Another “ignoramus”

Has the experience of the crisis changed your view of the central bank policy toolkit?

Governor Stein: Yes, on two dimensions. First, on the toolkit insofar as it has to do with crisis prevention; and second, insofar as it has to do with what you do in the aftermath, when the economy is very weak and you are stuck at the zero lower bound.

Let me focus on the first of these two—what we’ve learned about crisis prevention. Speaking broadly, the tools of central banks can be classified into monetary policy, lender of last resort, and regulation. You might argue that – since we’ve learned that financial crises are more damaging then we had previously thought – we should use each of these tools to do more in the way of either crisis prevention or crisis mitigation. To the extent that there exists a consensus, this is surely true with respect to regulation. That is to say, I think that everyone basically believes that regulation in the period leading up to the crisis was inadequate and that we need to do better.

The other two are a little more interesting. You might have thought that one lesson from the crisis is that central banks acting as a lender of last resort was an important and powerful part of the response.

And the second is with respect to monetary policy. If you take the view that we should be working with all of our tools to mitigate crises, should monetary policy be drawn into trying to reduce the odds of a crisis, or more generally, should it concern itself with buildups of risk in financial markets ex ante? I don’t know if there’s a consensus lesson there, but clearly the question has come more to the fore.

To him, the Fed is either a “fire preventer” or a “firefighter”. He sure does not think the Fed´s main (sole?) function should be to provide Nominal Stability!


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