Fed's Kohn Says We Need More Than Government's $250 Billion Stock Purchase

By: • Wed, Oct 15 2008, 9:01 PM

Federal Reserve Vice Chairman Donald Kohn said the U.S. government's recent decision to buy $250 billion in financial firm stocks is not enough to shore up the economy - but is a "key building block." He said he hopes private capital investment will follow the government purchase.

Speaking to an audience at Georgetown University Wednesday night, Kohn said regulation of the financial system will soon be tightened, adding that the existing regulatory system "didn't pass the test."

He said market participants are already working with regulators to increase transparency in the credit default swap market.

On monetary policy, Kohn said the potential positive effects of the recent easing in interest rates have been offset by falling confidence. In the question period following his speech, Kohn said the Fed must be open to changes in monetary policy to deal with bubbles.

Kohn's outlook for U.S. economy was meager. He said 2009 will be rough, and that while global efforts are promising, bank lending will be cautious for some time. Kohn said while U.S. inflation is heading downwards, prospects for growth are deteriorating and housing prices will continue falling.

He said recent economic data out of the U.S. has been downbeat. Just today, the United States saw the release of a gloomy beige book and a further drop in retail sales.