New York Fed Chief: We Should 'Try To Identify Bubbles'

Regulators should intervene to fight asset bubbles, the president of the New York Fed said in an interview this week.

"My view is not so much that we are going to prevent all asset bubbles," William Dudley said. "But what we might be able to do is prevent the asset bubbles from being quite so big and maybe preventing the consequences of the asset bubbles from when they burst being quite so bad."

Dudley was talking to Planet Money's Adam Davidson. It's pretty rare for a New York Fed president to give a broadcast interview, and Dudley is the main attraction on today's podcast, which we'll post later this afternoon. (Also, the complete transcript of the interview is included below.)

While Dudley's comments may sound straightforward enough, they're actually a pretty radical departure for a Fed official.

Just this week, Alan Greenspan testified that regulators "cannot successfully use the bully pulpit to manage asset prices and they cannot calibrate regulation and supervision in response to movements in asset prices."

That's basically the opposite of what Dudley is saying. He told Davidson:

...what I am proposing is that we try — try to identify bubbles in real time, try to develop tools to address those bubbles, try to use those tools when appropriate to limit the size of those bubbles and, therefore, try to limit the damage when those bubbles burst.

The tools that might be used to do this would depend on the nature of the bubble, Dudley suggested. For example, putting more rules in place about what it took to qualify for a mortgage might have restrained the housing bubble, he said.

For the more technical side of Dudley's ideas, check out the speech he gave this week to the Economic Club of New York City.

And, if you just can't get enough, here's the complete transcript of Davidson's interview with Dudley:

Q: The whole idea that the Fed should keep an eye on asset prices and worry about whether or not there is a bubble strikes me as the kind of thing that experts are really confounded by in its intense debate. But the average person, I would think, would say well, obviously, why in the world — haven't you been doing that all along? What are you telling me?

So I thought it would be helpful to start with some real Fed 101. You know, what the Fed's core job is and why up until now, it isn't looked at the possibility of there being bubbles in housing and stocks and the like. So there is actual — the Fed doesn't just exist to do whatever it feels like. It has a very specific mandate to keep prices stable and to maximize employment. Am I getting that right?

WILLIAM C. DUDLEY: Correct. The Fed has a dual mandate, which is full employment subject to price stability. So basically, we want to get the unemployment rate as low as possible, consistent with a very low inflation rate.

Q: And just some quick history. We are going to get into this over the coming weeks and months. We are looking at the Fed a lot. But up until 1913, there was nothing like that. I mean, just money was created by private banks and it was a free-for-all or according to other people —

MR. DUDLEY: And there were periodic banking crises that were very destabilizing to economic activity. The banking crisis of 1907 was really the force that created the impetus for the Federal Reserve Act and the Federal Reserve System.

Q: Okay, so the Fed's job is to keep prices stable because the view is an economy does better if consumers, investors, businesspeople can have a reasonable sense of what prices are going to be tomorrow, a year from now, 10 years from now. That is the issue, right? It is a public good to have stable prices.

MR. DUDLEY: And the idea is that resources get allocated more efficiently in the economy. And so if you have better allocation of resources, you are going to have stronger productivity and so the economy will be able to grow faster over time.

Q: Right, because if I am thinking of building a factory but I have no idea if 10 years from now the dollar will be half its value or three times its value, I don't know how much to invest and so I probably just won't build a factory.

MR. DUDLEY: Yeah, and that uncertainty essentially introduces risk. And because of that risk, certain activities won't be undertaken. So if the Federal Reserve is doing its job well, the Federal Reserve can keep that risk level fairly low and give people some certainty with which to invest.

Q: And we are going to get into this in a later podcast, but I just want to quickly mention because there is, you know, some people out there beating up on the Fed pretty hard these days and saying oh, you don't respond to how people are feeling on the street. But the whole idea of a central bank is that it not be subject to short-term political thinking.

