On ‘Right Reform’

Fed Chairman Bernanke wrote an op-ed in the Washington Post on Sunday on the very touchy subject of regulatory reform.  I guess he’s tired of everyone talking about him as if he’s not in the room while he’s in the room.  The first salvo:

For many Americans, the financial crisis, and the recession it spawned, have been devastating — jobs, homes, savings lost. Understandably, many people are calling for change. Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

Hmm… a system that works better would be something different, now wouldn’t it?  Hey, he left the door wide open, so yes, I stepped right on in.

More from the Chairman:

The proposed measures are at least in part the product of public anger over the financial crisis and the government’s response, particularly the rescues of some individual financial firms. The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly were — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society. (I know something about this, having spent my career prior to public service studying these issues.) My colleagues at the Federal Reserve and I were determined not to allow that to happen.

The bailout of individual firms was merely a product of the panic you and your colleagues at the Federal Reserve were engulfed in.  The attempt to justify it is farcical.

Moreover, looking to the future, we strongly support measures — including the development of a special bankruptcy regime for financial firms whose disorderly failure would threaten the integrity of the financial system — to ensure that ad hoc interventions of the type we were forced to use last fall never happen again. Adopting such a resolution regime, together with tougher oversight of large, complex financial firms, would make clear that no institution is “too big to fail” — while ensuring that the costs of failure are borne by owners, managers, creditors and the financial services industry, not by taxpayers.

You mean like the options you had available for AIG?  You didn’t need to buy the CDOs and CDS from AIG’s counterparties.  The second option on page 13 in the SIGTARP report was available to you and the New York Fed, but you and the New York Fed panicked and decided to try pay everyone off at par and sweep it all under the rug and out of the market.  You didn’t plan to fail, you just failed to plan.  Maybe you should revisit the definition of moral hazard because every step of that transaction shows everyone exactly what it looks like.

Of course, the ultimate goal of all our efforts is to restore and sustain economic prosperity. To support economic growth, the Fed has cut interest rates aggressively and provided further stimulus through lending and asset-purchase programs. Our ability to take such actions without engendering sharp increases in inflation depends heavily on our credibility and independence from short-term political pressures. Many studies have shown that countries whose central banks make monetary policy independently of such political influence have better economic performance, including lower inflation and interest rates.

You people have never met a rate cut you didn’t like.  You always think the answer is cheap liquidity, no matter what the question is.  Well guess what?  You have no more room to cut, your target rate trades in a range because you can’t set a target rate anymore.  Why?  You let the money market get away from you.  You’re already irrelevant in monetary policy.

In a fiat money system, the most important job for a central bank is not to control interest rates, but the supply of credit/money in the system.  If money supply is controlled, velocity of money is maintained and GDP will follow suit.  Interest rates will respond to the money supply.  What I’m trying to tell you Mr. Chairman, is that Volcker had it right.

You and former Chmn. Greenspan have succeeded in weakening and de-stabilizing the market by conditioning the market to expect a free handout at the slightest sign of trouble in the form of a rate cut.  Congratulations.

Independent does not mean unaccountable. In its making of monetary policy, the Fed is highly transparent, providing detailed minutes of policy meetings and regular testimony before Congress, among other information. Our financial statements are public and audited by an outside accounting firm; we publish our balance sheet weekly; and we provide monthly reports with extensive information on all the temporary lending facilities developed during the crisis. Congress, through the Government Accountability Office, can and does audit all parts of our operations except for the monetary policy deliberations and actions covered by the 1978 exemption. The general repeal of that exemption would serve only to increase the perceived influence of Congress on monetary policy decisions, which would undermine the confidence the public and the markets have in the Fed to act in the long-term economic interest of the nation.

But we have no idea who pledges what at the discount window and the haircuts you give them are.  Are you aggressive in valuing their collateral or not?  Besides, as David Merkel suggested, you are not independent at all.  You don’t have the will to tell a politician ‘No.’  Your institution hasn’t made an unpopular decision in over 2 decades.  Independent?  Hardly.

It’s time to audit the Fed and support HR1207.  Because as much as some folks want to go back to the gold standard, the politicos have gotten a taste of what budget-making is like under a fiat regime.

And like a heroin junkie after that first rush, the pols can’t break their addiction to easy votes via pork-barreling and massive deficit spending.

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Filed under finance, government, macro, Way Forward

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