Thursday, July 30, 2009

Bernanke bashing... Fair game or not?

Save Ben! Reappoint Ben! I don't know why it is a new sport or what anyone gets out of it. But both Bloomberg and the WSJ have carried Op-Ed or columnist opinions that trash the guy that may have saved the economy, Ben Bernanke. Hey, he has made mistakes; he is human; but he also has come up with very innovative and timely ideas to stopper a crisis that was bout to run out of control.

Does Harvard know best? Amar Bhide (Harvard scholar) has remarks that appear in the Journal that are so incoherent as to make no sense. I wrote to Bloomberg about their anti-Bernanke article and have gotten no reply on that. I suppose we are supposed to give this comment in the Journal weight because the guy is from Harvard. Certainly it's not because of what he has argued. His article is a jumble of illogic.

Your point??? Trashing Bernanke as a academic who has no proven experience or management skills makes no sense once you admit that the guys running the banks (ruining the banks?) were life-long bankers with tons of experience.

Blame WHO??? Labeling the financial melt down as the result of lax regulation is a knee jerk response; I find myself falling prey to the notion too from time to time. But when the lawmakers change the rules and remake them such that the game is unsafe, how is anyone supposed to act safely when the new game itself is now intrinsically more risky? It was the lawmakers (not the regulators) that allowed 'nothing down' loans and 'no income test' borrowing. The bankers only followed suit, like driving too fast on a road because the speed limit lets you. Still, the bankers failed to see the heightened risk and they bear the blame for that. But don't blame the 'cops' for not arresting them for staying within the new higher and more dangerous speed limit.' Actually I think the lawmakers and bankers are more guilty than the regulators although the regulators did play a role in supporting the rule changes instead of fighting them.

Who is most guilty over sub-prime issues?? Blasting Bernanke for not seeing the dangers of sub-prime lending early in his term, when in fact the Fed had uncovered misdoings and had been silenced by its own Chairman, Alan Greenspan, a year or so earlier, hardly makes sense.

Is this central banking or hot potato??? Blaming Bernanke for not having more foresight when Greenspan was the guy who was there for nearly 20Years and was a staunch opponent of regulation also resonates with little clarity of the situation.

The least political regulator -- The Fed has been an honest regulator - not without fault, but honest and, for the most part, skilled. Had the Fed had a different Chairman prior to Bernanke it might have actually have done a better job. Instead, Bernanke became the unluckiest central banker as he had to follow the reign of the world's luckiest central banker - a guy who left just as his string of luck was running out. When the failure of a bureaucracy comes down to its leader's failings and one who was a known partisan who did not like part the job he was assigned to do (regulate) it's hard to fault the institution of the Fed for the outcome...or to fault his successor. But that is what Mr Bhide does.

Fiddle dee dee: Moreover, the lawmakers do oversee the Fed and they did not exercise much of that oversight. In his autobiography Greenspan admits to planning to say long incomprehensible things to throw them off track when they made him testify. He has never suffered any adverse repercussions from that admission. I find that odd.

A division of power that sets the blame -- The House financial services committee was willing to 'roll the dice,' as Chairman Barney Frank put it, to spread homeownership more widely. Once again this proves that the road to Hell is paved with good intentions. Good intentions may indeed make for some very bad economic policy. And they did. Such was the oversight of 'Congress.' Such things are not the fault of the Fed.

Like a Rock...not Iraq -- The Fed has in fact has been one of our better, more reliable institutions of late. Under Paul Volcker the Fed stopped a rising runaway inflation that had been the product of the combination of rising oil prices and previous Fed policy errors. Those previous errors came from a Fed Chairman who had been too partisan- at that time a Democrat (Arthur F Burns). Greenspan followed Volcker fighting a 'rear guard' action on inflation trying to reduce it slightly further. But then he lost his way in his zeal for pushing for de-regulation everywhere. In ignoring regulation violations that were in the Fed's bailiwick that were dredged up by one of its sitting governors, Greenspan made the cardinal policy error he is still trying to dodge. Greenspan said to let it go. In retrospect he argues that the Fed was too much of a bureaucracy for him to have controlled it so well. Don't believe it. So the Fed governor (Ned Gramlich) stopped pursuing what could have been the Fed's finest hour (in retrospect).

Greenspin - Greenspan blew that up by himself. He continued asserting that nationally home prices had not fallen, a stylized fact with no substance. Of course, nominal house prices had not fallen, inflation had been too high even in the previous deep recessions. Real home prices had dropped and now with inflation lower wasn't the real message that home prices would be more at risk not less as risk to drop in nominal terms?

Personal or institutional failings? You decide -- Why doesn't Mr Bhide see the difference between the personal failure of Alan Greenspan and institutional issues that pertain to the Fed?

Your point again?? Bhide's solution is to recognize that in the past, firms specialized. Now things are too complicated, apparently. Well maybe there was less competition and because of that firms could make more profit more easily. Maybe with essentially 'business-line monoplies' firms did not have to take as much risk to make money? Maybe? So is his point that there is more money in a monopoly?

An odd quote: Hence we have this odd statement by Mr Bhide about not being able to know everything about everything. (
See the address above about six paragraphs down for this reference.

Confusion - I don't get this point at all. I allude to it above... does Bhide believe in monopoly? Does he not believe in delegation and management at the Fed? Can firms only do one thing right? What sort of point is he trying to make here?

Growing Fed powers, yes but much, much more -- Bhide goes on to list the way the Fed's powers have gradually spread as though that is evidence or proof of his point. But what also spread were regulatory overlaps, regulatory holes and differences of opinion among regulators that allowed some instititutions to choose their overseer - a dangerous thing. That was not the Fed's doing but instead the environment in which it worked and eventually it was the Fed's undoing since the Fed was not the main regulator of either AIG or Lehman Brothers or Bear Stearns for that matter. But the Fed did find a way to deal with the fallout.

Fed is independent but not a loose cannon - The Fed in fact is a bureaucracy with lots of different branches and expertise. Governors are selected for their diversity in expertise and that has been more true in recent years when the challenges of economic specialization stepped up. The Fed is and always has been accountable. It reports to Congress twice a year and is overseen by GAO audits of its books.

Is more too much? Adding more regulation to the Fed's plate may spread it too thin, but I doubt it. More likely the Fed would simply need a new branch to focus on that aspect of enhanced responsibility separate from monetary policy. It seems to me that the real issue is not the question 'can the Fed regulate these markets?' but instead the question of whether the markets are doing things that should be regulated or that can be managed. Maybe some of these activities simply should be stopped.

TIME BOMB!!! Any activity that pays out today but does not reveal its true worth for several years is a ticking time bomb. Many derivatives had that property, as salesmen and traders were paid on a calendar year basis while stuff they generated and often only partly sold sat on their firm's books unsold and marked to a hypothetical market. Those are more the sorts of things that regulators need to think about.

Is hindsight really 20/20? Oversight needs to be different and more sophisticated. It needs to push back. And with the strength of the financial lobby that will not be easy regardless of which party is in power. It's not as simple as consolidating product lines and getting more experience at the helm. Mr Bhide does not seem to have a clue how complicated it all is and how the solution lies in having good people with skill and sound judgment. His brief paean to artificial rules and the role of the gold standard open a whole new can of worms for troubles to emerge. Not only is the Fed a good choice, but what other agency would have managed the last crisis so well? Who would you have trusted to take the lead in the last crisis? When put it that way the job the Fed has done shines even more brightly. Hindsight is said to be 20/20. In this case I'm not so sure. Criticism of the Fed sure has been far more myopic than that.

1 comment:


Is this the way the game will be played from now on. Printing money will lead to a even greater financial crisis down the road.