thomas jordan : financial crisis dispersing? economy changing direction? speech by mr thomas jordan, member of the governing board of the swiss national bank, at the general assembly of the handels - und industrieverein des kantons schwyz, schwyz, 25 august 2009. the complete speech can be found in german on the swiss national banka€™s website ( www. snb. ch ). * * * the situation on the international financial markets has recently brightened again. this is mainly due to the positive keynote in company earnings reports and a series of unexpectedly favourable economic data. the relaxation of monetary policy was pursued further through the implementation of unconventional measures in march 2009, and this is also likely to have had a calming effect. price advances since march should, however, be partly seen as corrections to excessive downward movements in the previous period. considerable uncertainties still prevail and the danger of setbacks should not be carelessly underestimated. the recessionary developments in the world economy weakened significantly in the second quarter of 2009. expansionary monetary policy around the world, together with fiscal support programmes, have probably played an important role in this respect. economic indicators are also showing a turn for the better in the swiss economy. nevertheless, in view of the exceedingly low level of utilisation of production capacity, industrial investment will probably continue falling. given the increasingly gloomy outlook for employment, private consumption is also likely to put a damper on the resumption of cyclical activity. consequently, the current overall situation of the swiss economy remains difficult despite the many rays of hope with regard to the economic cycle. also, the danger of deflation does not yet seem to have been entirely averted. we have not yet reached the moment for a change of direction in monetary policy in switzerland. after analysing the available economic data and forecasts and taking various risk considerations into account, there is no need for the snb to take monetary policy action at present. the snb can afford to adopt a holding stance. however, this holding stance should not be mistaken for inactivity. the snb continues its firm implementation of an extremely expansionary monetary policy and the unconventional measures launched on 12 march 2009. the swiss franc money market is still being provided with a generous and flexible supply of liquidity, interest rates remain low, swiss franc bonds are still being purchased to dampen the level of risk premiums on the swiss franc

are quickly bidding up the price of farmland in search of a marginally better return. i was in the banking supervision area during the banking crisis of the 1980s, when the collapse of a speculative bubble dramatically and negatively affected the agriculture, real estate and energy industries, almost simultaneously. because of this bubble, in the federal reserve bank of kansas city ’ s district alone, i was involved in the closing of nearly 350 regional and community banks. farms were lost, communities were devastated, and thousands of jobs were lost in the energy and real estate sectors. i am confident that the highly accommodative monetary policy of the decade of the 1970s contributed to this crisis. another important effect of zero rates is that it redistributes wealth in this country from the saver to debtor by pushing interest rates on deposits and other types of assets below what they would otherwise be. this requires savers and those on fixed incomes to subsidize borrowers. this may be necessary during a crisis in order to avoid even more dire outcomes, but the longer it continues, the more dramatic the redistribution of wealth. in addition, historically low rates affect the incentives of how the largest banks allocate assets. they can borrow for essentially a quarter - point and lend it back to the federal bis central bankers ’ speeches government by purchasing bonds and notes that pay about 3 percent. it provides them a means to generate earnings and restore capital, but it also reflects a subsidy to their operations. it is not the federal reserve ’ s job to pave the yield curve with guaranteed returns for any sector of the economy, and we should not be guaranteeing a return for wall street or any special interest groups. finally, my view is that unemployment is high today, in part, because interest rates were held to an artificially low level during the period of the early 2000s. in 2003, unemployment at 6. 5 percent was thought to be too high. the federal funds rate was continuously lowered to a level of 1 percent in an effort to avoid deflation and to lower unemployment. the policy worked in the short term. the full effect, however, was that the u. s. experienced a credit boom with consumers increasing their debt from 80 percent of disposable income to 125 percent. banks increased their leverage ratios – assets to equity capital – from 15 - to - 1 to 30 - to - 1. this very active credit environment persisted over time and contributed to the bubble in the housing market. in