READ: The Danger of Too Loose, Too Long With an improving labor market and an uptick in inflation, the danger now is to wait too long to tightenRichard W Fisher 07-27-14 WSJ
“I have grown increasingly co. ncerned about the risks posed by current monetary policy. First, we are experiencing financial excess that is of our own making. There is a lot of talk about “macroprudential supervision” as a way to prevent financial excess from creating financial instability. But macroprudential supervision is something of a Maginot Line: It can be circumvented. Relying upon it to prevent financial instability provides an artificial sense of confidence”.
“There are some who believe that “macroprudential supervision” will safeguard us from financial instability. I am more skeptical. Such supervision entails the vigilant monitoring of capital and liquidity ratios, tighter restrictions on bank practices and subjecting banks to stress tests. All to the good. But whereas the Federal Reserve and banking supervisory authorities used to oversee the majority of the credit system by regulating depository institutions, depository institutions now account for no more than 20% of the credit markets”.
Mr. Fisher is president of the Federal Reserve Bank of Dallas. This article is excerpted from his speech on July 16 at the University of Southern California’s Annenberg School for Communication & Journalism.
Low interest rates and abundant availability of credit in the nondepository market, the bond markets and other trading markets have spawned an abundance of speculative activity
“The Fed has been running a hyper-accommodative monetary policy to lift the economy out of the doldrums and counteract a possible deflationary spiral. Much of what we have paid out to purchase Treasurys and mortgage-backed securities has been put back to the Fed in the form of excess reserves deposited at the Federal Reserve banks. As of July 9, $2.517 trillion of excess reserves were parked on the 12 Fed banks’ balance sheets, while depository institutions wait to find eager and worthy borrowers to lend to. But with low interest rates and abundant availability of credit in the nondepository market, the bond markets and other trading markets have spawned an abundance of speculative activity. ” — Fabian T. Pfeffer, the University of Michigan professor who is lead author of the Russell Sage Foundation study.