"Kohn did say that certain Fed programs including currency swap arrangements with other central banks as well as credit auction facilities “might be part of our permanent toolkit.”
Much of Kohn’s remarks dealt with past innovations in the financial sector and their effect on productivity and macroeconomic stability.
“Certainly, as financial innovations accelerated, we had solid reasons to believe that those advances were contributing to the pickup in overall productivity and, possibly, to the moderation in fluctuations of economic activity,” Kohn said.
While those innovations “did produce lasting gains,” Kohn noted that “these gains were clearly accompanied by increasing vulnerabilities,” especially in the housing market and the mispricing of risk.
“Ironically, an important contributor to these misalignments in spending and lending was the long period of economic expansion and low inflation over the past 25 years, interrupted only a few times by mild recession,” Kohn said.
“This good economic performance provided skewed data and bred complacency,” Kohn said.
Meanwhile, economic models used by central banks “are clearly inadequate” when it comes to the economic effect of the expansion and contraction of credit, Kohn said.
He also said it is unclear whether higher official interest rates a few years ago would have done anything to prevent the speculative bubble in housing or the erosion of lending standards. –Brian Blackstone
Here's my comment:
Comment by - November 12, 2008 at 11:41 am
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“This good economic performance provided skewed data and bred complacency,” Kohn said.”
For all I know this is true, but it sounds to me like saying we drove for miles and miles and miles and then we hit a wall. The skewed data bred complacency and so we stopped looking out the windshield.
Most of the proposed solutions like higher capital standards, etc., are very basic. I just don’t buy this line of explanation.