Fmr Fed Governor - Interview

(BEGIN VIDEOTAPE)

MATHISEN: The Kansas City Fed's annual Jackson Hole symposium comes as debate over the Central Bank's monetary policy and stimulus programs nears a crescendo. Joining us is Steve Liesman.

He's with Randy Crosner, the former Federal Reserve Governor and professor of economics at the University of Chicago's Booth School of Business.

Good morning, Steve.

LIESMAN: Hey, Tyler. You know, I've been coming here for about six years. And I can't remember a time when the markets have indeed -- the world has been wound up so tight on a Kansas City Fed meeting in August.

And I think the reason is the uncertainty over monetary policy. Everybody will be watching Fed Chairman, Ben Bernanke's speech tomorrow morning. And I can tell you that -- I mean, my understanding is he's going to offer an economic outlook which the market is pretty much starved for.

And if you're going to explain the Fed's response so far and offer the menu of options he's probably already offered, well not that there's anything new on the table, remains unclear.

One quick thing before I get to our guest, Randy Crosner, Alan Blinder has an interesting on Fed (ph) in the Wall Street Journal where he mentions that menu of options and adds one more.

The idea of negative interest rates that the Fed should charge banks, a fee for keeping excess reserves on account at the Federal Reserve.

For commentary on that and all of the other stuff going on here at the Kansas City Fed annual symposium, I'm joined by former Fed Governor Randy Crosner.

Randy, thanks for joining us.

CROSNER: Great to see you.

LIESMAN: Stakes seem pretty high this time around and it seems like it's because there's a lot of uncertainty over Fed policy right now.

CROSNER: It's not just over Fed policy. It's also the economy. And we've seen some very choppy data over the last few months. We've seemed to coming back reasonably steadily. But now, the data don't suggest that. And so, there's a lot of uncertainty about the economy and some uncertainty about how the Fed's going to respond.

LIESMAN: You sat around the table -- if you were sitting around the table, what would you recommend the Fed would do right now?

CROSNER: Well, I think the move that was taken at the last FOMC meeting was just right because what it was able to is bring down the long rates. Look what's happened to the ten-year rates, come down quite significantly.

And so I think that's going to have a big boost down the line.

LIESMAN: I should point out you didn't get the dress down memo that we sent earlier tonight. But given that's the case, the markets didn't think that move was just right. Why do you think the market reacted so negatively to what the Fed did?

CROSNER: Well, I think you have to separate out the equity markets from the fixed income markets. And the fixed income markets moved in a way that I think makes a lot of sense -- brought the rates down.

That's going to help re-fi. That's going to help make it less expensive for people to borrow and for our corporations to borrow. The equity markets have become very volatile. But I think that's partially because of the underlying volatility of the data.

LIESMAN: The big story on the table though is the dissent within the Fed. I was talking, you know, two or three months ago about there being six Fed members of the FOMC who didn't like where the policy is going, and now there seems to be seven. Does Bernanke have a rebellion on his hands?

CROSNER: No, no, no. I think there's always a good robust discussion around the table. When people come to vote, they may vote in one direction. But there's a robust discussion that gets us there.

And that very much affects the types of policies that are undertaken. So, it's not that, my goodness there's a rebellion because people have different views. People always have different views.

That's kind of the genius of the Fed, to have this decentralized system with people with different approaches.

LIESMAN: But is there a danger from a market standpoint that looks like a robust discussion seems like chaos from the outside?

CROSNER: Well, I really don't think it's chaos. It's always a robust discussion. I think it's very clear that the chairman has a very clear view of what should be done and are doing it.

LIESMAN: What are the next things the Fed ought to be doing right now?

CROSNER: Well, I think it's going to be very valuable in the speech on Friday for the chairman to clarify his economic outlook. There's a lot of uncertainty. As the chairman had said, this is the market's knowledge (ph).

I think that's very valuable and then, to give a little bit more color around the types of approaches that the Fed may take if things start to go further south.

LIESMAN: This idea of negative interest rates has been out there for a couple of years now. I remember hearing it a shadow over market committee meeting from a British central banker. What would happen if the Fed began charging banks to keep excess reserves, also increase the incentive, essentially, to lend?

CROSNER: Well, this idea has been around for centuries, not just.

(CROSSTALK)

LIESMAN: It's been there for a long time. It has been debated in the 19th century and even a little bit in the 18th century. There's a real challenge in the way the money markets would work.

CROSNER: If you have negative interest rates, that might make it very difficult for the repo markets, for the financing markets to work. And I think that's the main challenge is more this sort of technical thing.

The principle of it of trying to get people to lend makes sense but I think in practice, it's very difficult to implement.

LIESMAN: I can report that I talked to some members of the Fed about that idea. They didn't like it at all. I think for one of the reasons you just stated.

What about other things, should the Fed embark, in your opinion, on a bigger quantitative easing program right now to stave off the downturn of the economy?

CROSNER: Well, I think, as I said, that the Fed's got a lot of bang per buck for the most recent announcement because the ten-year rate and much of the yield curve has come down quite a bit, trying to move the longer end of the curve down.

And we'll have to see how the data are. I think the key is not only going to be the GDP revision that we're getting on Friday but the jobs report next Friday. That's really going to be crucial.

LIESMAN: Let me stop it there. We have jobless claims coming up.

Randy, thanks for joining us.

CROSNER: Great to see you.

LIESMAN: Guys, at least the mountains are coming up behind us here.

QUICK: All right.

LIESMAN: You know, talking about ten years, well, I'd say people are focused on the next ten days around here.

QUICK: You're not getting more focused on the next ten minutes right around here right now with Steve.

Gentlemen, thank you very much.

Steve, we're going to see you throughout the day today, too. Make sure you stay tuned for all that special coverage that's coming up.

END

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