Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

Thank you, Mr. Chairman. Let me make just a few quick points. There is no way you can state these things with perfect clarity and conviction, but my sense is that we are in a period in which the sets of basic pressures we’ve been living with now for 12 months are intensifying again and that the scale of the balance-sheet pressures is in some ways greater now than it has ever been. That poses to us the same set of risks that we have been facing and debating but, in some sense, with greater consequence. I just want to underscore that, because I do not believe it is right to look at the constellation of things that we can observe and the use of our facilities and conclude that we are now at a point where we can start to say that we have materially reduced the scale of risks to the financial system and what those risks pose to the economy and our objectives. That is my judgment. I can’t prove that, but I think it’s important for you to hear that from me.

Second, as Bill said and the Chairman said, I think these proposals together offer only modest benefits relative to the risks. They slightly change the mix of forms of assurance that we’re offering. It is very hard to know whether that balance would be more compelling on net than what we have today, but these alternatives would not be before you today if there had not been a fair amount of thought put into that basic judgment. Neither the Chairman nor Bill Dudley oversold or overclaimed what these would produce.

I do not agree with the concern, although I understand it, that any refinements to our existing tools, themselves, increase the expected duration of our commitment to these exceptional things. In fact, I would take the opposite view. If we have things we could do that would materially reduce the risk that intensification of these dynamics would make our problems worse, we’re more likely to be able to exit earlier and more likely to get out of this without having to do other things that we think will be much more consequential and worse from a broad moral hazard and risk perspective. Now, I do not think that anybody could look at this mix of things—what we have done to date or what we propose to do—without deep reservations. The basic business we are in entails risk; and if we are not prepared to take any risk, then we are going to be limiting our ability to mitigate materially the range of basic things that we exist to help mitigate. I agree with you about the reservations, and I worry about all the things you guys raised and don’t feel that comfortable about them, but I think it is worth recognizing again that there is risk in everything we are doing.

I am very, very worried about the concerns that Janet raised and those echoed by your colleagues. I do not believe at this point that we have a viable framework of interaction with other primary supervisors that leaves us in a comfortable position with our existing 28-day facilities. If we are not prepared individually to deny access to 28-day loans for institutions at the margin, to scale back access, to scale back the maturity of those things, or to call those loans, then we have a big problem, and we have to figure out how to fix that problem. If we fix the 28-day problem, we will fix the 84-day problem, although at the margin it does add a bit to that stuff, but that can be mitigated with other things. But if we don’t fix it for 28 days to our basic mutual comfort, we have a real problem.

I was going to make one process suggestion, Mr. Chairman, because we cannot resolve those things today. I think that Tom Hoenig, as chair of the Committee on Regulations and Bank Supervision; Governor Kroszner; and I—I will nominate myself since I’m chairman of the Credit and Risk Management Committee—should get on the phone together and enter into a conversation and see if we can come up with a better set of choices and principles for how we individually deal with a question that is going to get much worse for us, which is marginal institutions slipping toward the point of nonviability, where ratings lag and so ratings just have no value in making these judgments.

I also agree with and want to echo the point that Jim Bullard made before he left, which is that we do need to talk more about our balance-sheet-sterilization, reserve-management kinds of options because none of us should be fully comfortable that we now have an adequate set of contingency planning measures in the context of potentially huge increases in demand at open facilities. But the Chairman, of course, recognizes this better than anybody else, and it is very important for us to walk everyone through the range of choices and their limits. I just want to end by saying, Mr. Chairman, that I think we have to defer to you on this. It’s worth reflecting on whether we think we have the balance right in this context, but this is going to be a matter of judgment, and it is going to be hard to give anyone a high degree of reassurance that we know exactly how this will be received and whether, as I said at the beginning, we are right in suggesting that the benefits are modest but significant relative to the risks. The basic choice we face, of course, is whether it’s better to take advantage of those benefits now or to withhold them knowing that we may face a point down the road when things get materially worse. We may face worse choices then that would raise even deeper reservations for all of us.

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