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[Time] 59:54
Naive question: What if we had done nothing? What is best case for those interventions? Can't do counterfactual; speculative. Had Bear Stearns been let to fail, consequences would be severe; but can't quantify them. Would be looking at a much weaker economy with more dire prospects. Could be wrong. History gives one pause about inadequate responses. Federal Reserve balance sheet currently has between $6-8 billion in mortgage backed securities that had been issued by Fannie and Freddie. They bought up old ones and have been buying new ones as Fannie and Freddie have issued them, channeling money into mortgage markets to keep interest rates low--trying to keep the price of housing supported so there won't be a fall in existing loans. They are not marked to market--not quite worth what the Fed says they are. What are the implications for inflation as things return to normalcy? Dominant there is the macro objective. Economy entered recession at end of 2007, lasted probably till a couple of months ago; broad and deep by many metrics. When short-term interest rates hit zero, had to look for other ways to have a macro effect. Want to try to operate in deep markets and not operate in corporate credit where you end up picking and choosing among quality. Balance sheet and inflation--exaggerated. One, while there is a strong relationship between money and inflation in the long run, you have to emphasize the long run--probably five or ten years if you look at the evidence. What happens to the Fed's balance sheet during a year or two unless it persists. That gets to the second point: the Fed and all Central Banks have a challenge about when to start tightening and how much. Challenge after any recession or period of accommodation or ease. Inflation performance of U.S. and global economies since the 1980s has been period of low or diminishing inflation over time. History gives you at least some modicum of confidence that they may get it right.
Gary Stern on Too Big to Fail | EconTalk | Library of Economics and Liberty
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