While tighter regulation of financial institutions is needed, Minneapolis Fed President Gary Stern on Thursday warned against the pitfalls of over-regulation.
Stern said the Fed must avoid "excessive reliance" on conventional regulation, asking for more than can be delivered, along with excessive regulation that could cause the financial sector to become inefficient and hinder market performance.
"If the rules, although well intentioned, are too onerous, the resulting financial system may be very safe, but simultaneously it may be unnecessarily costly for households and businesses to obtain funding for worthwhile projects," Stern said during a speech to the Economic Club of Minnesota.
"This is not a desirable outcome," he said.
Stern also said the U.S. recession will likely carry on through to mid-year, with an initial recovery subdued. He said credit strains will impair the economy "for some time," but that it is unclear if more steps are needed to restore stability, and that a return to growth is likely not that far away given the policies in the U.S. and abroad.
He also said the threat of deflation should diminish as growth picks up, but that concerns about future inflation and deflation risks can't be ignored.
As well, the ample time to withdraw excess liquidity is "appropriate" and it is critical for future banking policies to address the "too big to fail issue", the Fed president added.
By Stephen Huebl and edited by Sarah Sussman
©CEP News Ltd. 2009