Tags: Bernanke | Fed | bank | Rogoff

Bernanke Gives Valedictory Speech — Part IV

By    |   Friday, 10 Jan 2014 06:47 AM

On Jan. 3, outgoing Federal Reserve Chairman Ben Bernanke spoke to the annual meeting of the American Economic Association in Philadelphia and spoke at length on the theme of "The Federal Reserve: Looking Back, Looking Forward."

In concluding his speech, Bernanke reviewed the Fed's monetary policy since the 2008 episode of the ongoing financial crisis and noted that the Fed had quickly slashed the Fed Funds Rate from 5.25 percent to near zero in 2007 and 2008. He touted the Fed's zero interest rate policy and quantitative easing policy as having promoted the recovery and boosted assets prices.

He then listed some tools the Fed might use when it decides to raise the Fed funds rate, such as increasing the interest rates paid on excess reserves and using reverse repurchase agreements.

I have wondered whether now that the Fed has taken credit for boosting stock prices, it will now feel impelled, if not compelled, to defend them if a serious correction occurs. Whenever this subject has come up, Bernanke has stated that the Fed doesn't have the authority to buy equities, to which I would retort that the Fed did not have the authority to take some of the most significant actions of 2008, such as bailing out Bear Stearns and other investment banks.

Bernanke then turned to the economic outlook and hailed what he called the recapitalization of the banking system, which he contends has made it safer than it was in 2008, and he looked forward to further "balance sheet repair."

He observed that the Fed tends to be overoptimistic in its forecasts, due in part to confusion over the drop in the rate of increase in productivity. Therefore, the Fed must be cautious in forecasting further progress toward recovery.

Harvard professor Ken Rogoff led off the expert commentary by praising Bernanke's willingness to take such "surreal" (perhaps a synonym for "unauthorized") steps as declaring investment banks such as Goldman Sachs and Morgan Stanley to be banks so that the Fed could bail them out. Rogoff predicted that since scholars still don't fully understand the Great Depression, it would take a long time to understand the events of 2008. He mentioned some ideas the Fed did not pursue, such as writedowns of subprime debt and nationalization of a major bank, which might be re-examined.

University of Chicago professor Anil Kashyap listed four open questions for scholars to consider: 1) the role of leverage and its potential to trigger destructive fire sales; 2) whether short-term guidance can create crowded trades, implying that monetary policy should be the last resort, not the first; 3) what to make of market reactions during 2013 to fears that the Fed might begin to taper its asset purchase; and 4) the paucity of knowledge about the role of liquidity and short-term wholesale funding of banks.

My view is that regulation of banks should be informed by principles of independence, transparency and accountability, all of which are lacking under current practice. One suspects that the authorities are still managing the crisis of 2008, using the Fed's balance sheet to cover up pockets of actual or potential illiquidity that could lead to writedowns and fire sales at banks.

(Archived video can be found here; text of the speech can be found here.)

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Robert-Feinberg
On Jan. 3, outgoing Federal Reserve Chairman Ben Bernanke spoke to the annual meeting of the American Economic Association in Philadelphia and spoke at length on the theme of "The Federal Reserve: Looking Back, Looking Forward."
Bernanke,Fed,bank,Rogoff
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2014-47-10
Friday, 10 Jan 2014 06:47 AM
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