By Steven K. Beckner

Bean argued that raising interest rates enough to have snuffed out
the boom would have had unacceptable economic consequences. Blinder
agreed.

If the Fed is going to buy assets, Blinder argued that it can have
more impact by narrowing spreads between Treasury securities and private
securities than it can by flattening the yield curve. And “given the
immense size of the Treasury market, the Fed can more easily” affect
spreads by buying “private assets.”

Dino Kos, former head of the New York Fed’s open market trading
desk, questioned whether the Fed has really purchased “private assets,”
given that the $1.4 trillion of mortgage backed securities it bought
were guaranteed by government sponsored enterprises that are now
government owned (Fannie Mae and Freddie Mac).

Former Fed Governor Lawrence Lindsay sought to dispel the notion
that the Fed did not anticipate the housing boom or did not do enough to
stop it. In fact, he said, he and his fellow Fed policymakers “were very
well aware” they were encouraging a boom and viewed it as “the “only
transmission mechanism” for reviving the economy from the 2001 recession
and avoiding deflation.

Taking a different tack, Jacob Frenkel, former head of the Israeli
central bank and now chairman of JPMorgan Chase International, said “the
main gorilla in the room is fiscal policy,” and “we must find a way to
remove the gorilla.”

Likening macroeconomic policy to a concert, Frenkel asked, “if one
of the main instruments is playing completely off tune, … do you get
the violin back in tune or change the other 13 instruments?”

Blinder responded that “the hard truth for central bankers is that
parliaments and presidents will do what they will” with fiscal policy
and that the central bank must treat it as “an exogenous variable.”

Governments “did what they did,” and central banks “must deal with
those constraints.”

But Blinder said there is only so much the central bank can do to
support growth. “If the Fed buys $27 trillion in assets and the term
structure is completely flat, it’s out of bullets, frankly.”

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** Market News International **

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