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The Spectacle Blog
Andrew Leonard has an interesting article in today’s Times on Bernanke’s recent arguments that the Fed should have greater regulatory oversight in order to ward off future recessions. Leonard makes a joker out of Bernanke by simply going over the Fed’s recent history, which clearly shows that a more powerful Fed would have made the current crisis worse, not better. In 2004 and 2005, the prevailing wisdom was that the housing boom was a good thing, and the Fed was downplaying the housing crisis as late as 2007.
“The Federal Reserve has unparalleled expertise,” Mr. Bernanke told Congress last month. “We have a great group of economists, financial market experts and others who are unique in Washington in their ability to address these issues.”
Fair enough. At some point, though, it sure would be nice to hear those experts explain how they missed the biggest bubble of our time.
It would be nice to hear the experts explain how they missed the bubble, but it wouldn’t strengthen the case for increased regulatory powers for the Fed. Even if Congress creates a board dedicated to pinning down the causes of financial crises, as Leonard suggests they should, and even if they excel in understanding the causes, it doesn’t help for governance. The Fed’s insight or the board’s insight will only be useful for fighting the last war. The causes of booms and busts are far too complicated for even the most brilliant Fed chair in the world, and given that market actors will also be factoring the Fed’s behavior into their decisions, there is nothing that they can do to prevent future mistakes. But they can do a lot to make things worse, as Leonard clearly shows they would have had they had the powers to do so in 2004-2007.
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More Blog Posts by Joseph Lawler
http://spectator.org/blog/2010/01/06/expertise-is-cheap-crises-are
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Pingback| 1.6.10 @ 12:43PM
Twitter Trackbacks for The American Spectator : AmSpecBlog : Expertise Is Cheap. Cri links to this page. Here’s an excerpt:
Franklin| 1.6.10 @ 1:16PM
According to Glenn Beck, the FED is right on target ...
... to create a depression 100 times worse than the last one.
Acynic| 1.6.10 @ 1:17PM
Let's see now, the Fed gave us the Great Depression, the very hi inflation 70s, and the housing bust - via very low interest rates.
Also, post the LTCM bomb they did nothing.
Yes, today's dollar purchases what 40 cents US would have bought 40 years ago.
so, the record is very plain to see; they are doing a great job and should be provided more power.
JP| 1.6.10 @ 1:32PM
Some time ago both energy and food was removed from the CPI. This was to remove short term volatility from the prices index. Greenspan and Bernecke both missed the last bubble because soaring energy prices were not taken into consideration. I remember Greenspan saying that "real" inflation was only 2-3%, when it was actually closer to 10% (Gas prices at that time shot up from $2 a gallon to over $4); the dollar was in a free fall (I remember reading about a super model in New York demanding to get paid in Euros or Yens), and speculators were rushing into both oil and commodities. Our experts missed all of this -go figure.
Currently, the Fed Chairman says inflation is under control. This, despite gold almost doubling in 18 months, and oil doubling in price since its low in December 2008 (Demand remains weak, but a weak dollar is having its affect). And Bernecke's and Geihtner's inflationary money supply is creating the expected result in creating a new bubble. Despite what the Fed has said, inflation is back. Analysts said just this morning that oil prices will continue to climb and could hit $100/barrel by late Spring. But Bernecke will claim there is no inflation. Ol' Ben will wait until oil is at $150/barrel and Gold is selling at $2000 a ounce before he considers raising interest rates.
Bob| 1.6.10 @ 1:41PM
JP, the issue is not as simplistic as you seem to understand. The Fed not only uses the CPI, but also increases in energy costs to make their decisions. In fact, they use numerous factors in their model beyond both CPI and energy. Bernanke missed the bubble because no one is good at predicting market timing.
The increases in gold are directly related to the fiscal solvency of the U.S. Both Reagan and Bush2 contributed to this problem by increasing the debt more than any previous president. Corporate demand is actually increasing and companies are currently quite profitable. However, job creation is always a lagging indicator.
Interest rates are low because treasuries can be sold at low rates -- i.e., China is still buying them. We will have a treasuries bubble sometime in the future, I don't know when. However, Gold is already peaking and oil is holding steady because OPEC knows if they let the price go too high, it will stimulate non-oil energy solutions.
Bob| 1.6.10 @ 1:34PM
Joseph,
Your populist response to a complicated issue shows your naivete to issues like this. It is far more complex. The Fed does need to be able to monitor and regulate instruments like derivatives and default swaps to be able to monitor capital reserves and accounting procedures. That gives the Fed more power. That said, giving them hidden powers to force private institutions to accomplish political goals like keeping interest rates to to stimulate the housing industry must be strictly limited and watched closely. Actually, they have done a good job of keeping inflation under control since Volcker. Greenspan was far too political and it is a positive that Bernanke is more of an academic.
No one can predict bubbles because bubbles wind up like a rubber band and market timing is virtually impossible. We can't expect the Fed to do that. Most of us trained in economics knew there was a housing bubble, we just didn't know WHEN it would hit. We also know a treasuries bubble is now forming. But we don't know if it will happen next year or 5 years from now. You cannot prevent a free market from irrational exuberance even if you are the Fed.
So the answer here is that the Fed does need more regulatory authority in certain areas and not any more in other areas. Remember, it was unregulated securitization (including derivatives and swaps) that caused the housing bubble, not the Fed. Yes, the Fed helped the process, but certainly not more than deregulation. I was in the industry... I know....