To Get a Systemic Risk Regulator Fire Bernanke
Everyone in Washington policy circles agrees that we need a systemic risk regulator to prevent another economic disaster like the one we are now experiencing. This quest ignores the fact that we already have a systemic risk regulator. It's called the Fed.
The Fed has often stepped outside the narrowly defined realm of monetary policy when it perceived larger risks to the economy. The two most obvious examples are its efforts to stem the stock market crash in 1987 and its intervention in the unraveling of the Long-Term Capital hedge fund in 1998. In both cases the Fed acted because it argued that there would be much greater damage to the economy if it just let the market run its course.
The problem in the current situation was not that the Fed did not have the responsibility to prevent the $8 trillion housing bubble that caused this crisis. The problem was that the Fed either did not see the bubble or somehow did not think there would be serious consequences from its collapse. In short, the Fed blew it - big time.
Just to be clear, this was not a minor error. It was as bad a mistake as you could possibly make on the job. This is like the cook who leaves the stove on and causes the restaurant to burn down. It's comparable to a nurse administering the wrong medicine, not once or twice but hundreds of times, leaving a lengthy trail of illness and death in his wake. The Fed's performance is like a school bus driver who drunkenly heads into oncoming traffic, causing the death of all of his passengers. In short, this is really serious.
But, in the clubby world of high level Washington no one would ever be so rude as to suggest that Ben Bernanke should be fired for his mistakes. In fairness, his predecessor Alan Greenspan deserves more blame. But Bernanke still could have mitigated the damage even as late as January of 2006, when he took over as Fed chair.
Furthermore, Bernanke had been a member of the Fed's Board of Governors prior to becoming Fed chairman. If he ever made any effort in this important position to stem the growth of the bubble he has kept it a secret.
Firing Bernanke is not just a question of justice, although the millions of workers who have lost their jobs because of his mistake may see it that way. It is also an essential step in creating regulators who are actually held accountable for the quality of their work and therefore have a reason for taking their job responsibilities seriously.
As things work now, there is no risk for simply going with the flow. If you just repeat what everyone else is saying, and it turns out to be wrong, the Washington elite steps in for you with a supportive chorus of "who could have known?"
However, if a regulator were to step out line - imagine someone at another regulatory agency began to openly challenge Alan Greenspan and warn about the enormous danger created by an $8 trillion housing bubble - then they would be risking their future career path and their current job. It is an extremely rare public servant who will put their career path in jeopardy to promote the public good.
This is why none of the other regulators could see an $8 trillion housing bubble. They would have borne enormous career risk to make an issue out of the bubble after Alan Greenspan and Co. at the Fed had said that everything was fine.
It is not the responsibilities of the regulatory agencies that needs to be changed, but the incentives for the regulators. If the regulators face no sanction for just going along - even when they thereby get it horribly wrong - then they will always just go along.
In short, if we want regulators that actually police against systemic risk rather than ignore it, then we have to fire the regulators who failed horribly in the past. If we are serious about getting a real systemic risk regulator then Ben Bernanke must go.
The Fed under GREENSPAN, not Bernacke, did NOT
1) Fail to regulate the Wall Street derivatives bubble. The Bush Administration did that.
2) Run up massive federal budget deficits to finance a cocked-up Iraq adventure. The Bush Administration did that with the help and support of supine Democrats in Congress.
3) Fail to reform tax policy favoring house owners over renters, thus helping further inflate the real estate bubble underlying the derivatives bubble. Look instead at a bipartisan lame Congress supported by an incompetent Bush Administration.
Bernacke is making some mistakes, no doubt. However, making him a scapegoat for the mistakes of politicians is not a good way to either improve the Fed's performance or preserve its traditional independence from politicians and their blunders.
May 31, 2009 8:39 PM | Reply | Permalink
Since we are not talking about any worse fate for the Titans of Finance than getting fired (just like millions of feckless plebes), I don't think we need worry too much about making an example out of somebody who is not the guiltiest of them all.
So axe First Quartermaster-General Bernanke von Ludendorff at once and let him get his revenge when he writes his memoirs.
Happy days.
June 1, 2009 9:43 AM | Reply | Permalink
This is little different from all that goes on in Washington anymore. Not a single person is held to account for their screwups no matter how serious the consequences or how they came to pass. It can be as serious as those of the Bush administration where it has been argued that there was actual criminal intent or it could be an actual mistake. In the end though our government has resources available that should create a condition where they never make a serious mistake that harms the country in any meaningful way. There is almost nothing they don't or can't know that would prevent such a mistake. Our FBI warned in 2004 there was serious problems with the mortgage industry and the Bush administration did nothing to rectify it. If you examine all the screwups that have happened over time you would find that in almost every case our government knew exactly what was going on and chose for one stupid reason or another not to do a thing. And in most cases it is because nobody in Washington wants to make waves even when the country is at risk. Cowards all of them.