MR. DUDLEY: Well, we certainly are creatures of Congress, so the idea that the Fed is, like, wholly independent and we can do whatever we want, I think that is not true. But there has been some insulation in terms of monetary policy, the conduct of monetary policy, the idea being that you want monetary policy to be independent, for example, of the election cycle.

You certainly don't want the politicians to pressure the central bank to keep interest rates low to generate a short-term spurt in economic activity that helps the politicians get reelected. That is not going to lead to a stable economy or a good monetary policy over time.

So there is definitely the importance of independence on monetary policy with the idea being that the Federal Reserve can do a better job if it has a little bit of insulation from the political process.

Q: And as we have seen the last couple years, not total insulation from the political process, but more than — but needs a decent amount. You shouldn't wake up every morning thinking, is some politician going to have me fired because he wants a huge boost in growth or whatever.

MR. DUDLEY: You know, but at the same time, I mean, we have to be accountable to Congress in terms of what we do. I mean, the chairman goes to Congress twice a year in the Humphrey-Hawkins testimony to explain why the Fed did what it did in terms of monetary policy. The Fed shares its views about the economy, about why it is doing what it is doing on monetary policy. So there does also have to be a sense of transparency so people understand why we are doing what we are doing.

Q: So you as a key part of the Fed — and you're not the entire Fed, but you have to keep an eye on price stability. So what does that mean? How do you keep an eye on price stability? Do you walk up and down the street and say, how much is a hot dog? How do you do that?

MR. DUDLEY: Well, you know, the Bureau of Labor Statistics does that essentially for us by collecting lots of statistics on prices. They look at a basket of what, you know, the average household would purchase and tracks those prices over time.

Q: They literally are like how much is bread this week? How much are socks this week?

MR. DUDLEY: Yeah, so this is a very, very elaborate, involved process. And so we can actually make a statement with a fair amount of accuracy that prices for this basket of services today costs X, versus X minus 1 percent a year ago. And that helps us judge how much inflation there is in the overall economy.

Q: And how do you personally get a sense of price stability? Do you go online like we do and look at the BLS report? Do you have economists who come in and give you a briefing?

MR. DUDLEY: Well, we look at the official report, so there is a consumer price index report and there is also a report as part of personal income, which we look at what is called the personal consumptions expenditures, deflators. Those are two different measures of inflation.

Not only do we look at the aggregate index, but we also look at subcomponents of the index because we want to throw out things that are very volatile that actually, you know, create noise in terms of what is going on.

So a lot of times, economists will say let's focus on what we call core inflation. So that is typically inflation minus food and energy. And it is not — we are not excluding food and energy because we don't care about those costs. But we tend to give them less weight because they tend to be very volatile and not very predictive of what inflation is going to be in the future.

I mean, what we care about is how current inflation predicts future inflation because what our job is to do is to set monetary policy today so that it generates the right inflation outcome tomorrow. So we need to have a pretty good measure of what is really going on underneath the surface in terms of inflation pressures in the economy.

Q: There is that great quote by Milton Friedman, and I don't remember it exactly, but it is, you know, monetary policy happens in unclear ways over an unclear period of time — something to that effect — that actually you don't know because it is unknowable what we do today exactly how it will affect the inflation and over what kind of period it will affect inflation.

MR. DUDLEY: Yeah, the classic expression is long and variable lags for monetary policy. So what we do today doesn't affect the economy immediately but it takes some time for that to play out. So the policy that we set today is really going to influence how the economy evolves a year or two from now.

Q: Okay. So now, we, you know, as reporters, we get that Bureau of Labor Statistic report. It is actually great. I always recommend it to just listeners if they want to check it out. It is, you know, tables and stuff that anybody can understand. Do you get special secret stuff because you are at the Fed?

