San Fransisco Fed Is Not My Type Of Bank

Yesterday I talked about how much I loved the Dallas Fed, because it is concerned with things like manufacturing, transportation and commercial real estate.

Today, I want to talk about the San Fransisco Fed, which is concerned with things such as exchange rates, international trade and policy.

The SF Fed recently published a piece on monetary policy in Korea and Japan. Much like everyone else, there was talk of the Lost Decade.

I'd like to wrap these remarks up with some reflections on what Japan's experience during its "lost decade of growth" which began in the early 1990s may have to tell us about handling the financial crisis and recession here in the U.S. Needless to say, this was a frequent topic of conversation, and, also needless to say, some issues were the subject of debate.

In terms of Japan's past conduct of monetary policy, a major lesson is that, when policy interest rates approach their lower bound and there is fear of deflation, it is important to make clear and strong commitments about the future stance of policy. The Bank of Japan did this by issuing statements that it would maintain its zero interest rate policy until inflation reappeared. The central bank also engaged in quantitative easing from 2001-2006, but it was unclear if that boosted economic activity much.

In terms of the massive fiscal stimulus of the 1990s, people generally seem to agree that it failed to raise real growth and succeeded only in raising public debt to excessive levels. One possible explanation is that spending went to activities that did not yield much "bang for the yen." Another explanation is that Japanese citizens may have believed in the government's long-term commitment to balance its budget; in that case, they would expect any current fiscal stimulus to be undone in the near future through higher taxes, prompting households to save rather than spend.

Regarding the current financial turmoil, our contacts suggested several approaches for resolving it, some of which, of course, we have already implemented. One is to provide a safety net for the financial system during a crisis by extending deposit insurance and to enhance interbank liquidity by guaranteeing debt. Another emphasizes the importance of the government's role in recapitalizing the banks, provided that there are conditions about reducing risky lending and that the government stands to gain from future bank profits.

The SF Fed seems to toe the party line (We love the TARP so much and everyone is going to be OK if they only wish hard enough *hugs*.)

The Dallas Fed (at least to me) is more interested in telling it like it is. Plus they use graphs and math, and I appreciate it.