Edward Kelly - No Recession, Unless....

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I feel so much better now...no recession, unless Kelly's underlying assumptions are incorrect. How likely is that?




Fed official sees minor Y2K problems

NASHVILLE, Tenn. (AP) - The Year 2000 computer bug shouldn't disrupt the U.S. economy enough to cause a national recession, Federal Reserve Board Governor Edward Kelley Jr. says.

But it could have the same effect as a severe snow storm or last year's United Parcel Service strike.

''In these instances, the shock to our economic infrastructure is transitory in nature, and, critically, the recovery process is under way before any adverse 'feedback' effects are produced,'' he said Thursday.

Kelley said he expects the millennium bug will cause isolated disruptions to commerce, as well as to some public services.

''In fairness, it must be said that if disruptions that occur are not isolated events as I have assumed, but rather spread across key sectors of the economy by interacting with each other, ... the decline in economic activity would prove to be longer lasting and a recession could conceivably ensue.''

The Y2K problem occurs when computers try to add or subtract dates using only the last two digits of the year -- 00 in the case of 2000 -- which may confuse them into reading the date as 1900. That could cause some to give faulty readings, corrupt the data or shut down completely.

Kelley is the most senior member of the Fed board, which is the governing body of the nation's central bank, which determines interest-rate policy, regulates banks and oversees the nation's payments system. It is the lender of last resort in financial crises.

He says a small percentage of banks overseen by the Fed are not progressing satisfactorily in their Y2K preparations. But he expects the industry as a whole to be prepared by Jan. 1, 2000.

Fixing the Year 2000 computer problem likely will cost private companies more than $50 billion, Kelley said. He's revised his estimate upward since testifying before Congress last spring, but he's not sure how much more it will be.

Kelly said the federal government is spending just under $7 billion on the problem, but he doesn't have a good handle on what state and local governments are doing to prepare for the Y2K bug.

Fed economists have identified $3.4 billion earmarked by states, ''but I'm quite confident that number is too low,'' Kelley told a group of business students at Vanderbilt University's Owen Graduate School of Management. And that may be where many of the Y2K problems occur, he said.

Critical, electronically-driven local systems that could be vulnerable include water, traffic, police, health and welfare services, Kelley said.

For example, he said, ''One or two malfunctioning traffic signals can cause serious congestion, confusion and delay, and the breakdown of traffic management systems could cause near total gridlock.''

-- Roland (nottelling@nowhere.com), March 26, 1999


....I wish all the government folks would quit patting themselves on the back and start figuring out how they are going to feed several million people when the "just in time" supply system breaks down. Although not a government problem, lack of food for the masses just may affect whether the government stays in operation.

Sincerely, Apple

-- Apple (villarta@itsnet.com), March 26, 1999.

More from the Fed...



Fed sees possible Y2K complications By Reuters Special to CNET News.com March 26, 1999, 5:25 a.m. PT

The Federal Reserve is worried about its ability to provide emergency loans to banks whose computers might seize up because of the Year 2000 bug, a senior Fed official said yesterday.

Speaking to the Senate Banking Committee, Fed Governor Edward Gramlich warned that banks' requests for money through the central bank's discount window could potentially rise "substantially in the future."

"For example," he said, "one or more banks could experience operational problems, perhaps owing to computer failures related to the century date change, that require a large volume of temporary funding from the discount window."

The millennium bug, or so-called Y2K problem, arises when older computers are unable to recognize more than the two final digits of a year.

Fed officials have repeatedly emphasized that U.S. banks appear to be in good shape for the millennium change and have gone through the necessary rigors of replacing old equipment and testing their systems.

Still, while Gramlich said yesterday that he was not predicting a bank computer problem, he said it was still important to be prepared for the possibility that it might happen.

To that end, he asked the lawmakers to support legislation that would permit the central bank to make the necessary loans without running into technical constraints on its balance sheet.

The Fed governor said the balance-sheet constraints have become a concern in light of a trend of a decline in the amount of reserves that banks hold with the central bank.

When customers make deposits into their checking accounts, banks loan out a portion of the money in order to earn interest. They are also required to stash a portion of that money with the Fed for safekeeping but such reserves are unprofitable for banks since they do not earn interest.

So the banks have found ways to minimize reserves by using computer technology to shift funds among various types of accounts.

Gramlich said that is a problem for the Fed, which by law must maintain a certain amount of assets on hand as collateral to back up its currency--the U.S. dollar.

The Fed has ample collateral now but it could be forced into some difficult choices if a situation arose where computer failures sent banks scurrying to the Fed for emergency cash.

"If the aggregate need for such loans exceed excess currency collateral, the Federal Reserve Board would be faced with some unpalatable choices," Gramlich said.

He said the trouble caused by that loan demand could even pose complications for the Fed's ability to steer the nation's monetary policy, since adjustments in reserves are a key tool the Fed uses to set interest rates.

"The small margin of available collateral poses a serious problem for the Federal Reserve," Gramlich said. "To date, the Federal Reserve has always had more than enough collateral to back Federal Reserve notes. In recent years, however, the margin of excess currency collateral has been dwindling."

To fix the problem, Gramlich said lawmakers could loosen up restrictions on the types of securities that count as collateral on the Fed's balance sheet. For example, it could lift provisions that prohibit the Fed from counting mortgage securities as collateral.

He also said passing legislation to allow the Fed to pay interest to banks on reserves would help because it would give them an incentive to hold more money with the Fed.

-- Roland (nottelling@nowhere.com), March 26, 1999.

I'm so tired of hearing about BANKING!!! O.K., now that I've said that. There is so much more to this than the banks. Are the bankers going to navigate the ships, pump the oil, deliver the crops, bring me groceries! Seems whenever anyone says anything positive about the situation, they say, "The banks are fine". I give up! I'll give them that one. Now, can we talk about the rest of the stupid economy?!?!?

-- margie mason (mar3mike@aol.com), March 26, 1999.

Margie -

I don't need a lecture from you on "how much more there is to Y2K" than the financial services industry. I have researched the topic until I am numb, and am quite aware of this, thank you very much.

I posted these articles to reiterate the hypocrisy of the Fed's continuing mantra of "our financial institutions are fine, BUT..."

If you are tired of hearing about banking, I suggest you skip these posts in the future. The thread was clearly labeled.


-- Roland (nottelling@nowhere.com), March 26, 1999.


No barb intended at you. It's the overall picture. The banks have been working a good long time. I might give them some credit here. What I was getting at was that it is the only indicator of progress I seem to hear from all the experts who say everything is O.K. I'd like to hear blitzes from some other links in the chain.

P.S. It might make a difference that I don't know who Edward Kelly is. :)

-- margie mason (mar3mike@aol.com), March 26, 1999.

Margie -

Sorry if I snapped...had a very rough day yesterday.

And by the way, I share your weariness with the "party line"! :)


-- Roland (nottelling@nowhere.com), March 27, 1999.

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