Policy Needs and Timing Concerns
By: Dr. Charles Lieberman
Date: 10/27/2009
The Federal Reserve Bank of Boston conference held on Cape Cod this past week focused on bank regulation, not on current policy. As former Fed Vice Chairman Alan Blinder put it so well, It's broke and we need to fix it. In fact, there appeared to be unanimous agreement that the existing supervisory and regulatory structure failed and a major overhaul is a necessity. But while Blinder's principles and framework for the overhaul were well received, there is little doubt that conference attendees, mostly economists, differed considerably over the nature of the new structure. Moreover, it is doubtful that the changes that emerge after Congress and lobbyists finish will reflect the well conceived principles that garnered solid support.
Even so, much of the discussion away from the sessions and papers kept coming back to current policy. The timing of the Fed's exit strategy came up repeatedly. No one expressed an impending need for the Fed to begin withdrawing the liquidity it had injected into the financial system. Maybe I spoke to the wrong people. However, many attendees questioned why anyone would give serious consideration that the Fed withdraw liquidity before the economy had generated its first quarterly gain in GDP or even its first increase in monthly payroll employment.
In contrast, many people expressed some disappointment that Congress is not further along in the process of the massive overhaul needed to repair the supervisory and regulatory structure, not to mention the accounting rules, which were mentioned only in passing. Still, these are complex problems. How should companies too big to fail be handled? Some people (not at the conference) believe such companies should be broken up into smaller business units. However, conference participants, including Fed Chairman Bernanke, do not wish to risk losing their sophisticated finance capabilities and are inclined to impose higher capital requirements and better regulation instead. Conference participants commonly doubted that the alphabet soup of regulators would not undergo the full rationalization that is needed. And we barely discussed the procyclical role in the credit crisis played by the accounting system.
There is still much to be done in the aftermath of the credit crisis. Some are suggesting policy is too accommodative, yet credit availability has not yet recovered for small firms. The need for regulatory reform is urgent, but little is happening. Put it all together and the debate over policy and regulation will remain front burner issues for the next few years. Download this article in PDF Format
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