May 31, 2009 8:57 PM | Reply | Permalink
come on folks, I am no Bush fan, and he also deserves blame for not having tried to counteract the bubble, but the institution with the most immediate responsibility was the Fed.
And you did not need the FBI, you just needed someone who could do arithmetic to see the bubble. The tax cuts and war were both bad news for the economy, but it was the bubble that sank the economy. This destroyed the housing sector and the loss of wealth in the wake of its collapse was responsible for the falloff in consumption.
May 31, 2009 9:12 PM | Reply | Permalink
You have not made a case against Bernanke. What exactly could/should he have done after Jan. 2006 when the housing bubble in retrospect had clearly decelerated and was topping out in many areas. Raise interest rates ala Volcker circa 1980? Cut them again to close to zero sooner?
"And you did not need the FBI, you just needed someone who could do arithmetic to see the bubble. The tax cuts and war were both bad news for the economy, but it was the bubble that sank the economy. This destroyed the housing sector and the loss of wealth in the wake of its collapse was responsible for the falloff in consumption."
I think you are mixing up cause and effect for starters, here. It was the debt bubble which kept the economy falsely inflated for some years prior to 2007.
June 1, 2009 5:48 AM | Reply | Permalink
It was the highly leveraged CDOs and CDSs that brought down the economy. High flying banks, employing practices that were formerly illegal, and swept up in a euphoria of greed, crashed it all.
Cherry picking in the history, Dean.
June 1, 2009 7:34 PM | Reply | Permalink
Thank you for coming out and saying it.
May 31, 2009 9:18 PM | Reply | Permalink
Hold Harmless Democrats do not fire anybody for anything but politically incorrect or sexually indiscreet personal behavior.
Congressional Democrats and their fund-raising, pimp-handlers are policy neutral:
As the Kentucky-Fried committee barons say, they "jes' wanna hep' ever'body."
May 31, 2009 10:30 PM | Reply | Permalink
The weakness of Baker's analysis is that it fails to explain what the Fed did wrong -- or failed to do right.
The Fed has two goals -- maintaining a stable currency (that is, a 2% targeted annual inflation rate) and full employment (some NAIRU if we only knew what that number was) -- which it fulfills by manipulating the short-term interest rate. The Fed believed throughout the Great Moderation -- say the mid-'80s through last year -- that it was performing its statutory mandate -- keeping inflation low and employment high -- in an exemplary manner.
Does Baker dispute this claim? No, he does not!
So, what's his beef? Or where's the beef?
N.B. I can think of a lot things the Fed did which in hindsight it ought not to have done. But shouting "asset bubble" doesn't tell us what, given the tools the Fed has at its disposal and the economic theories telling it how to deploy those tools generally agreed upon by the professoriat, the Fed did wrong.
May 31, 2009 11:04 PM | Reply | Permalink
eds,
the housing bubble led to record rates of housing construction and therefore a huge oversupply of homes. This is why construction has fallen by 50 percent, a loss in annual output of $450 billion. Illusory housing wealth fueled the consumption boom, pushing the saving rate to zero.
With the disappearance of $6 trillion in housing bubble wealth, the saving rate has now risen to almost 6 percent. That translates into $600 billion a year in lost consumption.
This loss of more than $1 trillion in demand (throw in another $250 billion or so from the collapse of the bubble in non-residential real estate) was an entirely predictable result of the collapse of the bubble.
Greenspan and Bernanke should have seen the bubble and they should have recognized the disaster that would be follow from its bursting. It was all completely predictable and the failure to try to have stopped this disaster is inexcusable. What were they doing that they thought was more important?
June 1, 2009 9:55 AM | Reply | Permalink
Promoting "maximum employment, stable prices, and moderate long-term interest rates" as called for by 12 U.S.C. 225(a), as amended?
June 1, 2009 11:37 AM | Reply | Permalink
Do you think the Fed should be thinking long-term about achieving its mandate or do you think it should think like Wall St. bonus babies looking no further than the tip of their nose?
Because the near 10% unemployment is a miserable failure to accomplish the fed's statutory mandate and is a direct result of policies which Bernanke helped formulate even while under Greenspan's leadership.
Bernanke contributed to the worst unemployment and worst economic decline since the Great Depression - you don't think we can find someone better to chair the Fed?
October 31, 2009 1:55 PM | Reply | Permalink
Dean,
As usual you present only part of the picture. While it's true that excess supply of new homes was created, that's an effect, not a cause, and it's only part of the picture. The effect of that effect over time was part of what led to a collapse in housing prices. Un-moderated over-supply of any commodity can do that. But what drove things was excess debt.
