on how this composition of assets affects credit conditions for households
and businesses. This difference does not reflect any doctrinal disagreement
with the Japanese approach, but rather the differences in financial and
economic conditions between the two episodes. In particular, credit spreads
are much wider and credit markets more dysfunctional in the United States
today than was the case during the Japanese experiment with quantitative
easing. To stimulate aggregate demand in the current environment, the
Federal Reserve must focus its policies on reducing those spreads and
improving the functioning of private credit markets more generally.
The stimulative effect of the Federal Reserve's credit easing policies
depends sensitively on the particular mix of lending programs and securities
purchases that it undertakes. When markets are illiquid and private
arbitrage is impaired by balance sheet constraints and other factors, as at
present, one dollar of longer-term securities purchases is unlikely to have
the same impact on financial markets and the economy as a dollar of lending
to banks, which has in turn a different effect than a dollar of lending to
support the commercial paper market. Because various types of lending have
heterogeneous effects, the stance of Fed policy in the current regime--in
contrast to a QE regime--is not easily summarized by a single number, such
as the quantity of excess reserves or the size of the monetary base. In
addition, the usage of Federal Reserve credit is determined in large part by
borrower needs and thus will tend to increase when market conditions worsen
and decline when market conditions improve. Setting a target for the size of
the Federal Reserve's balance sheet, as in a QE regime, could thus have the
perverse effect of forcing the Fed to tighten the terms and availability of
its lending at times when market conditions were worsening, and vice versa.
The lack of a simple summary measure or policy target poses an important
communications challenge. To minimize market uncertainty and achieve the
maximum effect of its policies, the Federal Reserve is committed to
providing the public as much information as possible about the uses of its
balance sheet, plans regarding future uses of its balance sheet, and the
criteria on which the relevant decisions are based.*4*
*Exit Strategy*
Some observers have expressed the concern that, by expanding its balance
sheet, the Federal Reserve is effectively printing money, an action that
will ultimately be inflationary. The Fed's lending activities have indeed
resulted in a large increase in the excess reserves held by banks. Bank
reserves, together with currency, make up the narrowest definition of money,
the monetary base; as you would expect, this measure of money has risen
significantly as the Fed's balance sheet has expanded. However, banks are
choosing to leave the great bulk of their excess reserves idle, in most
cases on deposit with the Fed. Consequently, the rates of growth of broader
monetary aggregates, such as M1 and M2, have been much lower than that of
the monetary base. At this point, with global economic activity weak and
commodity prices at low levels, we see little risk of inflation in the near
term; indeed, we expect inflation to continue to moderate.
However, at some point, when credit markets and the economy have begun to
recover, the Federal Reserve will have to unwind its various lending
programs. To some extent, this unwinding will happen automatically, as
improvements in credit markets should reduce the need to use Fed facilities.
Indeed, where possible we have tried to set lending rates and margins at
levels that are likely to be increasingly unattractive to borrowers as
financial conditions normalize. In addition, some programs--those authorized
under the Federal Reserve's so-called 13(3) authority, which requires a
finding that conditions in financial markets are "unusual and exigent"--will
by law have to be eliminated once credit market conditions substantially
normalize. However, as the unwinding of the Fed's various programs
effectively constitutes a tightening of policy, the principal factor
determining the timing and pace of that process will be the Committee's
assessment of the condition of credit markets and the prospects for the
economy.
As lending programs are scaled back, the size of the Federal Reserve's
balance sheet will decline, implying a reduction in excess reserves and the
monetary base. A significant shrinking of the balance sheet can be
accomplished relatively quickly, as a substantial portion of the assets that
the Federal Reserve holds--including loans to financial institutions,
currency swaps, and purchases of commercial paper--are short-term in nature
and can simply be allowed to run off as the various programs and facilities
are scaled back or shut down. As the size of the balance sheet and the
quantity of excess reserves in the system decline, the Federal Reserve will
be able to return to its traditional means of making monetary
policy--namely, by setting a target for the federal funds rate.
Although a large portion of Federal Reserve assets are short-term in nature,
we do hold or expect to hold significant quantities of longer-term assets,
such as the mortgage-backed securities that we will buy over the next two
quarters. Although longer-term securities can also be sold, of course, we
would not anticipate disposing of more than a small portion of these assets
in the near term, which will slow the rate at which our balance sheet can
shrink. We are monitoring the maturity composition of our balance sheet
closely and do not expect a significant problem in reducing our balance
sheet to the extent necessary at the appropriate time.
Importantly, the management of the Federal Reserve's balance sheet and the
conduct of monetary policy in the future will be made easier by the recent
congressional action to give the Fed the authority to pay interest on bank
reserves. In principle, the interest rate the Fed pays on bank reserves
should set a floor on the overnight interest rate, as banks should be
unwilling to lend reserves at a rate lower than they can receive from the
Fed. In practice, the federal funds rate has fallen somewhat below the
interest rate on reserves in recent months, reflecting the very high volume
of excess reserves, the inexperience of banks with the new regime, and other
factors. However, as excess reserves decline, financial conditions
normalize, and banks adapt to the new regime, we expect the interest rate
paid on reserves to become an effective instrument for controlling the
federal funds rate.
Moreover, other tools are available or can be developed to improve control
of the federal funds rate during the exit stage. For example, the Treasury
could resume its recent practice of issuing supplementary financing bills
and placing the funds with the Federal Reserve; the issuance of these bills
effectively drains reserves from the banking system, improving monetary
control. Longer-term assets can be financed through repurchase agreements
and other methods, which also drain reserves from the system. In considering
whether to create or expand its programs, the Federal Reserve will carefully
weigh the implications for the exit strategy. And we will take all necessary
actions to ensure that the unwinding of our programs is accomplished
smoothly and in a timely way, consistent with meeting our obligation to
foster full employment and price stability.
*Stabilizing the Financial System*
The Federal Reserve will do its part to promote economic recovery, but other
policy measures will be needed as well. The incoming Administration and the
Congress are currently discussing a substantial fiscal package that, if
enacted, could provide a significant boost to economic activity. In my view,
however, fiscal actions are unlikely to promote a lasting recovery unless
they are accompanied by strong measures to further stabilize and strengthen
the financial system. History demonstrates conclusively that a modern
economy cannot grow if its financial system is not operating effectively.
In the United States, a number of important steps have already been taken to
promote financial stability, including the Treasury's injection of about
$250 billion of capital into banking organizations, a substantial expansion
of guarantees for bank liabilities by the Federal Deposit Insurance
Corporation, and the Fed's various liquidity programs. Those measures,
together with analogous actions in many other countries, likely prevented a
global financial meltdown in the fall that, had it occurred, would have left
the global economy in far worse condition than it is in today.
However, with the worsening of the economy's growth prospects, continued
credit losses and asset markdowns may maintain for a time the pressure on
the capital and balance sheet capacities of financial institutions.
Consequently, more capital injections and guarantees may become necessary to
ensure stability and the normalization of credit markets. A continuing
barrier to private investment in financial institutions is the large
quantity of troubled, hard-to-value assets that remain on institutions'
balance sheets. The presence of these assets significantly increases
uncertainty about the underlying value of these institutions and may inhibit
both new private investment and new lending. Should the Treasury decide to
supplement injections of capital by removing troubled assets from
institutions' balance sheets, as was initially proposed for the U.S.
financial rescue plan, several approaches might be considered. Public
purchases of troubled assets are one possibility. Another is to provide
asset guarantees, under which the government would agree to absorb,
presumably in exchange for warrants or some other form of compensation, part
of the prospective losses on specified portfolios of troubled assets held by
banks. Yet another approach would be to set up and capitalize so-called bad
banks, which would purchase assets from financial institutions in exchange
for cash and equity in the bad bank. These methods are similar from an
economic perspective, though they would have somewhat different operational
and accounting implications. In addition, efforts to reduce preventable
foreclosures, among other benefits, could strengthen the housing market and
reduce mortgage losses, thereby increasing financial stability.
