Ben Bernanke testifies this morning (10am) – vote now on The Hearing for the line of questioning you’d like the Joint Economic Committee to pursue. Or write in your own question.
I’m sorry…. Deflation?
Are you sure you didn’t mean to write: “is there still a serious risk if inflation.”
One question for Dr Bernanke
If gold was to break above its previous highs in a very decisive manner – would he find that discomforting?
Would the market be sending some kind of signal – and if so how would he interpret it?
Recently a discussion started about how to reform the Federal Reserve Banking System. My first question would be if Mr. Bernanke thinks that such a reform is necesary to finally restore confidence in financial markets. My second question would be if he thinks that major regulatory overhaul will be sufficient to prevent the current crisis from reoccuring.
During one of Bernanke’s testimony sessions last year, Ron Paul asked him about meetings and discussions between Bernanke and other central bankers around the globe.
As he often does, Paul went on a bit about “printed money” and “honest money” and so forth, culminating with a question: “Does the subject of gold ever come up in these discussions with other central banks?”
Bernanke replied, “Only in the context of the sales the central banks are planning.”
(Reposting my question here in case any “regulars” have any thoughts.)
Bagehot wrote that during a liquidity crisis, central banks should lend freely against good collateral at a penalty rate.
(“Freely” because you must never starve a panic; “against good collateral” to avoid taking on credit risk; and “at a penalty rate” to prevent moral hazard.)
I see the free lending. One might argue about the quality of the collateral, but we’ll let that slide.
My question is: Whatever happened to the penalty rate? Why are the Fed’s liquidity provision facilities being provided at near-zero rates of interest?
Is the intent truly to “ease credit conditions”, or is it to perform a back-door recapitalization of the banking system?
““at a penalty rate” to prevent moral hazard”
I believe this is incorrect. The reason that Bagehot posited a “penalty rate” was to protect the central bank’s gold supply, since the bank was operating on a fixed exchange rate and could be forced off of its peg, if it did not husband its resources.
I think Bagehot’s objection would be that the Fed is prolonging the crisis by lending against dubious collateral and protecting banks from failure. There’s a section in Lombard Street which states outright that the government should never support a bad bank, because it will prevent a healthy system from developing. Bagehot never dreamed of system that would prevent bank failures — especially of any bank that had issued some questionable loans.
Another way of reading the “penalty rate” item is that the goal is to bankrupt the most dubious banks as quickly as possible, so the banking system as a whole can get over the failures. A three month crisis was extremely long in Bagehot’s day. I don’t think that this is a practical policy in a modern banking system however.
Is cash the new asset bubble?
Is the dollar going to loose value? If so, when.
When the inflation will start ( +7%) ?
If the MBS’z still arent performing in 2yrs time who is going to manage the assets in repo?
Also in 2 yrs if much of the collateral that the FED has accumulated to date is of low quality or economically impaired. Is the FEDz ballance sheet going to impair its ability to control the ramifications of its emergency facilitys to the point that a better plan than say Bear,Lehman,TARP,BofA,Merril,PPIP is not possible.
Is there any chance that we can just do this all again and again and again with the money thing if the monetary policy of the United States is purely institutional posturing
I would’ve asked Mr. Bernanke the following:
When should we expect the conclusion of Basel III (not II, but III)?
And what exactly it is going to look like?
The banking community’s decades-long tinkering with Basel I in pursuit of capital liberalization ran the system aground. Which is why, in my humble opinion, lasting and sustainable confidence –- not the looter’s high that trillions in Fed backing of debt and guarantees has educed -– will not and can not return until (i) the new rules are clearly delineated and recognized by the public, across social classes irrespective of consumer sophistication; and (ii) all financial players can drink from the same well without suffering dysentery.
Note to Mr. Simon Johnson: Love your blog, but I have a request: Would you please write a post (think, “Basel Accord For Beginners”) that explains the role of catalyst Basel II played in the crisis? It would explain so much to so many. Thank you.
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