Investing in real property IS a form of saving, if you put your own money into the property.
It is, again, not "lost consumption". It's a return to closer to real levels of consumption, levels not leveraged by insane borrowing over many years.
"Greenspan and Bernanke should have seen the bubble and they should have recognized the disaster that would be follow from its bursting. It was all completely predictable and the failure to try to have stopped this disaster is inexcusable. What were they doing that they thought was more important?"
Again, what would you have had Bernanke do AFTER Jan. 2006?
I am not a mind reader, so I don't know what you're thinking but not saying. I also don't know what G&B thought was more important, but some things do stand out:
They may have feared that restricting debt would do terrible things to the economy esp. after the large psychological hit of 9/11 combined with the modest real hit of 9/11 in the wake of the modest recession of 2001 in the aftermath of the collapses in the late 90s. You're the expert, you tell us.
I know you and others were concerned about possible housing bubble in 2003 or earlier. Let me ask you this: What did you think was so important in 2003-2006 that you were not twisting arms, knocking on doors in DC, and appearing on dozens of reputable talk shows etc. letting people know that the sky was truly about to fall?
But again, the disaster was not the bursting of the bubble, it was what led to the collapse, distortions of fundamental realities. If you want to hit Bernanke for that, you're going to have to evidence your claim better.
June 1, 2009 8:07 PM | Reply | Permalink
eds,
actually I was doing everything I could to warn people about the housing bubble after July of 2002. I didn't want to engage in pointless exercises, which is why I did not go knocking on doors, but i certainly wrote about as much as i could and talked about it on every interview show I could.
As far as Greenspan and Bernanke's other concerns, they may have had them, but they were hugely wrong. That is why they should get fired.
Whatever they thought was important in 2003-2007 was absolutely trivial compared to the bubble. The impact of the collapse (which was 100 percent predictable to anyone who understands any economics) dwarfs whatever items they wasted their time in these years.
June 1, 2009 8:31 PM | Reply | Permalink
The feds' jawboning power is pretty enormous. Their control over US interest rates in the absence of a liquidity trap, pretty much absolute. The power they wield by deciding who gets access to their overnight window, ditto. Yes, Greenspan is much more to blame, not only for the monetary policy that helped inflate the housing bubble but also for enabling the Bush/Cheney regime's looting of the national purse. But that just means Bernanke took a bad situation and made it worse rather than taking a good one and making it bad.
Oh, and Ellen is wrong about something else too: the fed under Greenspan and Bernanke (and Volcker before him) did not really focus on keeping employment high; they were willing to trade high unemployment and/or low job growth for low inflation pretty much every time.
June 1, 2009 10:05 AM | Reply | Permalink
Depends upon what you think NAIRU is.
June 1, 2009 11:40 AM | Reply | Permalink
There is too much concentration on the Fed, which is and should be a central bank and as such should focus on smooth functioning of the banking system, i.e. interest rates and the money supply.
The regulatory functions should reside elsewhere.
Monetary policy is one piece of the puzzle; macro and micro effects are even more important and they should be the purview of Treasury through regulation and congress through legislation.
The UK system employs a central bank plus an overall regulator (The Financial Services Authority). That system fails because of weak performance by the FSA.
Most needed is a discussion of the economic functions of government and what the objectives should be. Congress should redesign the system such that economic goals are spelled out and metrics are established and reported periodically and routinely.
A major shift should be recognition that banks and the financial sector, in all its forms, exist to facilitate the real economy, not to make money for banksters.
June 1, 2009 11:06 AM | Reply | Permalink
It should be clear by now, after several centuries of economic history, that any asset bubble spells trouble, whether it involves housing, stocks or tulips.
It should also be clear that among people with access to money and credit, there will be enough bad apples to game the system and those people must be defended against lest they disrupt the entire economy.
These happenings are not new.
June 1, 2009 11:17 AM | Reply | Permalink
I think, the nation is finding it difficult to recover from on of the deepest downturns of the housing market so far. Despite a lot of federal efforts to recover the situation, the market is not showing very bright signs of easing. The recession in this market is still increasing every day as the unemployment rates are also reaching red alert.
For decades, investment in real estate has always been one of the key profit areas of for banks and other financial institutions. Investing in a house was always considered to be the one of the safest way to safeguard one’s money. Owing to this investment fundamental, people continued investing in real estate during the period between late 1990’s and 2005 even though the prices were reaching their all time highs. With banks and financial institutes sinking, the condition of housing market has become even more volatile.
http://www.housingnewslive.com/housing-market-crash-in-us.php
Though the housing market has become more affordable now, it has not triggered buyers to jump into the attractive deals as they are unsure of their repayment prospects in the future too.
June 2, 2009 7:54 PM | Reply | Permalink