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.