The public in many countries is understandably concerned by the commitment
of substantial government resources to aid the financial industry when other
industries receive little or no assistance. This disparate treatment,
unappealing as it is, appears unavoidable. Our economic system is critically
dependent on the free flow of credit, and the consequences for the broader
economy of financial instability are thus powerful and quickly felt. Indeed,
the destructive effects of financial instability on jobs and growth are
already evident worldwide. Responsible policymakers must therefore do what
they can to communicate to their constituencies why financial stabilization
is essential for economic recovery and is therefore in the broader public
interest.
Even as we strive to stabilize financial markets and institutions worldwide,
however, we also owe the public near-term, concrete actions to limit the
probability and severity of future crises. We need stronger supervisory and
regulatory systems under which gaps and unnecessary duplication in coverage
are eliminated, lines of supervisory authority and responsibility are
clarified, and oversight powers are adequate to curb excessive leverage and
risk-taking. In light of the multinational character of the largest
financial firms and the globalization of financial markets more generally,
regulatory oversight should be coordinated internationally to the greatest
extent possible. We must continue our ongoing work to strengthen the
financial infrastructure--for example, by encouraging the migration of
trading in credit default swaps and other derivatives to central
counterparties and exchanges. The supervisory authorities should develop the
capacity for increased surveillance of the financial system as a whole,
rather than focusing excessively on the condition of individual firms in
isolation; and we should revisit capital regulations, accounting rules, and
other aspects of the regulatory regime to ensure that they do not induce
excessive procyclicality in the financial system and the economy. As we
proceed with regulatory reform, however, we must take care not to take
actions that forfeit the economic benefits of financial innovation and
market discipline.
Particularly pressing is the need to address the problem of financial
institutions that are deemed "too big to fail." It is unacceptable that
large firms that the government is now compelled to support to preserve
financial stability were among the greatest risk-takers during the boom
period. The existence of too-big-to-fail firms also violates the presumption
of a level playing field among financial institutions. In the future,
financial firms of any type whose failure would pose a systemic risk must
accept especially close regulatory scrutiny of their risk-taking. Also
urgently needed in the United States is a new set of procedures for
resolving failing nonbank institutions deemed systemically critical,
analogous to the rules and powers that currently exist for resolving banks
under the so-called systemic risk exception.
*Conclusion*
The world today faces both short-term and long-term challenges. In the near
term, the highest priority is to promote a global economic recovery. The
Federal Reserve retains powerful policy tools and will use them aggressively
to help achieve this objective. Fiscal policy can stimulate economic
activity, but a sustained recovery will also require a comprehensive plan to
stabilize the financial system and restore normal flows of credit.
Despite the understandable focus on the near term, we do not have the luxury
of postponing work on longer-term issues. High on the list, in light of
recent events, are strengthening regulatory oversight and improving the
capacity of both the private sector and regulators to detect and manage
risk.
Finally, a clear lesson of the recent period is that the world is too
interconnected for nations to go it alone in their economic, financial, and
regulatory policies. International cooperation is thus essential if we are
to address the crisis successfully and provide the basis for a healthy,
sustained recovery.
*Footnotes*
1. A basis point is one-hundredth of a percentage point. *Return to text*
2. Board of Governors of the Federal Reserve (2008), "*FOMC Statement and
Board Approval of Discount Rate Requests of the Federal Reserve Banks of New
York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco*," press
release, December 16. *. <A%20href=" #f2?Return to text*
3. Primary dealers are broker-dealers that trade in U.S. government
securities with the Federal Reserve Bank of New York. The New York Fed's
Open Market Desk engages in trades on behalf of the Federal Reserve System
to implement monetary policy. *Return to text*
4. Detailed information about the Federal Reserve's balance sheet is
published weekly as part of the *H.4.1 release*. For a summary of Fed
lending programs, see *Forms of Federal Reserve Lending to Financial
Institutions** (229 KB
PDF)*<http://www.newyorkfed.org/markets/Forms_of_Fed_Lending.pdf>.
generali1984
Forumer storico
Tutto bene?
Ciao Big !
sì grazie , spero lo stesso per tutti voi
sempre di corsa e con poco tempo , ma leggo sempre quello che scrivi ...........insomma ti spio