Speaking at Winona State University, Minneapolis Fed President Gary Stern (voter) said the top issue for policy-makers is the "too big to fail" problem.
"Recent events have been unprecedented. I'm skeptical of claims that the Federal Reserve or anyone else should have foreseen the situation as it actually played out," said Stern. "I also strongly support the actions the Federal Reserve has taken in response to these events, even with the undesired side effect of intensifying the TBTF problem."
Stern suggests an approach of "Systemic Focused Supervision", which focuses on the early identification of a "too big to fail firm", followed by a preemptive correction of the problem, such as closing failing banks while they still have capital to limit losses, and increased communication between borrowers and lenders.
Although significant strains continue in the financial markets, Stern also pointed out that progress has been made in money markets.
By Erik Kevin Franco and edited by Stephen Huebl
©CEP News Ltd. 2008