While the outlook is “extremely uncertain,” the “fragility of the financial system and the weakness in real activity” are “likely to persist for a while,” Federal Reserve Board vice chairman Donald L. Kohn told the Cato Institute yesterday.
“The current situation is so severe that it calls for careful review of how such a crisis evolved and how we can prevent a similar situation from happening again,” he said, according to text of his prepared remarks released by the Fed.
Kohn added he is not convinced central banks should try to “check speculative activity through tighter monetary policy whenever they perceive a bubble forming.”
“The recent experience may have made us a bit more confident about detecting bubbles, but it has not resolved the problem of doing so in a timely manner,” he said. “Nor has it shown that small-to-modest policy actions will reliably and materially damp speculation. For these reasons, the case for extra action still remains questionable, despite our having learned that the aftermath of a bubble can be far more painful than we imagined.”
