MR. MISHKIN
The key point here is that we have a situation of potential nonlinearities , big tail risk , that could actually get very nasty , and in fact there is a potential for recession .
MR. MISHKIN
Also , even in the modal forecast and not worrying about the downside risks , the expected future output gaps are more negative , so we have less pressure going forward there .
MR. MISHKIN
There 's the episode of 1970 with the Penn Central crisis , there 's the 1987 stock market crash , there 's the 1998 LTCM episode , and then , of course , the World Trade Center terrorist tragedy in 2001 .
MR. MISHKIN
However , the issue that most concerns me here is that , even though I think the modal forecast is that growth will be slower than we expected , the downside risk is actually very , very substantial .
MR. MISHKIN
Therefore , it took quite a long time for them to fix their balance sheets in order to get players back into the financial markets to make loans to people who had good investment opportunities .
MS. DANKER
`` The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output .
MS. DANKER
Then : `` Developments in financial markets since the Committee 's last regular meeting have increased the uncertainty surrounding the economic outlook .
MS. DANKER
To further its long-run objectives , the Committee in the immediate future seeks conditions in reserve markets consistent with reducing the federal funds rate to an average of around 4 3/4 percent . ''
MS. DANKER
165 , MS. DANKER. , '' I 'll be reading the directive from page 35 of the Bluebook , and the assessment of risks from the table distributed today .
MS. MINEHAN
181 , MS. MINEHAN. , '' I fully agree with Governor Kroszner 's idea that thinking that in this short form we can explain all of that is risky .
MR. KROSZNER
We have a transition from a sort of cushion of the strong equity market offsetting the negative wealth effect in the housing market .
MR. KROSZNER
Also , as Governor Warsh mentioned , there are more large private pools of capital to step in to bid for the LTCMs , if such things happen .
MR. KROSZNER
But part of that volatility , as a number of people have expressed , is about concerns about what is going into those securities in the originate-to - distribute model .
MR. KROSZNER
Although there are still upside risks to inflation , as Vice Chairman Geithner mentioned , overall we might want to think of moving a little more toward a greater balance of risk but still with a predominant concern for inflation . ''
MR. KROSZNER
But that caution with respect to investment and the slowing of the investment recovery make it harder to be optimistic about a rebound in productivity growth .
MR. KROSZNER
There is also a lot of discussion of the amount of highly leveraged loans in the pipeline -- on the order of $ 300 billion .
MR. KROSZNER
The major banks have very high , relative to historical trends , capital-to-asset ratios in excess of the required minimums .
MR. KROSZNER
That is extremely important because the banking system can provide a critical automatic stabilizing mechanism , as it did in 1998 , when there are liquidity challenges .
MR. KROSZNER
I share Governor Warsh 's concerns , not only from the point of view of the financial markets but also regarding the structure of mortgage markets -- that we may be seeing a little less of that kind of structure than we have seen in the past .
MR. KROSZNER
There were some parallels to what we are seeing now : Risk spreads were rising very dramatically after a period of near-record low levels , and we saw the yields on Treasuries go down quite a bit because that 's where people were going .
MR. KROSZNER
But with more uncertainty and more volatility , as Governor Warsh and others have mentioned , undoubtedly that is going to weigh heavily in the board room .
MR. KROSZNER
I am not ready to go quite as far as the Greenbook has gone in marking down potential , but I do think that it is a real possibility , and it is very closely linked to my concerns about investment , which obviously the financial market volatility has affected .
MR. KROSZNER
Basically , I would start taking my first steps , but just very first steps , a little more toward a balance of risk because of the greater downside to growth .
MR. WARSH
First , on the diagnosis of exactly what 's going on in the financial markets , I do think that the deterioration of the financial markets since we last met has been quite remarkable and quite profound .
MR. WARSH
I wo n't say that this is a liquidity problem and not a credit problem , but as I look at institutions with very different credit postures , these liquidity issues , these term funding issues , seem to be nonetheless apparent .
MR. WARSH
In terms of the blurry line between our liquidity-provisioning roles and our credit - provisioning roles , I 'll admit that it is a hard distinction to maintain .
MR. WARSH
We have a bit of a natural experiment on that by looking at a period a few months ago -- called a quarter-end -- that was n't much different from a year-end , at least among U.S. financial institutions .
MR. WARSH
I buy the argument that in Europe the year-end funding pressures could be more significant because of the differences in disclosure and scrutiny around those two periods .
MR. WARSH
They work in selling broad corporate debt issuance , and the dynamic of auctions and the competitive dynamic therein strike me as likely to be quite useful .
MR. WARSH
I would expect there to be considerable bids if all goes well operationally , maybe 5 basis points above what we 've said is the reserve price , and so the hope is that this will be , in fact , a crowded auction .