Investors welcomed Federal Reserve Chairman Jerome Powell’s speech at Jackson Hole on Friday, in which markets interpreted it as meaning that the central bank would not lose its support for the economy too quickly. However, not every speaker at each annual meeting gave cause for optimism.
Don Kohn, the former vice-chairman of the fund’s financial supervision, took the opportunity instead to warn of threats to the stability of the global financial system and called on regulators and legislators to act swiftly to address these issues.
“Addressing the risks to financial stability is urgent,” he said call Kansas City Federal Reserve’s annual Jackson Hole Economic Policy Symposium. “The current situation is fraught with unusually high risks of unexpected events, which could indeed lead to the financial system exacerbating shocks, putting the economy at risk.”
Kohn pointed out protocols the last Federal Reserve meeting, which showed that members of the bank’s interest rate committee saw “significant” vulnerabilities in the financial system as asset values rose to historic highs and government and private debt reached record levels relative to the size of the economy.
Despite these exaggerations, investors do not seem to be concerned, as evidenced by low interest rates in a wide range of
and corporate indebtedness “although private debt has grown disproportionately among lower-rated corporate borrowers,” he said.
Moreover, Kohn said the government appears to be in a bad position to respond to the recession, which could result from the bursting of the asset bubble or the debt crisis, given that the Federal Reserve is already pursuing an aggressive monetary stimulus. the federal government maintains a historically high budget deficit.
Kohn’s caution about the state of the economy and financial markets is shared among many high-level investors, with GMO co-founder Jeremy Grantham being one of the most prominent proponents of this view. In June, he argued The Fed should act as carefully as possible to deflate the prices of all assets as [it can], knowing that an earlier decline, however painful, would be less and less dangerous than waiting. ”
But unlike bubble watchers like Grantham, Kohn does not blame Fed’s policy on high debt and asset prices. Rather, he argues that the central bank must now prepare for a potential bubble that will burst through prudential regulation.
One strategy to isolate the US economy from the bursting of the asset bubble would be to demand large banks
to finance itself with less debt and more equity in the form of retained earnings or money collected from shareholders.
The federation’s so-called counter-cyclical capital buffer allows the regulator to change how much debt banks can take on, reducing levels in good times when banks can afford it.
“Increasing capital requirements during the boom could break asset prices,” said Jeremy Kress, a former attorney at the Federal Reserve’s Banking Regulation and Policy Group and a professor at Rossi Business School in Michigan. told MarketWatch in June. “Unlike other countries, the Federal Reserve has never turned on this discretion buffer. Maybe now is a good time to activate it,” Kress said.
Kohn called on the Fed to increase the countercyclical capital buffer that Randal Quarles, Fedal’s current vice-president of financial supervision, has resisted, telling industry in June that increasing the buffer “Unnecessarily reduce companies’ ability to lend to their customers.” Disagreements could soon turn political as President Joe Biden’s progressive allies has called him appoint either the President or the Vice-President of the Federation, who is more in line with the stricter rules for bank lending.
Kohn also targeted two creations of the Dodd-Frank Financial Reform Act introduced as a result of the recent financial crisis: the Financial Stability Board, which includes the heads of all major financial regulators, and the Financial Investigation Bureau, which was summoned to allow regulators to request information to maintain financial stability.
“I think most would agree that the performance of the two new units has been patchy,” Kohn said, arguing that the FSOC had proved unable to act quickly, while OFR had never used its subpoena power for fear of confusing the industry. He argued that the FSOC should be reorganized to give the Treasury Secretary more powers to act unilaterally and that the OFR should be given new clear powers to gather regular information from policy makers.
Kohn also called on Congress to give new powers to all federal financial regulators to make financial stability a priority.
“Currently, systemic risk is not something they have to consider in the performance of their duties,” he said. “They should be required to take a broader perspective in order to take into account and be responsible for the systemic consequences of their activities and the activities and companies under their supervision.”