It is neither controversial that mistakes were made leading into the crisis nor that the Fed bears much responsibility. That said, I’m unclear the institution (or Bernanke) deserve such aggression as demonstrated in this article.
Instead of focusing on the Chairman, I’d like to see more interest in the system-wide incentives that drive the current structure. Arguably, almost anyone could have been chairman and the results would have been the same (or far worse).
I’ve previously expressed skepticism on the Fed’s dual mandate. This time I’ll ask: should “chief protector” (ie, Fed’s role as banker’s bank) and “chief regulator” co-exist? This is a government-sponsored entity and if we don’t change it, it’s hard to blame anyone but ourselves when the issue explodes into financial calamity.
Fed’s approach to regulation left banks exposed to crisis
By Binyamin Appelbaum and David Cho
Washington Post Staff Writer
Monday, December 21, 2009; A01
Foreclosures already pocked Chicago’s poorer neighborhoods but the downtown still was booming as the Federal Reserve Bank of Chicago convened its annual conference in May 2007.
The keynote speaker, Federal Reserve Chairman Ben S. Bernanke, assured the bankers and businessmen gathered at the Westin Hotel on Michigan Avenue that their prosperity was not threatened by the plight of borrowers struggling to repay high-cost subprime loans.
Bernanke, who was in charge of regulating the nation’s largest banks, told the audience that these firms were not at risk. He said most were not even involved in subprime lending. And the broader economy, he concluded, would be fine.
“Importantly, we see no serious broad spillover to banks or thrift institutions from the problems in the subprime market,” Bernanke said. “The troubled lenders, for the most part, have not been institutions with federally insured deposits.”
He was wrong. Five of the 10 largest subprime lenders during the previous year were banks regulated by the Fed. Even as Bernanke spoke, the spillover from subprime lending was driving the banking industry into a historic crisis that some firms would not survive. And the upheaval would shove the economy into recession.
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Of course the Fed bears much of the responsibility, and the institution itself is to blame. The Fed has consistently shown it’s only tool to be that of inflating the money supply to prevent imploding bubbles (which it blew up) from sucking the life out of the economy. The market should be setting interest rates, not some private banking cartel – we’d be better off picking interests rates out of a hat.
It appears the next crisis just around the corner is that of a currency/soverign debt crisis. Unfortunately, the Fed’s only tool of printing money will only amplify the problem this time around – this time the crisis will be the Fed’s “tool” itself.
Bernanke assisted in blowing up the bubbles, couldn’t recognize the largest one ever (housing), denied that housing prices would fall on a national level, believed subprime to be contained and now thinks that doubling it’s balance sheet will prevent us from facing the depression our country’s had coming for awhile.
It’s time to face the music. Unfortunately our leaders would rather burn the dollar to a crisp than see our bankers out on the streets.
It’s a very interesting perspective John. Personally, I feel the Fed’s toolbox has consistently grown quite ample and they can in fact accomplish quite a lot with the capabilities at their disposal. The previous bubble was so dangerous not simply because it was large however, but because it was credit-driven (and yes, fomented both directly and indirectly by the Fed).
Issues of US-specific monetary policy aside, I think there is no question that global stability will increasingly require a coordinated effort among central banks, large fiscal players and private sector actors to a level that is historically unprecedented. US moral leadership in this arena will be critical but is as of yet uncertain.
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