Donald Kohn, still Vice Chairman of the Federal Reserve for a few more months, spoke yesterday at Davidson College in North Carolina, and he assigned some homework to monetary policymakers.  Kohn was trying to shed light on areas that need further study, and he stressed that while he himself was having trouble coming up with clear answers, he shared his "tentative thoughts" as a way of jump-starting important areas of inquiry:

The first two assignments concern the policy actions the Federal Reserve and other central banks took during the financial crisis. A key part of the Federal Reserve's response was to fulfill its traditional role of providing backup liquidity to sound institutions during times of financial turmoil. In a break with tradition, we had to provide that liquidity to nonbank financial institutions as well as to banks. One assignment is to evaluate the implications of the changing character of financial markets for the design of the liquidity tools the Federal Reserve has at its disposal when panic-driven runs on banks and other key financial intermediaries and markets threaten financial stability and the economy. In addition to providing liquidity on an unprecedented scale, we reduced our policy interest rate (the target for the rate on overnight loans between banks) effectively to zero, and then we continued to ease financial conditions and cushion the effect of the financial shock on the economy by making large-scale purchases of several types of securities. My second assignment involves improving our understanding of the effects of those purchases and the associated massive increase in bank reserves.

The third and fourth assignments relate to whether changes to the conduct of monetary policy in normal times could make financial instability and its wrenching and costly economic consequences less likely. Number three involves considering whether central banks should use their conventional monetary policy tool--adjusting the level of a short-term interest rate--to try to rein in asset prices that seem to be moving well away from sustainable values, in addition to seeking to achieve the macroeconomic objectives of full employment and price stability. The fourth and final assignment concerns whether central banks should adjust their inflation targets to reduce the odds of getting into a situation again where the policy interest rate reaches zero.

It is a refreshing speech, in that Kohn does not run away from any responsibility to do a better job in creating better monetary policy.  In his conclusion, he offered up a candid assessment of the shortcomings of central bankers at the outset of the global economic crisis:

We thought we knew enough about the basic structure of the markets and the economy to achieve economic and price stability with relatively minor perturbations. And we thought we had the tools necessary to deal with liquidity shortages and maldistributions. The reality is that we didn't understand the economy as well as we thought we did. Central bankers, along with other policymakers, professional economists and the private sector failed to foresee or prevent a financial crisis that resulted in very serious unemployment and loss of wealth around the world. We must learn from our experience.

Read the full speech here.