The Region

The Role and Value of Market Forces

Top of the Ninth

Gary H. Stern President, 1985-2009

Published June 1, 1999   |  June 1999 issue

Elsewhere in this issue of The Region, my speech at the Federal Reserve Bank of Chicago's May Conference on Bank Structure and Competition is reprinted. One of the themes of that speech is that as a matter of sound public policy we need to bring more market discipline to bear on our largest commercial banks. This step is desirable to offset effectively the underpricing of risk taking arising from the safety net—principally deposit insurance and the discount window—underpinning banking. The problem is particularly acute for large institutions because of "too-big-to-fail" precedents that especially distort market signals in their case.

More recently, I have been thinking about economic growth and, specifically, about those factors that account for the sustained positive performance of our economy over the past several years. To be sure, I have not arrived at a fully satisfactory explanation for growth in the United States, but at this stage the analysis emphasizes the value and significance of market forces in contributing to the expansion. In particular, openness to foreign trade, deregulation and acceptance of major industrial reorganizations—factors that have promoted competition and specialization and hastened the adoption of new technology—appear critical to the growth process.

Emphasis on the role and value of market forces—in this case on competition and specialization—is consistent with some of the earliest writings in economics and with the recommendations in my Chicago Conference remarks. It is, I suspect, no accident that confidence in market signals and outcomes increases as we continue to gain experience in both macro and banking policy. In any event, I plan in a forthcoming speech and in a subsequent issue of this publication to discuss the role of the market in promoting growth and prosperity.