The speakers at Wednesday’s Kalispell Chamber of Commerce luncheon were, in some ways, a study in contrast. Bob Nystuen, president of Glacier Bank, described the many ways the Flathead’s local banks were prospering despite the national economic downturn. Then Nystuen introduced Jim Lyon, first vice president and chief operating officer of the Federal Reserve Bank of Minneapolis, who painted a bleaker picture of the economy by describing the drastic measures the Federal Reserve System has taken over the last 15 months.
Lyon rattled off a list of actions the Fed has taken to stabilize financial markets since September 2007, from lowering the federal funds rate target 425 basis points to the establishment of several new lending facilities, that has increased the Fed’s presence drastically as the government has been forced to partially nationalize the financial industry to avoid a complete global meltdown.
“It’s our clear view that whenever possible, problems should be addressed through private sector solutions,” Lyon said. “However, it’s also true that notwithstanding concerns about moral hazard, from time to time there may be situations where the systemic spillovers associated with the failure of a particular firm are great enough that government intervention to prevent the failure is warranted.”
This criteria is what led the Federal Reserve to facilitate the acquisition of investment bank Bear Stearns by JPMorgan Chase and make credit available to insurance giant AIG. It also explains why a rescue of Lehman Brothers “simply wasn’t possible because it lacked sufficient collateral to adequately secure a Fed loan,” Lyon said.
Lyon went on to describe steps the Fed has taken to stanch problems in the commercial paper market, boost investor confidence and increase the sales of money market instruments in secondary markets. In almost all of these cases, the Fed has set up new and complex vehicles to accomplish these goals.
“The implications for the system’s balance sheet of this unprecedented series of actions to respond to the financial market crisis have been enormous,” Lyon said, noting that prior to this year, the Federal Reserve’s assets totaled $800 billion. As of November 5, its total assets are $2.1 trillion.
“In the coming months, I expect our balance sheet to grow,” Lyon added.
While the financial markets have seen some improvement as a result of these changes, consumer spending saw its largest drop in 28 years in the third quarter of 2008, and the unemployment rate, at 6.5 percent, is at its highest in the last 14 years.
On the bright side, however, Lyon pointed out that inventories and capital spending are better than in past recessions, the government’s aggressive $700 billion bailout plan, and the “remarkable resilience” of the U.S. economy could “mitigate the depth and duration of the downturn.”