So, Are We In Crisis?

Federal Reserve Governor Randall Kroszner addressed the Federal Reserve Bank of San Francisco's Conference on the Asian Financial Crisis of ten years ago.  But, his remarks began with "reinforcing" remarks made last week by Chairman Bernanke on the recent turbulence in financial markets".  The folks at the Fed acknowledge a "fairly sharp downturn in housing markets" and "growing investor concerns about mortgage credit performance, particularly with subprime mortgages", as well as the possibility that "If current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the broader economy".  Here's the bright side:  "Fortunately, this recent period of turbulence in financial markets has occurred at a time when U.S. commercial banks are strongly capitalized, reflecting years of robust profits".

The meat of Governor Kroszer's talk related to his recent study of banking crises.  He sought to provide a framework for analyzing the impact of banking crises on real economic activity, based on analysis of crises originating in various countries during the past 25 years. Kroszner offered three insights for policymakers:  

1.  the importance of a healthy banking system,

2.  the impact of sound macroeconomic policy, and

3.  the benefit of high levels of transparency and disclosure. 

He ended with the caveat that no two crises are alike and yesterday's solutions may not cure today's problems. 

(ag) Sept. 11, 2007, in Economy