We need a more accurate, more risk-sensitive measure of capital adequacy to provide these institutions with appropriate risk-management incentives and to provide ourselves with a more reliable basis for supervising them in a way that focuses on true risks. In the process, such a measure should also enhance our efforts in taking prompt corrective action.
Assessments concerning the degree of slack in the labor market are highly relevant to an evaluation of the appropriate stance of policy, so I’d like to review my reasoning in some detail.