Fed's Kocherlakota: Must Craft Early Detection Crisis System

STONE MOUNTAIN, Ga. — The challenge facing regulators following the 2008 financial crisis is how to build an effective system that can detect financial crises in the making, rather than simply conducting an analysis after a meltdown has occurred, Minneapolis Federal Reserve Bank President Narayana Kocherlakota said Tuesday.

Moderating a panel at the Atlanta Fed's Financial Markets Conference, Kocherlakota said the question confronting regulators is that "as we move through time, what are the danger signals, what are we supposed to be thinking about, and how do we build the right kind of electronic eye (in the sky)?"

"I think ex-post there's a tendency to think that things are much more obvious than they are ex-ante," he continued.

Kocherlakota cautioned against such thinking, however, calling for focus to be on what are the devices, the detectors, the data analyses that regulators should be doing on an ex-ante basis to "make the right decisions."

"I think it's really important to be thinking about the ex-ante point of view — how do we detect the insipient prices — and then, given that we have better ways to detect these things, how do we build institutions that allow for the right responses," he said.

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