We've just finished up monetary policy in class. One of the last things we
covered was how stimulative monetary policy could become less effective when
banks want to lend less and consumers want to borrow less. Basically you can't
push on a string.
While I was describing this in class of Friday, the President of the Federal
Reserve Bank of San Francisco was explaining it to other bankers at the Fourth
Summit Meeting of Central Banks on Inflation Targeting in
Why hasn't aggressive monetary accommodation fueled a rapid recovery
in economic activity? I will focus on three powerful currents that have
slowed the pace of recovery. The first is the massive destruction of wealth
crisis brought about by the declines in house and stock prices. The second
is the severe tightening of credit resulting from the financial accelerator
mechanism, triggered by the decline in real estate prices and the upsurge
in residential foreclosures. The third is heightened uncertainty regarding
sovereigns and the overall health of the financial system. These renewed
concerns about the financial system have diminished the appetite for risk
and sent investors
fleeing to safe assets, such as U.S. Treasuries.
As they say, read the whole thing.