MR. DUDLEY: No, I think what is available is pretty available to all. I mean, what we do — what we get is a lot of other ways of looking at that data. So for example, the Dallas Federal Reserve Bank has a trimmed mean measure of inflation. So they basically don't look at the overall index but they throw out the prices of goods and services that are rising most rapidly and those that are rising least rapidly and look at the, you know, 90 percent of the distribution that is in between to get a measure.

So there is a lot of different ways of looking at the inflation data. And we also look at other things besides the actual inflation data. We also look at what drives inflation. So we are looking at, you know, how high is unemployment? We are looking at things like, you know, what's happening to wage cost? What's happening to unit labor cost, which is wage cost plus the productivity growth?

So if we have very strong productivity growth, that actually drives down, you know, labor cost. It is hard to have a big inflation problem when unit labor costs are falling. So it is not just the prices themselves, but it is also all the factors that affect those prices and are likely to affect those prices in the future.

Q: Okay, so now we are getting at exactly the issue that, for me, you are raising in this paper you wrote, which is — okay, so sort of by law, you have to consider a basket of consumer goods. And I forget exactly what's in the basket. Are there durable goods?

MR. DUDLEY: Oh, yeah. It is a broad-based basket.

Q: So it's food and clothing like short-term consumables?

MR. DUDLEY: It is goods and services. And, in fact, it's also housing services. So to the extent that you own your house, the consumer price index basically has an imputation for if you were to rent the house from yourself. And so it is really — everything that people consume really is part of the inflation basket.

Q: Okay, so I am thinking, like, I just had a sandwich, if I bought a car or a dishwasher or I went to the doctor, you know, hundreds and hundreds of different data points. And you look at wages. You look at how much people are making. But somehow, it's a — you don't look at stock prices or housing prices.

MR. DUDLEY: Well, I don't think that's quite right. I mean, we do look at stock prices and housing prices to the effect — to the extent that they affect the economy's performance and our ability to achieve the dual mandate of full employment and price stability.

So if the stock prices went up dramatically and that made consumers feel wealthier and then they responded by spending, we'd want to take that into consideration in terms of, you know, how fast that would cause the economy to grow and what consequences that would have for the unemployment rate.

What we don't do — I think at least historically, what we haven't done to any large degree is that we haven't taken asset prices into consideration above and beyond their impact on employment and inflation. So we haven't really taken asset prices onboard in terms of financial stability.

In other words, what is the risk of a big rise in asset prices being a bubble and that bubble bursting and that bubble then destabilizing the financial system and the macro-economy? I don't think we've taken that onboard that much because we had this other mandate, which is full employment and price stability.

Q: And that is what I want to get at. I don't understand the contradiction. I mean, I am assuming you don't want to get into whether former chairman Greenspan did the right thing or did the wrong thing. But this week is one more week when people really beat up on him and say you didn't see that this was a housing bubble. But the truth is he wasn't — he was very clear at the time that it's not his job to decide if it is a housing bubble.

MR. DUDLEY: Well, you know, I mean, I think that is why the debate is evolving. I mean, I think that we saw in the — what we have seen in the last, I don't know, 15 or 20 years is that asset bubbles seem to be reoccurring.

Q: Possibly more rapidly than in the past?

MR. DUDLEY: Yeah, it is hard to say. But certainly we had a technology stock market bubble, which was very large in the late 1990s, followed by a housing and credit bubble over the last few years. And, you know, both those bubbles were large. And when they deflated, they actually had pretty significant effects for the macro-economy.

So I think it is that experience is making us rethink the notion that we should, you know, basically put very little weight on the asset bubbles and just worry about cleaning up the bubbles after they burst. You know, this is all about cost and benefits. You know, identifying asset bubbles in real time is going to be very, very difficult. But what we have learned over the last few years is the consequences of not trying to identify asset bubbles and having a very passive approach also can be very — you know, lead to very unfortunate consequences.

Q: And I just want to reiterate. The stakes here really are, is it possible for the financial crisis we just lived through to be preventable? I mean, that's ultimately what we are talking about, right?

