Today, Federal Reserve Vice Chairman Donald Kohn spoke at a forum titled "Great Decisions in the Economic Crisis," held at the College of Wooster. He praised several of the actions the government has taken to address strains in "funding markets, tight credit conditions, balance sheet weaknesses" and overall economic weakness, including implementing the Term Asset-Backed Securities Loan Facility to restart the securitized loan market, the Federal Reserve's recent monetary policy action to support market functioning and reduce interest rates in the mortgage and private credit markets through the commitment to purchase an additional $750 billion in agency mortgage-backed securities, and the Capital Purchase Program designed to inject capital more broadly into the banking system. Although Vice Chairman Kohn lauded the actions taken by the government thus far, he cautioned that these policies are "subject to a number of risks" including:
- Will the accompanying deterioration in economic conditions lead to increases in protectionism and financial nationalism, resulting in "great inefficiency and a worse outcome for all"?
- Are the government's policies and programs "inadvertently re-creating many of the structures and behaviors that contributed to the crisis," such as providing "too much leverage as markets are calling for deleveraging" and "supporting economic activity by further increasing government deficits at a time when the longer-term fiscal outlook is already troubling"?
- Are the institutions that are receiving taxpayer money using the money in the most efficient way to address the intended problem?
- Are the policies being put in place "sufficient to restart the flow of credit, or will the government need to do more?"