Our mission, as set forth by the Congress is a critical one: to preserve price stability, to foster maximum sustainable growth in output and employment, and to promote a stable and efficient financial system that serves all Americans well and fairly.
The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand.. a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.
Among the largest banks, the capital ratios remain good and I don’t expect any serious problems . . . . among the large, internationally active banks that make up a very substantial part of our banking system.
We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s going to drive the economy too far from its full employment path, though.
So it’s important, as it affects overall levels of production and employment in the U.S. There are many domestic industries doing well in the United States, notwithstanding a strong dollar.
Every effort needs to be made to try and offset the costs of Katrina and Rita by reductions in other government programs, especially those that are wasteful, duplicative and ineffective.
I and others were mistaken early on in saying that the subprime crisis would be contained. The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict.
I served seven years as the chair of the Princeton economics department where I had responsibility for major policy decisions, such as whether to serve bagels or doughnuts at the department coffee hour.
