Minneapolis Fed boss says lessons need to be learned on economy

WILLMAR -- The recession is likely to persist for several more months, but there are signs that recovery is "not too far off," a Federal Reserve Bank official told a Willmar audience on Tuesday.

Gary Stern, president of the Federal Reserve Bank of Minneapolis, addressed close to 200 people at the event, which was organized by the Young Professionals of the Willmar Lakes Area Chamber of Commerce.

His forecast for the economy was guardedly optimistic.

"Once the economic recovery begins, the pace of activity is likely to be subdued for some time," he said.

He also warned that policymakers need to "give serious thought" to how the U.S. can avoid a recurrence of the conditions that led to the recession.

"The first order of business is to pursue sound economic policies," he said.

Over the past four decades, there have been recessions but nothing as severe or far-reaching as the crisis that began to develop in 2007, he said. "I've certainly never seen a financial situation like this one."

Stern gave prepared remarks on financial conditions and the economic outlook. He also spent about 20 minutes fielding questions from the audience on issues ranging from bank bailouts to the role of credit rating agencies.

Stern, who's retiring this summer as the longest-serving president in the Federal Reserve Bank system, foresaw the economic crisis five years ago when he and colleague Ron Feldman co-wrote "Too Big to Fail: The Hazards of Bank Bailouts."

The book characterizes the "too big to fail" issue as a growing problem that has gone unaddressed and could lead to excessive risk-taking by financial institutions and turmoil in the economy.

In their book, Stern and Feldman recommended several reform measures, including systemic, focused supervision of the largest banks, and possibly requiring them to have higher capital and even pay a tax on activities deemed to be especially risky.

Stern said Tuesday that addressing the "too big to fail" issue needs to be a priority in U.S. financial policy.

It could be challenging, however, as increased restrictions could make the system more inefficient, he said.

Someone in the audience wanted to know if the largest financial institutions should be broken up.

Breaking up the biggest banks is a drastic action, and it might not have a long-lasting effect, Stern replied.

"It's really all about how well it would work in practice," he said.

Did corporate executives contribute to the economic crisis by becoming too greedy and failing to oversee their corporation, someone else asked.

"Clearly there have been some crashes and burns," Stern said. "But that's always been the case in capitalism."

In a market economy, periods of excess are generally followed by periods of correction -- and for the most part, American prosperity has been improving, he said.

"I think the U.S. economy has been quite good at that on average, and I think that's about as much as you can ask," he said.