policy interest rates remain zero, and the federal reserve ’ s balance sheet continues to expand even as the economy improves. with these actions, the fomc ’ s objectives have shifted from that of containing a global crisis to that of more quickly accelerating economic growth. its components focus on raising inflation expectations, increasing asset values and pushing up growth in aggregate demand, and, as stated in its september 2010 press release, employment. while i agree these are worthy goals, i am concerned that maintaining a crisisoriented policy as the tool to achieve them significantly changes the economic risks. past success in pursuing this form of policy is mixed at best. central banks and the long run a swiss central banker once advised me that the duty of a central banker is to take care of the long run so the short run can take care of itself. in the united states, this simple expression has been codified in its laws. the federal reserve act requires that, “ the … federal open market committee shall maintain long - run growth of the monetary and credit aggregates commensurate with the economy ’ s long - run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long - term interest rates. ” these mandates recognize that the factors of production come together in a systematic fashion across economies, sectors within economies and resource availability to create growth. the process is not simple nor does it occur quickly – which is the purpose of putting policy in the context of the long run. it is within this context that policy should acknowledge the improving economic trends and begin to withdraw some degree of accommodation. if this is not done, then the risk of introducing new imbalances and long - term inflationary pressures into an already fragile recovery increase significantly. short - run actions have consequences in the spring of 2003 there was worldwide concern that the u. s. economy was falling into a “ japanese - like ” malaise ; the recovery was stalling, deflation was likely to occur and unemployment was too high. this was the prevailing view despite the fact that the u. s. economy was growing at a 3. 2 percent annual rate and the global economy ’ s average growth was nearly 3. 6 percent. in addition, the fed funds policy rate was 1 ¼ percent. although most bis central bankers ’ speeches knew that such a low rate would support an expanding economy, in june 2003 it was lowered further to 1 percent and was left at that rate for nearly a year, as insurance

legal framework. the growth of large institutions has distorted the framework of the financial system in ways other than just tbtf. larger and more complex institutions have become more difficult to regulate and supervise. in some cases, regulators did not have the resources or authority to keep up with a growing and innovative financial system, particularly during a period when some regulatory rules were being replaced with a risk - focused supervisory system. it has been very difficult for examiners to get large banks to tighten their operations, especially when the banks were generating tremendous profits. these large institutions wield considerable influence. an obvious example of this is the way that fannie mae and freddie mac were both able to game the political system after their accounting problems and avoid tighter regulation and more realistic leverage constraints. looking back, one sees that the crisis was inevitable, if for no other reason than that these tbtf firms would push the boundaries until there was a crisis. in a 1999 speech on financial megamergers, i concluded that “ to the extent these institutions become “ too big to fail, ” and … uninsured depositors and other creditors are protected by implicit government guarantees, the consequences can be quite serious. indeed, the result may be a less stable and a less efficient financial system. ” more than a decade later, the only thing i can change about this statement is that the government guarantees are no longer just implicit. actions during the financial crisis have made this protection quite explicit. the results so, what does this protection mean? tbtf status provides a direct cost advantage to these firms. without the fear of loss to creditors, these large firms can use higher leverage, which allows them to fund more assets with lower cost debt instead of more expensive equity. as of year - end, the top 20 banking firms held tier 1 common equity equal to only 5. 1 percent of their assets. in contrast, other banking institutions held 6. 7 percent equity. if the top 20 firms held the same equity capital levels as other smaller banking institutions, they would require $ 210 billion in new equity or reduced assets of over $ 3 trillion, or some combination of both. ( see attached charts. ) stated another way, almost one - quarter of the assets held by these large institutions are supported by less equity capital. furthermore, tbtf reduces the cost of the debt that these firms issue. due to their implied government support, ratings agencies explicitly increase the debt ratings of the largest banking organizations above the intrinsic rating that would be assigned based on the bank