The global economic crisis is likely to persist for some time and put into question how policy will have to change to prevent other such occurrences down the road, according to Fed Vice-Chairman Donald Kohn speaking at the Cato Institute's 26th Annual Monetary Conference on Lessons from the Subprime Crisis on Wednesday. However, monetary policy may not be the solution.
"¥ it is evident from the current crisis that much has to change on the regulatory front. Governments around the world face the challenge of revamping the regulatory structure governing financial markets," said Kohn. "And changes in this area, I believe, will prove to be the most necessary and effective at reducing the odds on another severe financial crisis."
In a speech titled, "Monetary Policy and Asset Prices Revisited," the central banker went on to say that the costs of the housing market collapse turned out to be much greater than he expected, but the losses have not changed his views on targeting asset bubbles through monetary policy.
"The severe fallout may indicate a larger potential gain than I had anticipated to leaning against excess exuberance in asset markets," he said. "However, realizing that potential rests on meeting my two other conditions as well--the timely identification of the bubble, and the ability of a central bank to materially influence the trajectory of the speculative component of asset prices."
The problem lies in the effectiveness of monetary policy to affect asset bubbles, he added, and although interest rates play an important role on the mortgage market in the United States, it is difficult to gauge the potential side effects of rate manipulation.
By Erik Kevin Franco and edited by Stephen Huebl
©CEP News Ltd. 2008