TBTF: Too Big To Fail
Today, Cleveland Fed Head Pianalto said the Fed has a responsibility to fund banks in stress.
On the other hand... From the coauthor of Too Big To Fail, The Hazards of Bank Bailouts. He is the longest serving district bank president or Fed governor,
and the only member of the Federal Open Market Committee to serve with three Fed chairmen.
Federal Reserve Bank of Minneapolis President Gary Stern:
While governments cannot and should not uniformly avoid public support for creditors of failing banks,
they should seek to minimize that support because of the distortions it produces.
Such public support—even when it passes a benefit-cost test at the time of provision—
encourages future risk-taking by institutions whose creditors expect to benefit from future support.
Such risk-taking can even contribute to the specific financial conditions that prompt further government support.
We simply cannot allow widespread perceptions of government support to pervade the financial system.
On Targeting Asset Bubbles... While I have not yet changed my opinion that asset-price levels should not be an objective of monetary policy,
I am reviewing this conclusion in the wake of the fallout from the decline in house prices and from the earlier collapse of prices of technology stocks.
it may well be that containing damage as and after prices correct is, in the end, the preferable alternative.
It is well within the realm of possibility for policy makers to build support for, and at least obtain tolerance of, policies designed to address excesses.
actions to limit or reduce asset prices quite likely would have implications for economywide growth and employment.
But then, so, of course, do asset-price collapses.
Hattip to Bloomberg.
On the other hand... From the coauthor of Too Big To Fail, The Hazards of Bank Bailouts. He is the longest serving district bank president or Fed governor,
and the only member of the Federal Open Market Committee to serve with three Fed chairmen.
Federal Reserve Bank of Minneapolis President Gary Stern:
While governments cannot and should not uniformly avoid public support for creditors of failing banks,
they should seek to minimize that support because of the distortions it produces.
Such public support—even when it passes a benefit-cost test at the time of provision—
encourages future risk-taking by institutions whose creditors expect to benefit from future support.
Such risk-taking can even contribute to the specific financial conditions that prompt further government support.
We simply cannot allow widespread perceptions of government support to pervade the financial system.
On Targeting Asset Bubbles... While I have not yet changed my opinion that asset-price levels should not be an objective of monetary policy,
I am reviewing this conclusion in the wake of the fallout from the decline in house prices and from the earlier collapse of prices of technology stocks.
it may well be that containing damage as and after prices correct is, in the end, the preferable alternative.
It is well within the realm of possibility for policy makers to build support for, and at least obtain tolerance of, policies designed to address excesses.
actions to limit or reduce asset prices quite likely would have implications for economywide growth and employment.
But then, so, of course, do asset-price collapses.
Hattip to Bloomberg.
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