Ex-Fed Governor Randall Kroszner Expects Economy to Revive in 2010

Randall Kroszner was a Fed governor until January 2009. In a television interview on CNBC today, he said he expects growth to resume in 2010 and that the Fed's actions will have a positive impact on consumers and lending.

Perhaps most interestingly is that he provided a behind-the-scenes peak at recent Fed deliberations. Some of his noteworthy responses include:

• The Fed is not worried about inflation but instead is working to prevent deflation. The Fed is very much aware of what it is doing regarding printing money but there is no current risk of inflation.
• To right the economy, three things have to happen: 1) stabilization of financial markets; 2) stabilization of housing; 3) restore consumer confidence. The first two will help with the third.
• The Fed's balance sheet is very flexible. It is designed to go up when the need is there and come down when that need decreases. In the first part of 2009, its balance sheet actually shrunk by $600 billion.

The biggest takeaway seems to be that the Fed is not concerned about inflation. Central banks know how to stamp out inflation. They raise rates. But deflation, as we have seen, is a much trickier problem. The Fed's challenge is how to pump massive amounts of liquidity into the market without creating another bubble. Greenspan lowered rates precipitiously in 2001 to prevent deflation after the Internet crash and that helped create the housing bubble. I believe the Fed will take a much more active role in pricking potential asset bubbles this time around. Whether that will be good or bad for the economy remains to be seen.