The American Spectator

The Public Policy

Depressed About Paulson

By Philip Klein on 4.1.08 @ 12:51AM

(Page 2 of 2)

After six aggressive moves including one last month, the federal funds rate now stands at 2.25 percent. Given the weakness of the dollar, we can only guess how long it will be before the Fed will have to bring rates up again.

Paulson sees the Fed's potential as a stabilizing force, but Fed members are not prophets who can predict precisely when markets are in the midst of an asset bubble.

In 2004, Greenspan wasn't oblivious to the potential dangers posed by a housing bubble. He gave this issue great consideration, but ultimately concluded that it wasn't a major concern because, "while local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity."

Greenspan and Bernanke, to their credit, understand the limitations of the Fed. As the Washington Post noted in 2005, they "have both said it is unrealistic to expect the Fed to identify a bubble in stock or real estate prices as it is inflating, or to be able to pop it without hurting the economy. Instead, the Fed should stand ready to mop up the economic aftermath of a bubble."

Even in his speech announcing Treasury's proposal to make the Fed into a market stabilizer, Paulson acknowledged that "No regulator can prevent all instability and market turmoil, and this one won't either" and said he expected that "we will continue to go through periods of market stress every five to ten years."

BUT PAULSON ONLY considers whether the super-regulator will fail to "prevent" a crisis, rather than whether it will make a crisis far more severe, as the Fed did in the 1930s, and as it arguably did in this decade.

Even though the Fed helped bring about the Great Depression, the economic catastrophe resulted in the body being given yet more power by politicians who concluded that the under-regulated free market had failed. We cannot afford to make the same mistake again.

Letter to the Editor

topics:
Ben Bernanke, Environment, Oil