Sunshine on the Markets

Ben Bernanke wants stronger regulation of the financial system, with a stronger Federal Reserve in the driver’s seat.

But the Fed, under both Bernanke and his predecessor, Alan Greenspan, bears much of the responsibility for the collapse and should not be handed more power without a full accounting of its role in the system’s breakdown and without changing the secretive way in which the central bank operates.

The Fed — a system of regional central banks — was created by Congress in 1913 “to provide the nation with a safer, more flexible and more stable monetary and financial system,” according to the central bank’s Web site. By its own admission, the central bank’s authority over financial matters has grow to encompass not only establishing monetary policy — setting short- and long-term interest rates — but to oversee the nation’s banks, monitor financial markets and act as banker for financial institutions and the US and foreign governments.

Its goal, according to the Fed Web site, is to maintain stability, ensure the safety and soundness of the system and contain systemic risk.

The Fed — along with the rest of Washington’s regulatory agencies — failed miserably, ignoring the dangers that the housing bubble posed to a broader economy already experiencing limited growth.

Bernanke, in a January speech to the American Economic Association, blamed the financial crisis on failed regulation and attempted to absolve the Fed by claiming that little evidence existed that low interest rates contributed to the bubble. As the Financial Times reported Jan. 3, Bernanke said that “exotic new mortgages and lending to borrowers who could not hope to repay their loans were chief causes of the sharp increase in home prices that ran from the late 1990s until 2006 and whose collapse hurt millions of Americans.”

“All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs,” he said.

And that means, as far as Bernanke and President Obama’s economic team are concerned, more power in the central bank’s hands, which could do more harm than good — especially if Bernanke continues to avoid owning up to the Fed’s complicity in the collapse.

David Leonhardt, a business writer for the New York Times, points out that “More than a few people — economists, journalists, even some Fed officials — noticed” the swelling bubble.

“It wasn’t that hard, if you were willing to look at economic fundamentals,” he wrote. “You couldn’t know exactly when or how far prices would fall, but it seemed clear they were out of control. Indeed, making that call was similar to what the Fed does when it sets interest rates: using concrete data to decide whether some part of the economy is too hot (or too cold).”

The Fed, he said, “could have had a real impact if they had decided to attack the bubble,” if Greenspan or Bernanke used their authority to crack down “on wishful-thinking mortgages.”

Leonhardt suggests “a serious discussion of how to reduce the odds that the Fed — however much authority it has — will listen to the echo chamber when the next bubble comes along,” starting with Bernanke coming clean. It also could include, Leonhardt writes, a “financial version of the National Transportation Safety Board — an independent body to issue a fact-finding report after a crash or a bust,” as proposed by MIT economist Andrew Lo.

Whatever role the Fed ends up playing, it is important that we open its windows a bit and let in a little sunlight.

The current system, in which the banks appoint the very people who are empowered to oversee their actions, is a giant conflict of interest. At the very least, the measure proposed by US Reps. Ron Paul (R-Texas) and Alan Grayson (D-Fla.) as an amendment to the financial reform bill, which would open the Fed to audits, should become law, despite concerns that it will compromise the central bank’s independence and open it to political manipulation.

The Fed, of course, already is subject to undue influence — from the banking industry — without any say from elected officials or the people they have been elected to represent.

The result is a financial system concerned only with profit and not with the well-being of borrowers or the broader economy.

Hank Kalet is a poet and newspaper editor in central New Jersey. E-mail; blog

From The Progressive Populist, Febuary 1, 2010

News | Current Issue | Back Issues | Essays | Links

About the Progressive Populist | How to Subscribe | How to Contact Us

Copyright © 2010 The Progressive Populist
PO Box 819, Manchaca TX 78652