John At The Center

Missed the opening remarks.

Missed Janet Yellen’s Perspective but she’s doing Q&A now.

She’s talking about how house prices need to adjust down so we don’t recreate a bubble condition.  Feels that with the tightness in the credit markets and deterioration in the macroeconomy, we might be in danger of overcorrecting, which would take a greater toll on economy.

Someone asked about a lower Fed Funds rate and if that would help.  Yellen feels we could go lower.  Doesn’t know what the effective number corresponding to zero would be.  With rates going to zero, there are broad implications on money markets and such that would constrain the lower boundary on how low the Fed can take this rate. Talking about Japan.  Japan should’ve cut rates lower faster than they did to curb inflation.

Taking a couple questions about the Treasury capital injections and she’s emphasizing that these are Treasury programs, not Fed programs.

Talking about “quantitative easing”, (aka balance sheet expansion) in Japan, which corresponded with no economic impact.

Fed size of balance sheet has increased significantly. $800 billion before last year. That number doubled over the last year. At the end of this year, it could be at $3 trillion. This is a kind of “quantitative easing”.

Talking about how Fed can pay interest rates on reserves. Paying 35 basis point under fed funds rate. Enables Fed to come pretty close to floor on federal funds rate, which might be higher than zero but extend greater liquidity and extend size of balance sheet.

So fed funds doesn’t have to go to zero because they have other ways of extending liquidity and extend size of balance sheet.

Next question on what we can do about small businesses.  She agrees that there is a credit crunch but says it’s not true that small business loans are not being made.

FDIC took over IndyMAC, made a commitment to restructure mortgages and keep people in homes. We’ve come to a view where to do that, we make the payment more affordable.  Even for houses that are under water, they will be inclined to stay.

Effectively change it to interest only payments, that don’t write down the principal.  This is easier/not as complicated as when you’re writing down principal.  Could result in a streamlined process.