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Financial system under the microscope
By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — Are banks healthy or weak? Is money flowing to speculative markets? How will the Federal Reserve respond if bubbles form due to ultra-loose monetary policy?These questions about the financial system will move to the forefront this week, given a light schedule of official data releases.
On Friday morning, Fed Chairman Ben Bernanke will talk about how the central bank monitors finance in a speech at the Chicago Fed’s annual conference on bank structure and competition.
MarketWatch consensus
See economic calendar
DATE REPORT CONSENSUS PREVIOUS
May 9 Weekly jobless claims 337,000 324,000
Before the financial crisis, the Fed had a hands-off approach to asset prices. The central bank thought it could clean up after any bubble that popped.But the damage caused by the collapse of the housing bubble has raised doubts about the wisdom of that approach.
Some Fed officials, notably Fed Governor Jeremy Stein, have said the central bank may have to use monetary policy to prick new bubbles.
The question isn’t theoretical.
Dean Baker, co-director of the Center for Economic and Policy Research in Washington, sees grounds for concern about bubbles in the latest Case-Shiller data released last week.
“Many of the areas most affected by the housing bubble and subsequent crash are seeing extraordinary prices increases,” Baker said. For instance, prices in Phoenix have risen at a 24% annual rate over the last three months and in Las Vegas at a 26.3% rate, he said.
“The end of this round of speculation is not likely to be much prettier for the areas affected than the end of the last round,” Baker said.
Bank credit has been an important headwind in the recovery.
Economists can get a sense of the availability and demand for credit when the Fed releases its latest survey of senior loan officers, which is due on Monday at 2 p.m.
The report is expected to show that banks are growing more willing to lend but not as willing as in the boom years, said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
Banks are not taking risks because they are still dealing with an awful lot of bad loans.
The most interesting aspect of the report is whether banks are more willing to supply residential mortgages and if there is demand for them, Ashworth said.
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