MR. DUDLEY: Well, yeah. I think the way I would describe it is what we would like to do is restrain asset price movements when those asset price movements are unmoored from the fundamentals, so not appropriate given what is actually happening in the economy. Two, when the collapse of those asset price bubbles can destabilize the financial system and the macro-economy. And three, when we actually have tools that we think can work to prevent those bad outcomes.

Q: So it's —

MR. DUDLEY: So what I am saying now is not so much that we necessarily will do a particular set of actions in response to a particular set of price movements, but that we should have a more proactive approach, a more willingness to consider all our available options rather than sit back with a view more that, now we can't really do anything about this; we can only respond after the fact.

Q: And the reason I find this conversation exciting — and I am hoping — (chuckles) — that some of our listeners do, too, because it is sort of rarified stuff, but the stakes are really, really high because we are talking about this question, which really is a question. No one knows for sure, could — if the Fed were differently structured, could it have prevented this crisis and could it make it less likely that a crisis like this or some other horrible bubble-bursting crisis would happen in the future?

MR. DUDLEY: I mean, my view is not so much that we are going to prevent all asset bubbles. I think that's unrealistic. But what we might be able to do is prevent the asset bubbles from being quite so big and maybe preventing the consequences of the asset bubbles from when they burst being quite so bad.

So imagine in the last few years if, let's say, a much tougher approach had been taken to subprime underwriting. So we basically said, you can't have no-doc loans. You have to have restrictions on loan-to-value ratios. You have to make sure the subprime loans that the people actually can afford them once their teaser rates periods end.

Q: Crazy ideas. Why would you want to do any of that?

MR. DUDLEY: If you had done all those things — if you had done all those things, I would speculate that — if all those had been in place, there would have been less credit that had flowed into the housing sector, housing prices would have gone up less far and when the whole situation reversed, we'd see a less severe decline in housing prices, less stress on the financial system and therefore less stress on the macro-economy.

So it seems to me that, you know, obviously, hindsight is 20-20. But it seems to me with the benefit of hindsight, it seems like things could have been done to restrain the asset price movements in a way that would have generated a more stable financial system and a more stable macro-economy.

Q: What I think I am hearing is that the Fed could have done a lot more to make this not so bad and didn't do it.

MR. DUDLEY: Well, I think that a lot of things we learn as we go through. You know, each business cycle is different. Some of this is about, you know, authority — the authority in terms of what we can actually do, in terms of the actual macro-prudential tools that we have available.

Like, for example, I don't think the Federal Reserve had the authority to say that loan-to-value ratios across all real estate mortgages in the United States have to be X percent. You might need someone to actually have the authority. I am not necessarily saying that the Fed is the entity that necessarily should have that authority.

But it strikes me that certainly when you see asset price movements that are very pronounced and unmoored from the fundamentals, it would be useful to have someone to have the ability to use macro-prudential tools to take the other side of that bubble to try to limit its growth.

Q: And I want to just jump in — can macro-prudential tools —

MR. DUDLEY: Let me define what I mean by that. By macro-prudential tools, I mean things that are not firm-specific, that deal with the sector — like housing — that's the source of the prospective problem.

So, for example, a macro-prudential tool with respect to housing would be limits on loan-to-value ratios or tougher appraisal standards or limits on how much debt people could take relative to their income. Those would be macro-prudential tools in the context of housing.

Q: And the reason that's relevant after this crisis is we have a regulatory framework that is primarily focused on bank by bank. So is Bank of America good? Is Citibank good? Is your local-corner bank in good shape? But we don't have a — there are not as many tools for regulators to say, well, wait a second, each of those banks might be sound, but there is a bigger problem that is affecting the whole economy. And it is a tough thing to do because if you then say to Bank of America or whoever, bank X, you can't do this thing that is profitable for you because of the overall economy, they'll say, what are you talking about? We are totally sound. You should leave us alone.

