zero interest rate

["Rakesh Bhandari"<rakeshb@xxxxxxxxxxxx>]

Barkley,
 this is very interesting indeed. there was an editorial in the wsj about this
 last week; emphasized that this agency was basically forcing banks to hold
govt
 securities while in effect cutting off lines of credit to smaller businesses
 especially.

 by the way,  does this automatic triggering explain why the fed is better at
 killing booms than reversing downturns? that is, while rate hikes cool off the
 economy, rate cuts are neutralized by this OCC counter-action?

also, does O'Neill have discretion to over-ride this basically automatic
reaction by the OCC? If so, why hasn't he done so after the 9/11 terrorist
attacks?

 Rakesh


        Another factor that is related to this although
 partly exogenous in the U.S. are regulations on
 loans quality by the Comptroller of the Currency,
 a little known agency located in the U.S. Treasury.
 This entity can declare that a bank has bad loans
 and in conjunction with the requirements to have
 not too many bad loans can force banks to reduce
 their lending.  Thus, even though the Fed is striving
 mightily to engage in stimulative monetary policy,
 it is being offset to a significant degree by the OCC
 that is ordering banks to reduce loans because of
 all the bad loans they have on their books, many of
 these in the now collapsed dot.com sector.
       The irony is that it is an economic decline that has
 made these loans bad.  This turning of good loans into
 bad ones then essentially automatically triggers this
 regulatory reaction that induces a tendency to a
 contractionary monetary policy, despite the efforts of
 the Fed.  Some in Congress are now calling for the OCC
 to be put under the Fed exactly to avoid this kind of
 absurd impasse.
 Barkley Rosser