The pressing issue of Too Big To Fail (TBTF), the notion that some companies are too interconnected and powerful to be allowed to fail, was the focus of remarks by Minneapolis Federal Reserve President Gary Stern Thursday. Speaking at Winona State University in Minnesota, Stern discussed how he and colleagues have been examining the TBTF problem in light of "unprecedented" events in the financial markets.
In prepared remarks, Stern said that he "strongly support(s)" the actions of the Federal Reserve during the financial crisis. Events of the past year have sparked unprecedented action by the U.S. central bank, including slashing the federal funds rate to 1 percent at its October 2008 meeting from 5.25 percent in September 2007, establishing new lending facilities, and allowing primary dealers access to the Fed's credit facilities.
I "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 said.
However, looking forward, Stern urged that special attention be paid to the "magnified TBTF problem." When examining the problem, Stern suggested that reforms laid out by he and colleagues at the Minneapolis Fed be considered.
"One criterion is that we consider reforms that would have helped prepare policymakers for the financial fallout they have faced over the last year or so, and it is my conviction that several reforms I have previously articulated fit that bill," he said.
Although he did not comment on the economic outlook, Stern did note that there has been "some important progress" in credit markets.
"We have seen some important progress in recent weeks in funding markets, due to these policy responses and due to related actions taken by other governmental institutions," he said.
"That said, significant strains continue in some markets and among financial institutions," Stern added. "It is critical that the steps we have taken succeed in restoring stability."
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