Tom Palley and Reserve Requirements

[Finmktctr@xxxxxxx]

In the LAT piece, Tom P. is referring to a system of asset-based reserve
requirements.  Applied to all financial sector assets, such a system would:
a) respond to the long-term movement of this sector's assets out of the
banking industry and into nonbank financial firms; b) respond to banks
shifting deposits into non-reservable sweep accounts; and c) enable monetary
policymakers to target sectoral bubbles and droughts w/o exposing the broader
economy to blunt-instrument interest rate changes.  Used properly, these
universalized reserve requirements would have strong counter-cyclical effects
(at every stage of the cycle) in contrast to the prevailing regime of bank
capital standards.  There's even an existing domestic precedent of sorts in
the National Assn. Of Insurance Commissioners' Asset Valuation
Reserve/Interest Maintenance Reserve, adopted after the insurer meltdowns of
the early 1990s.

Long version: "Stabilizing Finance: The Case for Asset-Based Reserve
Requirements," Thomas I. Palley, Financial Markets & Society, August 2000
http://www.fmcenter.org/pdf/FMSaug2000.pdf


Subj:    [PEN-L:16565] He's not God after all!
Date:   9/1/01 11:19:40 AM Eastern Daylight Time
From:   jdevine@xxxxxxxxxxxxxxx (Jim Devine)

[note that leftist economist Tom Palley is quoted below. I hope that the
AFL-CIO isn't saying that financial controls should be imposed at this
point in the business cycle...]

September 1, 2001 / Los Angeles TIMES.

Talk about it Fed Chairman Talks of Limits to His Powers

By ROBERT A. ROSENBLATT, TIMES STAFF WRITER

WASHINGTON -- Federal Reserve Board Chairman Alan Greenspan warned Friday
that huge swings in the stock market and big changes in home prices are
making consumers more unpredictable in their behavior, making it much
harder for policymakers to influence the economy.
>****<
The changes in financial institutions give consumers more knowledge and
more opportunities to change their spending rapidly, undermining the powers
at Greenspan's disposal.
>****<
The current system emphasizes the 401(k) salary set-aside accounts, with
individuals getting monthly or quarterly statements showing their
retirement balances. The stock market boom often changed consumers'
outlook, sometimes making them enthusiastic spenders, said Tom Palley,
deputy chief of public policy at the AFL-CIO. "You receive a statement
saying that your wealth has increased, and you think that means there is
less need to save, that the savings is being done by the [stock] market,"
Palley said. Consumers, feeling rich, rush to spend, he said.
>****<
The AFL-CIO would like Greenspan to use other tools than interest rate
changes to deal with the economy. Imposing new reserve requirements on
banks could slow down the growth of home equity loans, or the Fed could ask
mutual funds to hold more of their assets in cash to dampen stock market
fluctuations, Palley said. Such steps would slow the erratic swings in
consumer spending, he said.