When the U.S. Sneezes...

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A: It's very unlikely the next move will be to lower the rate (absent some surprise shock). My guess is the next move is up. When, I don't know. If we get worse-than-expected news on inflation and benign news on the economy, that might galvanize the Fed to raise rates. If inflation stays very modest, I don't see an increase until next year.

Q: We've got a lot of problems: a weak dollar, soaring oil prices, rising unemployment, housing is still a mess, financial institutions are crumbling. Which do you see as the biggest threat?

A: Some of these are related to the very accommodative monetary policy. It is partly responsible for the weakness of the dollar, which is (raising) import prices. It also has something to do with energy prices and the distress in airlines and automobiles. The economy needs time to adjust to higher relative energy prices.

In the house we are building, I think we are going to install a geothermal heating/cooling system. That's an extra capital cost but it will reduce energy use. That's the kind of capital cost households and companies can put in place, but savings in energy takes awhile to occur. We don't want the change in energy prices to lead to monetary policy that creates generalized inflation on top. That is where I fear we are headed.

Q: Are we on the verge of a global depression?

A: If you mean by depression anything like the 1930s, no. I don't think we are likely to have more than a mild recession.

Q: Do you see the Fed bailing out more banks or brokerages?

A: Bear Stearns was a real game changer. The Federal Reserve would find it very difficult not to engage in a similar operation with a large bank or another investment bank. The more interesting question is whether the Fed would step in for assistance on a large non-financial company.

This is an example, not a prediction: Suppose we have a further upward spike in energy prices and one of the top U.S. airlines says it has to discontinue operations. If this happens when Congress is out of session, the only possibility is Federal Reserve resources.

What argument is the Fed going to make when politicians come and say, "Look, you bailed out Bear Stearns." The airline has more employees than Bear Stearns and the collateral damage would be greater. Would the Federal Reserve say no under those circumstances? No one knows.

Until the Federal Reserve defines the rules of the game, who has access and who doesn't, anytime a corporate crisis occurs, people will be asking, Why isn't the Fed stepping in after all it did for Bear Stearns?

I'm a small boat sailor. If my boat is sinking, I'm going to bail like crazy to stay afloat. Once you have your situation stabilized, you better know what direction you're going or you are going to end up on the rocks. The Fed bailed like crazy, saved the financial system from a cascading collapse. What has not been done so far is worrying about the compass course.

Q: Should the Fed have done more to stop the housing bubble?

A: No, I don't think so. We all understood that the house price increases could not continue. We did not think through the possibility of a significant price decline and large-scale defaults and foreclosures.

The person who was closest to this was (the late Fed governor) Ned Gramlich. Ned was concerned about abusive lending and the risk to lower-income households. We understood there was abusive lending and practices that were stripping equity out of households. I don't remember the issue ever being raised that it could lead to defaults.

Q: If the Fed had acted to protect consumers, might it have prevented the credit crisis?

A: Maybe. The people who should have known were the financial firms sinking huge amounts of money into this. The biggest problems were mortgage originators who were not federally regulated. At this period there was a continuous push by Congress to make mortgage credit more readily available to subprime borrowers. For the Fed to have acted would have been contrary to the intent of Congress.

Q: Isn't the Fed supposed to be independent?

A: The Fed is independent up to a point. The financial community, the Fed, academics, didn't see the problem brewing."

Surely, Mr. Poole retains more than a few inside channels of communication to the Fed. Whether or not the central bank follows any of his advice remains to be seen. Late(er) in 2008 and early in 2009 the markets will give us a lot more facts than we can speculate about right now. In the interim, the show must go on.