MR. DUDLEY: Well, part of it, too, in the subprime mortgage case was that a lot of this occurred in a very, very lightly regulated part of the economy. I mean, you know, state licensed mortgage brokers who originated mortgages to securities firms who then securitized those mortgages to end investors. And the Federal Reserve had no authority over any of that.

So you know, you're absolutely right that you have to have a comprehensive regulatory oversight for this to work. If you're only regulating part of the financial system and you try to, you know, put these prudential standards in place, all you'll do is push the business into the unregulated sector and you really won't actually address the problem that you are trying to fix.

Q: So I just want to get from you very clearly, how much can we blame the Fed for not doing it? You said one of the things is they might not have had the authority from Congress, but that's one of the things.

MR. DUDLEY: Well, I think that, you know, if you look at the crisis, there is lots of blame to go around for lots of different regulators including the Fed. You know, most of the large firms that got into this severe difficulty in the crisis, the Federal Reserve was not their, you know, primary regulator.

But, you know, could we have done better in terms of raising the alarm bells on some of these issues? Probably. Could we have done better in supervising some of the largest banks to have better risk-management systems in place so that they didn't have the very large exposures that they turned out to have? Absolutely.

Q: So here's what I thought you were going to say. I thought you were going to say, which is some version of what Alan Greenspan has said this week and other times, which is sure, it's easy now to look back and say that was a bubble. But a bubble is something that is only ever clear in hindsight.

At the time you made reference to the book, "This Time is Different," and we've had Carmen Reinhart on to talk about that great book about 1200 years or 800 years or whatever of financial bubbles. And every time there's some reason why everyone thinks now everything is different, this isn't a bubble, this is a fundamental shift in the economy that means housing prices will always go up, stock prices will always go up, whatever it is.

And so I thought you were going to say you can't do it, it's too hard in the middle of a bubble to know if it is a bubble, and even if you can do it, it is extremely risky. You know, if in 2004 or 2005, the Fed said whoa, whoa, whoa, housing prices are going up too fast, too many people are buying houses is what that means — you know, supply is so big — I can only imagine what the outpouring response would be: What are you saying? Poor people can't own houses now? You only want rich people to own houses?

It would be really, really hard in 2005, even in 2006, to even make that claim. And so I thought I was going to come here and hear a spirited defense of Fed actions. But what you are saying is actually what some of the critics are saying, which is that we probably could do a better job of identifying asset bubbles and intervening in them in a way that works.

MR. DUDLEY: At the same time, I would completely agree with you. This is not easy. I think you are absolutely right that every asset bubble is different. They are highly idiosyncratic in terms of, you know, the causes, duration. And I think that you are also right that it's, you know, very difficult to identify them in real time.

So I am not saying at all that this is easy. All I'm arguing for is that taking a completely passive approach doesn't seem to me to be fully appropriate when we've seen in this crisis the consequences of that approach. I think that, you know, it would be hard to do this well, but I don't think that is an excuse to not try to act.

I mean, the Federal Reserve conducts monetary policy all the time under conditions that are of high uncertainty. Trying to evaluate asset price movements is, you know, going to be highly uncertain. But, you know, as the prices go up higher and higher, the probability that it's probably not related to the fundamentals goes up more and more. I mean, at some point, there has got to be a shift where action then becomes appropriate.

I think also when you see asset prices moving a lot, you sort of have to ask yourself the question, well, what is really going on? What is driving those asset price movements? And are those — you know, my view of asset price bubbles is that it often starts with innovation that's real. And that innovation results in a change in value, which is appropriate. But then what happens is there are feedback loops that reinforce the idea that this innovation is extremely valuable.

So for example, in the housing boom, subprime credit is introduced. That leads to much greater demand for housing. That pushes up home prices. And then the feedback loop starts taking place. Because home prices are going up, subprime lending doesn't look very risky. So that encourages more people to do subprime lending, which creates more credit for housing, which causes house prices to go up further, which, again, makes subprime mortgage lending look not very risky.

