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Aggressive Fed policies were needed, district president says
PHOTO: Dr. Curt L. Anderson, professor of economics and director of the UMD Center for Economic Education, left, and Ninth District Fed President Dr. Narayana Kocherlakota.
Controversy has surrounded the Federal Reserve Bank ever since the 2008 liquidity crisis, the Minneapolis Fed president said last month in Duluth, but the central bank was absolutely justified in taking strong actions such as quantitative easing.
Narayana Kocherlakota said borrowing and lending markets had nearly seized, forcing the Fed to make loans, backed by a wide range of collateral, to its bank members.
“The style of what the Fed did was very much in line with what the Fed has done for almost two centuries,” he said, arguing that the scope of response was dictated by the size of the economic shock being experienced in the United States.
Kocherlakota’s public appearance resulted from a new Fed decision to have all of its top executives be more transparent.
“I think it’s been good for us to go out and talk about it and explain (Fed policy) as best as we can,” he said.
Kocherlakota fielded a broad range of monetary policy questions at an Oct. 29 news conference and an Oct. 30 town meeting, both hosted at UMD and co-sponsored by the Labovitz School of Business and Economics and National Bank of Commerce. Between those sessions, he met with local banking and business representatives to gather input about the local economy, information Kocherlakota later said he was not at liberty to share within the context of a one-on-one reporter interview.
He said the controversial Fed mechanisms to reduce interest rates, even marginally, are justified. Kocherlakota also endorsed tighter regulation of commercial banks.
“When you lower interest rates, there’s upward pressure on asset types of all kinds. There’s upward pressure on stock prices, there’s upward pressure on home prices. That allows more people to refinance on the margin, and that will stimulate demand,” he said. “Monetary policy is never a cure-all. It doesn’t lower unemployment back to where we want it to be overnight, but gets us there a little faster than we otherwise would.”
Kocherlakota argued regulators haven’t hindered banks from lending.
“I don’t think that the oversight was as strict as it could have been in 2006 or 2005, so we have to correct for that to get the right balance,” he said. A bigger problem for banks, he suggested, is the lack of qualified borrowers plus low lending demand by ones that are qualified, as shown by the low utilization rate on pre-approved corporate lines of credit.
“That’s a sign of low, low demand, not a sign of oversight pressing down” on banks, he said. “It would be good news in some sense if we had tension (about regulations), because it would mean the economy is improving a lot.”
Kocherlakota attempted to debunk suggestions that U.S. currency should again be backed by gold. If a gold standard had been in place during 2007, “It would have triggered debilitating deflation,” he said. The value of precious metals is rising, he said, because
“People are nervous about a number of things, and gold provides a sense of safety and security. Government debt (such as Treasury bills) also offers that same kind of safety and security.”
Meanwhile, he said the Fed’s quantitative easing policy isn’t creating worthless currency and won’t trigger inflation, as some critics contend.
“We’re taking on deposits from banks and using them to fund the purchase of longer-term securities. Those reserves are the license for money creation. Banks are not using those licenses right now. They don’t have any projects they feel are useful to lend to. We expect that to change, and then we’ll have to buy back their reserves or we’ll have to raise the amount of interest we pay on those reserves to tamp down the inflationary pressures that exist at that point,” Kocherlakota said. “Because we can pay interest on those reserves, it doesn’t really matter how big the balance sheet is anymore because it won’t create inflation,” he said.
When asked if the U.S. central bank was created by international bankers to create a “one world order,” as suggest by conspiracy theorists, Kocherlakota said the Fed is wholly owned by the American people and subject to the laws of Congress.
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