The Future Role of Central Banking Policy: Urgent and Precedent-Setting Next Steps
Policy Workshop — July 22, 2008


Severe stress in the financial markets has given rise to a host of unprecedented actions by the Federal Reserve, including the Bear Stearns intervention, new lending facilities for primary dealers, and a decision to authorize the Fed to lend to Fannie Mae and Freddie Mac should such lending become necessary. These developments raise important policy questions about the future of central banking policy. Many of these questions are best considered as part of an overhaul of the complex regulatory structure of the U.S. and global financial systems, which will take time. However, there are also urgent policy issues to be addressed in the weeks and months ahead. The Fed must decide whether to extend the primary dealer credit facility it established in March and whether to make that facility permanent. There is also a pressing need to define as clearly as possible the circumstances in which the Fed would intervene again to prevent the failure of a financial institution, considering in particular whether it is too big or too inter-connected to fail. Further, policymakers face questions about how to respond to challenges facing Fannie Mae and Freddie Mac. In addition to their urgency, these decisions will likely affect the course of the larger regulatory reform in the future. Indeed, they are the first steps toward reform and will set precedents.

This policy workshop brought together economic, financial, and legal experts to present and discuss research on these immediate policy issues, with the purpose of considering alternative policy recommendations. The workshop was co-sponsored by:

  • The Working Group on Economic Policy, Hoover Institution;
  • The Rock Center on Corporate Governance, Stanford Law School; and
  • Stanford Graduate School of Business.

Based on the discussions, the organizers prepared a summary of the workshop's findings, preliminary conclusions, and suggestions for additional research (see below).


Opening Address

Session I: Financial Market Functioning and the Effectiveness of the New Credit Facilities

Session II: Policy Interventions and Lessons Learned from the Fannie Mae, Freddie Mac, and Bear Stearns Crises

Session III: Are There Alternatives to Fed Intervention beyond Depository Institutions?

Session IV: Is New Regulation or New Legislation Needed to Extend the Temporary Facilities?

Session V: Clarifying the Criteria for Federal Reserve Intervention

Conclusion: Summary of Proceedings and Preliminary Conclusions


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