But that can only go on as long as you can qualify more and more new buyers to buy houses, which is increasingly difficult because house prices are going up faster than incomes. So as you're thinking through that chain, you should see that this is going to end very badly.

At some point, housing prices are not going to be able to go up faster than income. In fact, they're going to have to go up much more slowly than income. At that point in time, subprime mortgage lending is going to be a lot — you are going to find out it is a lot riskier than you thought. And then when that happens, all the securities that were issued back by subprime mortgage assets are going to be a lot more risky. And so you sort of have to follow the thread through a little bit. And I think if you did that, you would probably take a little bit more cautionary approach.

Q: All right, and this is something we are going to be following. I do want to say your speech that we are going to link to — your speech that we are linking to on our Web site,, Caitlin (sp) and I were just talking about for a Fed policy analysis, it is really readable. It is really clear. I think the average person can read it and really understand it. There is not a lot of technical jargon. It's very clear.

So I just want to — so let me ask, are you — what are you promising us? If this happens, will there be fewer bubbles? Will there be less severe bubbles? What can we expect?

MR. DUDLEY: I would say that what I am proposing is that we try — try to identify bubbles in real time, try to develop tools to address those bubbles, try to use those tools when appropriate to limit the size of those bubbles and therefore, try to limit the damage when those bubbles burst.

Q: And you don't know if you can pull it off?

MR. DUDLEY: No, I mean, but until you try — you know, you are certainly not going to succeed if you don't try. So it seems to me that what has really changed is that we have seen the consequences of inaction. We've seen that pretty demonstrably in the worst recession in the post-World War II period. That suggests that we should reconsider whether we should make an effort to be more proactive, and that's essentially what I am proposing.

I am proposing a framework of how to think about this, what tools you might be able to use to address the asset bubbles and under what conditions you might apply those tools to try to temper a bubble formation and demise for that matter.

Q: So my feeling is that this is a pretty big deal that the president of the New York Fed saying this. I think people hear the Fed and they imagine it is sort of Ben Bernanke. But it's actually a very vibrant and sometimes argumentative — not impolitely argumentative, but, you know, you have got a dozen Fed presidents around the country, you've got all these Fed governors. They are all really smart people who often disagree. Help me understand how big a deal this is you saying this. Like, how many other Fed big shots hate you now or disagree with you?

MR. DUDLEY: (Chuckles.) Look, I think Chairman Bernanke's views are changing just as mine are. So I don't think there is any, you know, appreciable difference between where he is and where I am right now.

I think that the views of all of us have been changing in response to what we've actually lived through. The consequences of this bubble bursting, I think, are very unacceptable in terms of the amount of people that have lost their jobs.

You know, the fact that we have a 9.7 percent unemployment rate today is unacceptable to the Federal Reserve. And if you think about why that came about, it came about because we had a huge asset bubble in housing and credit that burst very violently and destabilized the financial system, therefore, constrained credit in a way that made it very, very difficult for our economy to function properly.

Q: All right. Thank you very much. ...

So you as the New York Fed president, you are now in the hotel and shopping mall business, as I understand it? I mean, part of your balance sheet includes a variety of assets that no Fed president has ever had on their balance sheet. Just first off, is that just a weird thing for you to think about?

MR. DUDLEY: Well, it is not so much the — we don't have the assets. We have the loans that are collateralized by those assets.

Q: Although I think a few of them are REO, that they are —

MR. DUDLEY: A few of them are REO, but most of them are still, you know, loans. We are not in the business of trying to acquire hotels — (chuckles) — and office buildings. But you're right. You know, as part of the Bear Stearns transaction, which Bear Stearns was acquired by J.P. Morgan, and in relationship to AIG, we have three Maiden Lane facilities, which represent about 5 percent of our balance sheet.

