Central banks around the world have taken a number of actions to restore confidence in the financial markets. The Fed has also taken many initiatives, including the following:
How will turmoil in global money markets affect the world economy? And what can central banks do to prevent a future credit crunch?
These questions were the focus of a research conference held May 29-30 at the Federal Reserve Bank of New York and cosponsored by CBS.
The conference was attended by more than 100 participants from academia, central banks, hedge funds, investment banks, rating agencies and regulators. Opening remarks were delivered by Timothy Geithner, president of the Federal Reserve Bank of New York. Dean Glenn Hubbard and Donald Kohn, vice chairman of the Board of Governors of the Federal Reserve System, delivered keynote speeches and offered policy perspectives for the road ahead.
Hubbard noted how the evolving credit crunch has placed the relationship between capital and liquidity into sharp relief. After reviewing the actions taken by the Fed, Hubbard noted that moral hazard is a risk of prompt central bank action in providing extraordinary liquidity support, especially in the present U.S. context. He also noted that the time for economy and accumulation of capital and liquidity is during “good states” before the crisis arrives. Finally, he added that the regulatory policymakers should carefully think through the links between capital and liquidity.
Many participants in the conference noted that the actions of the Fed might induce moral hazard and encourage risk-taking behavior in the future. The opening of the Fed’s discount window to investment banks came under considerable debate, given the excessive leverage and risk-taking behavior of the investment banks.
The Fed-assisted takeover of Bear Stearns by JPMorgan was also the subject of considerable discussion. The consensus was that the actions of the Fed saved deadweight costs associated with the potential bankruptcy of Bear Stearns but might have encouraged risk taking in the future.
The conference ended with a panel discussion of the credit crunch. One consensus was that securitization will now focus on core constituencies with standardized collateral, and highly customized securitized products will not find risk capital in the near future. Participants noted that the elevated levels of LIBOR indicate that the crisis is not over yet.
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- Drastic cuts of the discount rate;
- dramatic reductions of the target Fed funds rate;
- setting up special liquidity facilities, which allow banks to tap into the Fed’s balance sheet to acquire term funding; and
- opening up the discount window to investment banks and dealers.
How will turmoil in global money markets affect the world economy? And what can central banks do to prevent a future credit crunch?
These questions were the focus of a research conference held May 29-30 at the Federal Reserve Bank of New York and cosponsored by CBS.
The conference was attended by more than 100 participants from academia, central banks, hedge funds, investment banks, rating agencies and regulators. Opening remarks were delivered by Timothy Geithner, president of the Federal Reserve Bank of New York. Dean Glenn Hubbard and Donald Kohn, vice chairman of the Board of Governors of the Federal Reserve System, delivered keynote speeches and offered policy perspectives for the road ahead.
Hubbard noted how the evolving credit crunch has placed the relationship between capital and liquidity into sharp relief. After reviewing the actions taken by the Fed, Hubbard noted that moral hazard is a risk of prompt central bank action in providing extraordinary liquidity support, especially in the present U.S. context. He also noted that the time for economy and accumulation of capital and liquidity is during “good states” before the crisis arrives. Finally, he added that the regulatory policymakers should carefully think through the links between capital and liquidity.
Many participants in the conference noted that the actions of the Fed might induce moral hazard and encourage risk-taking behavior in the future. The opening of the Fed’s discount window to investment banks came under considerable debate, given the excessive leverage and risk-taking behavior of the investment banks.
The Fed-assisted takeover of Bear Stearns by JPMorgan was also the subject of considerable discussion. The consensus was that the actions of the Fed saved deadweight costs associated with the potential bankruptcy of Bear Stearns but might have encouraged risk taking in the future.
The conference ended with a panel discussion of the credit crunch. One consensus was that securitization will now focus on core constituencies with standardized collateral, and highly customized securitized products will not find risk capital in the near future. Participants noted that the elevated levels of LIBOR indicate that the crisis is not over yet.
More...