Investors on Friday applauded Federal Reserve Chairman Jerome Powell’s Jackson Hole speech, and markets interpreted it to mean the central bank would not end its support for the economy too quickly. But not all the speakers at the annual meeting gave reason for optimism.
Don Kohn, the Fed’s former vice president of financial oversight, seized the opportunity to warn of imminent risks to the stability of the global financial system and called on regulators and lawmakers to take swift action to address those concerns.
“It is urgent to address the risks to financial stability,” he said during a speech at the annual Jackson Hole Economic Policy Symposium of the Federal Reserve Bank of Kansas City. “The current situation is full of … unexpectedly unexpected risks, which, if they occur, can cause the financial system to amplify the shocks, putting the economy at risk.”
Kohn noted the minutes of the most recent Federal Reserve meeting, which indicated that members of the bank’s interest rate fixing committee saw that there were “notable” vulnerabilities in the financial system, as the securities of assets have risen to all-time highs and public and private debt reached near-record levels relative to the size of the economy.
Despite these excesses, investors do not seem concerned, as evidenced by low interest rates on a wide range of governmental TMUBMUSD10Y,
and corporate debt “even though there has been a disproportionate increase in private debt among business borrowers with a lower score,” he said.
In addition, Kohn said, the government appears to be in a poor position to respond to an economic recession that could result from the bursting of an asset bubble or a debt crisis, as the Federal Reserve already has a stimulus. aggressive monetary policy, while the federal government maintains a historically high budget deficit.
Kohn’s concern about the state of the economy and financial markets is shared among many high-profile investors, with GMO co-founder Jeremy Grantham one of the most prominent proponents of this view. In June, he argued that the Fed “should act to deflate all asset prices so carefully.” [it can], knowing that a previous decline, however painful, would be less and less dangerous than expected. ”
However, unlike bubble observers like Grantham, Kohn does not put the blame on the high price of debt and assets at the foot of Fed policy. Rather, he argues that the central bank must now prepare for a potential bubble to burst through prudential regulation.
One strategy to isolate the U.S. economy from the bursting of an asset bubble would be to require major XLF banks,
to be financed with less debt and more own resources, in the form of retained earnings or money obtained from shareholders.
The Fed’s so-called countercyclical capital buffer allows the regulator to change the amount of debt banks can take on, lowering the level at good times when banks can afford to do so.
“By raising capital requirements during boom periods, this could break the prices of fugitive assets,” Jeremy Kress, a former attorney for the Federal Reserve’s banking regulation and policy group and a professor at the Ross School of, told MarketWatch Michigan business. in June. “The Federal Reserve, unlike other countries, has never activated this discretionary shock absorber. Maybe now may be a good time to activate it,” Kress said.
Kohn urged the Fed to increase countercyclical buffer, which Randal Quarles, the Fed’s current vice president of financial oversight, has resisted doing, and told the industry hearing in June to increase memory intermediate “would unnecessarily reduce the ability of companies to provide credit to their customers.” The disagreement could soon become political, as President Joe Biden’s progressive allies have asked him to appoint a Fed chairman or vice chairman who is more susceptible to tougher rules on bank lending.
Kohn also pointed to two creations of the Dodd-Frank Financial Reform Act instituted in the wake of the latest financial crisis: the Financial Stability Oversight Council, which comprises the heads of all major financial regulators, and the Bureau of Investigation. Financial, which was equipped with subpoena power so that regulators could demand the information necessary to maintain financial stability.
“I think the majority would agree that the performance of these two new entities has been poor,” Kohn said, arguing that FSOC has proven incapable of acting quickly, while the OFR has never used the its power of citation for fear of cluttering feathers in the industry. He argued that the FSOC should be reorganized to give the Secretary of the Treasury more power to act unilaterally and that the OFR should be given a clear mandate to regularly gather the information needed by policymakers.
Kohn also called on Congress to pass a new mandate for all federal financial regulators to make financial stability a priority.
“Right now, systemic risk is not something they need to take into account when carrying out their missions,” he said. “They should be required to broaden their perspective to take into account the systemic implications of their actions and the activities and companies they supervise and take responsibility for doing so.”