Friday, October 22, 2010

Richard Alford: The Fed has not learned from the crisis

By Richard Alford, former economist of the Federal Reserve in New York. Since then, he has worked in the financial industry as an economist of floor trading and a strategist both sale and buy side.

Even at the front of the financial crisis of 2007, economists and policy makers actively debated if central banks should use the policy of "lean" interest against possible, bubbles price or "cleansing" after a bubble burst, reserving the interest rate for inflation targeting policy. Consensus began to emerge: there are situations where it would be advantageous for the banks to use the interest rate policy is to support against price bubbles. Some current and former Fed officials have reversed their position and now adopt the consensus view. This view is consistent with the position that the Federal Reserve kept "too low for too long" reserve funds rate, but any admission that officials reserve US Federal is implicit at best.It also appears that the Fed has not generalized lessons, he could have learned from the crise.Il is committed to two exceptionally low rates of interest for a long period of time and now QE despite the parallels between execution until the crisis of 2007 and current developments in money and international capital markets.

Speech by Vice President Yellen, former vice chairman Kohn and recent testimony by Bernank e reflect this somewhat reluctant the idea that, in some cases with price bubbles is political acceptance appropriate.


It is conceivable that accommodating monetary policy could serve as Amadou accumulation of the effect of leverage and excessive risk-taking in the financial system.

Similarly, I do not wish to assert that it is never appropriate for monetary policy take account of its impact on financière.La regulatory stability is financial imparfaite.Déséquilibres may emerge even though we are strengthening prudential supervision and control.


We should not categorically excluded from monetary policy to address given damage financial imbalances that they may cause.the FOMC is closely monitoring the financial terms of signs of such imbalances and will continue to do so.


For all these reasons, my preference would be to use the regulatory and monitoring to strengthen the financial system and to lean against problems.Given our current state of knowledge, monetary policy should be used if built imbalances and regulatory policies were either unavailable or proved ineffective.

All statements, as reluctant indicate a retirement clearly the position that the policy interest rate should reflect ever concerns about stability financière.La position that interest rates were too low for too long, is reflected most clearly in the Declaration of Kohn.Kohn lists two contingencies, if both are met, to justify the Fed parameter higher rate than inflation and the output would imply.They are 1) economic and financial imbalances must exist, and 2) regulatory policies must be absence or ineffective.(I would add that the imbalances must reflect the exceptionally rapid credit growth).Two of the ups and downs were clearly satisfied in the post-2001 period.There were many unsustainable economic and financial imbalances: the personal savings rate close to zero and one economy depend unsustainable levels of consumption and investment in income, housing, who were driven out by the price of assets not viable.De more, large institutions financial were over-leveraged and depend on short-term financing.As we know, regulatory policy was ineffective or non-existent.

At the risk of putting words in his mouth Kohn, it indicates clearly that interest rates were too low because imbalances and the State of the réglementation.Il is not a full confession, but perhaps a mea culpa.

Unfortunately, the u.s. Federal Reserve seems unable to generalize the lesson that sometimes appropriate interest rate policy is a function more than inflation and the gap of production.Actuellement, wholesale, viable, financial and economic imbalances are parallel to the imbalances that existed in United States before crise.Les charged international organizations to promote and maintain stability in global markets are woefully inadequate to facing a crisis involving the dollar.

Nevertheless, reserve US Federal appears on the definition of strategy as if the prices and incomes were exclusively determined by national economic concerns and in spite of its status in the issuance of currency reserve the monde.Récent Bank speech Bernanke made no mention of any policy non-household moving concerne.Malgré currency markets and the status of an importer of capital, the Fed American embraced QE and is committed to pursuing a policy of low for a long period of time, interest rates probably independently of any international developments.

It is fair to say that the Fed is proving once more its limitations has decided as a manager of risque.Compte view of the current economic climate and recent developments (intervention FX and introduction of capital controls), the risk of a dollar crisis is much more at risk of expenses due to a crisis queue.Les are difficult to estimate a dollar crisis would be a currency in which the currency crisis had been réserve.Gamme currency crisis and diffusion pattern are someone guess.

If risk management discipline was applied to the decision to adopt the EQ, he would rule Fed position as stated by Bernanke .the ' fees to the United States economy (and worldwide) Fed policy precipitated a dollar crisis would be much more extensive by orders of magnitude that benefits likely (or possible) which could be achieved if QE is able to raise expectations inflationnistes.Dans his recent speech would be expected, Bernanke alluded to return EQ risk analysis, but it seems just ignored the existence of the rest world and any feedback on the United States.

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