So it is a lot smaller than people, I think, realize where we're managing assets that we have never had to manage before. And that is challenging because, you know, we are trying to maximize the value of those assets to the taxpayer because that whose interest that ultimately we're representing, but we are trying to do it in a way that, you know, we don't get embroiled in difficult, you know, sort of private sector kind of webs, which can be quite complicated at times.

For example, in some of the commercial real estate that we have that, you know, we own — we own pieces of the capital structure on properties that are no longer performing well. And negotiating a solution in terms of how you're going to restructure this across a wide range of private sector participants, plus the Fed, you know, is very, very challenging.

Q: So is there someone on staff who is representing this property as a property owner?

MR. DUDLEY: We have a whole group that manages all these special investments. Plus we have lots of outside help — advisors who provide us with impartial advice in terms of what they think we should do in terms of best managing the asset to maximize the value for the taxpayer.

Q: We bought a toxic asset. I mean, us at Planet Money. We pooled our money and we bought a toxic asset. And we actually found that Maiden Lane has the same toxic asset, just a year later vintage. So ours is actually better than yours — (laughter) — although ours we bought at a penny on the dollar and I think you bought it 30 cents on the dollar, I hate to tell you. We came out a lot better.

Do you have — when you are looking at those assets — are there people here whose job is — I guess what I want to understand is are there people here whose job it is to just make those perform, get as much value as they can as if they were an investment bank or a pension fund or something, totally not thinking about other Federal Reserve, financial stability issues and then other people in the building who are thinking about those issues without thinking about how it will affect those properties?

MR. DUDLEY: Well, we certainly were aware when we took on these portfolios that we didn't want to, you know, rapidly liquidate the assets because that could actually depress financial asset markets more generally. And in our role as the Federal Reserve, you know, that would be sort of in conflict with our broader mandate.

So we certainly wanted to manage these assets in a way that didn't destabilize the economy. So we internalized that consequence. But other than that, I think we are trying to manage them as a, you know, smart investor would manage them in a way to maximize their value.

You know, that said, we would prefer — you know, since this isn't what we view our main job, we would prefer to actually, you know, probably liquidate these portfolios maybe a little bit more quickly than a private investor because, you know, we don't really want to be in this business.

So if you sort of said a private investor might view this as something that they're going to do for the rest of their life — (chuckles) — and then hand it off to their daughter or son to manage the business for us — no, we view this as a one-time experience and we want to get out of this business, you know, sooner rather than later.

Q: This is not marking a fundamental shift in Fed policy? You are now going to be looking for great hotels and motels?

MR. DUDLEY: We would hope that we never would have to do this again. If we do our job properly in terms of financial stability and regulation and monetary policy, hopefully this will be very much a one-off experience.

You know, and I think that is borne out by history. The last time that the Federal Reserve used the authority that we have used during this crisis, clause 13(3) — section 13(3) authority — prior to this crisis was back in the Great Depression.

So this is something that we do not use lightly. We did not want to get into this business. But at the end of the day, we thought that this was necessary to support the financial system, and by supporting the financial system, support the economy.

Q: So just one very last question. We actually called one of the REO properties, a mall in Oklahoma that's in default. And I don't know how to say this other than as inarticulately as, it just blows my mind to think that we could call a mall in Oklahoma and realize their owner is the Fed. Just how do you feel when you think about that? It's such a weird thing.

MR. DUDLEY: Well, were not happy about it. (Chuckles.) You know, these were special circumstances. We came into this property to basically — to find a way for Bear Stearns to be taken over by J.P. Morgan because we thought that the alternative —

Q: But I just want to — with your experience —

MR. DUDLEY: When we thought the alternative was a financial market calamity. So this is sort of the downside of the intervention.

Q: But for you just as a human being, would you —

MR. DUDLEY: I did not expect as president of the New York Federal Reserve that I'd be having to worry about a mall in Oklahoma City. (Chuckles.) Is that fair?

Q: All right.




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