“My forecast is actually for some improvement beginning around the middle of the year,”

TO BE NOTED: From Real Time Economics:

"By Brian Blackstone

The U.S. economy should find its footing around the middle of the year even after another “significant” contraction in the first quarter, Federal Reserve Bank of Minneapolis President Gary Stern said Tuesday.

Still he warned in an interview with The Wall Street Journal and Dow Jones Newswires that, when the recovery does come, it will be hard to discern right away.

“My forecast is actually for some improvement beginning around the middle of the year,” Stern said. “That doesn’t mean we’re going to take off to exceedingly rapid growth.”

But the inevitable worries about double-dip recession won’t get a very receptive response from Stern, who is in his third recession since becoming head of the Minneapolis Fed 24 years ago. His tenure, the longest of any current Fed official, spans the chairmanships of Paul Volcker, Alan Greenspan and Ben Bernanke.

“One of the things I’ve observed coming out of the last two recessions is that there’s always a lot of concern about (how) ‘this is a very fragile recovery’” and worries that “if the Fed doesn’t do just the right thing…the whole thing will collapse again,” he said, leading to talk of “double dips, triple dips.”

Stern knows from experience how hard it is to spot the trough of a business cycle. Recalling his days as the Minneapolis Fed’s research director in 1982, he said that he told the Minneapolis Fed’s directors that there was “no sign of the recession ending” in November of that year. Of course, the National Bureau of Economic Research eventually determined that the recession did in fact end that
same month.

Even if his recession-dating record isn’t spotless, Stern knows his history, and “if you look at history I don’t know if we’ve ever had a double dip,” with the possible exception of 1980 and 1982, he said.

Still, Stern expects the employment market to play out this time much as it did coming out of the last two recessions in 1991 and 2001, with job growth slow to catch up to rising output.

Stern disputes comparisons between the current economic downturn and the Great Depression.

To be sure, “these are in my judgment historic times in the financial sector,” Stern said. Noting that there used to be five major, standalone investment banks in the U.S., Stern said, “if you had told me 13 months ago we were going to have zero at the end of March, I’d have said no way.”

On the other hand, “I wouldn’t rush to the Depression when it comes to the economy for comparisons,” Stern said.

“For those of us who were around for ‘80-’82 and ‘73-’75, what’s happening in the economy and a lot of the rhetoric that goes with it rings more familiar,” he said.

Stern also said that he sees some signs that credit market conditions have improved since late last year, though the gains are of the uneven “two steps forward, one step back” variety."

The FDIC resolution regime, he says, does not put creditors at banks at sufficient risk of facing losses

TO BE NOTED: From Real Time Economics:

"By Sudeep Reddy

Gary Stern, president of the Federal Reserve Bank of Minneapolis, has had the ultimate I-told-you-so year at the central bank.

His book, “Too Big To Fail: The Hazards of Bank Bailouts,” addresses the problems that arise when banks become too large, create risks to the financial system and then require government rescues to save the economy.

Stern

The book originally came out five years ago. That’s at least four years before bailouts of Bear Stearns, Citigroup, Bank of America, AIG and hundreds of banks that have received government money to help stay afloat.

In a speech at the Brookings Institution today, Stern kicked off his remarks (titled “Better Late Than Never”) with this line: “Destiny did not require society to bear the cost of the current financial crisis.”

Brookings this year is re-releasing the book (by Stern and co-author Ron Feldman), but Stern doesn’t seem terribly confident of the prospects for addressing the too-big-to-fail problem quickly. “I am quite concerned that policymakers may double-down on previous decisions,” he says, and some ideas in the current environment “will waste valuable time and resources.”

Stern offers a three-point approach for reducing the size and scope of spillovers from a firm’s failure to prevent the need for intervention:

1) Early identification: Central banks and other bank-supervision agencies can conduct failure simulation exercises to identify problems around derivatives contracts, resolution regimes and overseas operations. One option would be to require too-big-to-fail firms to prepare documentation of their ability to enter the functional equivalent of a prepackaged bankruptcy.

2) Prompt corrective action: Bank supervisors would take actions against a bank as its capital falls below certain triggers. “Closing banks while they still have positive capital, or at most a small loss, can reduce spillovers in a fairly direct way,” he says.

3) Communication: Policymakers must communicate that creditors may be put at risk of loss.

The re-release of Stern’s book comes as the Obama administration, the Federal Reserve and Congress discuss a new resolution regime for major financial institutions (similar to the FDIC’s power over banks).

While Stern says society will be better off with it, he doubts that approach “will correct as much of the [too-big-to-fail] problem as some observers anticipate.” The FDIC resolution regime, he says, does not put creditors at banks at sufficient risk of facing losses. “A new regime will not, by itself, put an end to the support we have seen over the last 20 months.”