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Stern is a voting member of the Federal Open Market Committee that sets national monetary policy and is an influential figure in America’s economy. He co-authored a book in 2004 called “Too Big to Fail: The Hazards of Bank Bailouts.” He spoke to WSU faculty and community members at a luncheon before giving a lecture-like speech in a crowded Performing Arts Center.
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Gary Stern, President of the Federal Reserve Bank of Minneapolis, speaks at Winona State University on Thursday at a luncheon with local business people concerning the country’s economy.
(Photo by Melissa Carlo/Winona Daily News)
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Stern recommended policies be enacted to lessen the fallout when large institutions fail, including closing banks that still have capital before they go under and identifying early what institutions may be in danger.
If the “net of connections” of large firms had been understood in 2006 instead of now, steps could have been taken to reduce interconnectedness and the spread of risk to the country’s markets, he said.
“Such preparations may not have prevented the need for safety net expansion, but would have raised the odds that more narrow measure would have sufficed,” he said.
Those policies may have also allayed adverse effects to financial institutions after the collapse of the subprime lending market, he said.
But he insisted the recent federal bailout was the appropriate action.
“I also strongly support the actions the Federal Reserve has taken in response to these events, even with the undesired side effect of intensifying the too big to fail problem,” he said. “Extraordinary times call for extraordinary actions. This is, in my opinion, a historic episode.”
Some in the audience came less to learn from Stern but to question the nation’s financial policies and express their displeasure. Jon Heer, a computer science major at WSU, wore a T-shirt in protest of the Federal Reserve and repeatedly challenged Stern’s views and policy proposals during a question-and-answer period.
“The part he didn’t comment on is that the banking industry tends to actively find people who will make bad decisions,” Heer said. “I thought his answers were sort of illusionary.”
Stern compared today’s problems with a recession in the early 1990s. The economy recovered over a period of 12 to 36 months — a possible indication for how long it may take before today’s economy recovers. Some indicators show credit and financial markets are slowly starting to normalize, he said.
“It will take awhile for the headwinds to abate,” he said.
That hint at a timeframe was the first Ron Nelson, president of Merchant’s Bank, has heard from the Fed since the massive bailout of financial institutions by the federal government. The American economy will rebound eventually, because of its diversity and resiliency, said Nelson, who heard Stern’s speech.
“I expected him to say that it wouldn’t’ be an overnight thing,” he said. “But he could have said seven to 10 years.”
Jon Heer wrote on Nov 18, 2008 11:19 AM: