Life of the Party

Friday, 03.21.08

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How Good is Bernanke?

8 November 2005

Clive Crook predicted that we'd see how Ben Bernanke performs in a crisis.

Overkill?

22 January 2008

During a past rate cut, Clive Crook wondered if the Fed was panicking.

Moral Hazard

October 2002

Alan Greenspan acknowledged that past Fed actions might incentivize bad behavior.

Desperate to inject liquidity into the market, the Federal Reserve has been unusually willing to lend money.

William McChesney Martin, the longest serving Fed chairman, once remarked that the job of a good central banker is to take away the punch bowl just as the party gets going. Over the last week, Ben Bernanke seems to have reversed that dictum: he's the host wandering from guest to guest with a tray of Jell-O shots.

This remarkable expansion of the Fed's powers has helped avert some of the worst damage, and its temporary success has inspired calls for a more systematic and comprehensive regulatory regime. Liberal commentators hope the current crisis will lead to a reflowering of the regulatory and redistributive powers that grew out of the Great Depression.

They will probably not be much disappointed; as night follows day, more regulation follows scandals in the financial markets. But few have specified what regulations they think will actually reduce the risk of this sort of thing happening again. There are proposals that have merit -- increased capital requirements, for starters. But the broad demands for "stricter scrutiny" and "more transparency" are meaningless. The key piece of information about all these securities was that by 2005, the subprime market involved many criminally stupid loans. And that knowledge was freely available in every newspaper in the country.

The problem is not transparency but complexity: The value of the securities was as opaque to those who held them as it was to everyone else. Regulating away the risk of a repeat will involve doing away with much of the complexity that has broadened and deepened US capital markets over the last thirty years. This may be necessary. But one thought should give pause: Many of these complex securities were created to get around previous regulations. Taking away the punch bowl doesn't do much good if the guests just drive to another bar. — Megan McArdle

Economic seat-belts

Chris Farrell thinks the Fed should force more regulation on investment banks during the good years to prevent future blow-ups.

Hands off is best

Crypto-racist fringe libertarian Lew Rockwell says the government cannot wave a magic wand. All it can do is "prolong the period at the bottom."

Let the high-flyers fall

Robert Novak argues that the Fed crossed a line by bailing out Bear Stearns. "Too big to fail" should not mean "too big to be punished."

Ways to make it worse

Leo Wang explains, in technical detail, why each of the tools at the Fed's disposal won't defeat recession in the long run.

Filed Under: Federal Reserve, markets, regulation

(2)

Excellent article and witty.

Posted by mark sabatino | March 21, 2008 10:22 AM

Is it my imagination, or are failures getting bigger over time?

Perhaps financial crises are like forest fires; it is better to have many, smaller, more controllable fires rather than huge fires that spin out of control. Trying to suppress every little fire is a bad idea. That's a lesson that the US Forest Service has learned, and it seems to me it's a lesson that the SEC and Congress needs, to learn, too.

Posted by Gavin Andresen | March 21, 2008 11:07 AM

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