Structural Changes in the Financial Markets: Economic and Policy Significance

In a speech delivered this spring to the Board of Directors of the Federal Reserve Bank of Kansas City and to the CS First Boston Corporation Global Banking Conference in New York City, Henry Kaufman predicted that the latest swings in bond and stock prices are likely to be merely a prologue to much greater volatility in the years ahead. This potential for financial trauma is a by-product of radical changes in the structure of financial institutions and markets that over time are leaving the system without an adequate institutional buffer and, therefore, more susceptible to sharp oscillations in the flows of investment credit.> Kaufman stressed that while new financial excesses cannot be totally prevented, proper action can mitigate their adverse consequences to some extent. To accomplish that, however, we must be willing to acknowledge the risks that lie ahead, to take them into account in the formulation of monetary policy, and to make some fundamental changes in the structure of official oversight and regulation of financial institutions and markets.