Milton Friedman’s research partner, Anna Schwartz, goes after the federal reserve:
As rebukes go in the close-knit world of central banking, few hurt as much as the scathing indictment of US Federal Reserve policy by Professor Anna Schwartz.
The high priestess of US monetarism – a revered figure at the Fed – says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. “The new group at the Fed is not equal to the problem that faces it,” she says, daring to utter a thought that fellow critics mostly utter sotto voce.
More thoughts from Anna and my musings on the Fed.
About Lance
I want to thank everybody who has encouraged me over the past few years to do this. I doubt it will hold but a few people's interest, but that is okay with me. Special thanks go to Peter over at http://www.liberalcapitalist.com.
I value my privacy a great deal, so I will guess you will have to get to know me over time to find out much. I am in the financial services, wealth management, investing or whatever you want to call it business. I have children, my oldest is entering college.
I have no great or imposing academic background, my grades varied from high enough to get invited to an honors program at my university to frustrating enough to cause my father great grief. My major was history, with a minor in ethics. My main interest towards the end was in the history of economic ideas before life took a turn and I ended up never going on to graduate school. However, I have a fair knowledge of history, economics, investing and would probably be considered well read. My tastes are eclectic and I pretty much find the entire world interesting.
I have an enduring interest in how people learn about and analyze the world; my posts here will examine this topic in detail over time. I make no claims to be above the very biases and errors I see in others, in fact it is my belief that we are incapable of escaping them, only moderating their control over us.
I am a member of no political party, but I would broadly consider myself a man of the right. I am inclined to free market economics, limited government and a fairly narrow view of the role of the state. A small L libertarian if you will. However, if you are looking for broad based "the left believes..." or "wingers are so...." types of attacks on liberals, conservatives, neo-cons or whatever enemy you want to slam, look elsewhere.
Lance
in retrospect, what should the fed have done differently?
First, I do think interest rates were kept too low, too long. The goal was to inflate asset prices, specifically housing, to stimulate the economy. Of course, high asset prices mean lower returns later, or in this case, declines. That worked, but what do you do next? The loans encouraged by high, and rising, prices don’t make sense when that condition clears.
The fear at the time was a deflationary spiral (see Japan since the end of the ’80′s.) The problem I had with that fear, and it was legitimate, was that for all the issues surrounding the tech and stock bubble (the latter not being over) Japan’s crisis was a financial, and specifically related to a real estate bubble, collapse. In order to avoid the Japan disease, we have put those very same conditions in place. The tech and stock market bubble collapse (once again, that collapse is still in process, and will be for some time) was unlikely to lead to a Japan scenario. I don’t think this will either, but it certainly has much more of a chance, which makes the policy much harder to defend. Recessions come and go, huge financial crises are not to be played with, even if the worst case scenarios are unlikely.
Second, if you are going to inflate housing, and in essence create a strategy for raising prices that may not be sustainable long term, it certainly makes sense to curb speculative excesses and fraud through regulation. I am no fan of regulation, but irrational prices encourage irrational greed. Doing what you can to ensure loan quality in this kind of environment was a no brainer. At minimum fraud needed to be curtailed. That wouldn’t have avoided the crisis, but it would have made it less severe. The Fed created conditions, it then needs to work to ameliorate the risks to the broader economy those artificial conditions create. Low regulation environments make sense when the ultimate investors and homebuyers pay for their greed or mistakes. The discipline of the markets. However, if you create a situation where that solution causes broader systemic issues due to your own policy, the market will not work it out, because politicians and economic actors can’t afford for that many people to suffer.
Nice post, Lance. I guess I’m definitely one those people who think that the Fed has scary amounts of power, although to be fair, since the Great Depression it has seemed to wield that power with much more care.
And in the case of the subprime mess, I think a fair share of the blame needs to go to Congress and the President for pushing the home mortgage industry to put more people in homes without considering the potential downsides (e.g. large numbers of people who default 20% of the time getting huge, low/no equity mortgages).
The list of culprits is long, very long. Throw in consumers, politicians at the federal, state and local levels who restricted housing in many areas and setting off a spiral of increasing prices which people began to believe was normal, and many many other factors.
In reality though, the fed has far less power than people think (a post I will be writing soon) but that makes it highly discouraging when they blow it bad enough to lead to such an outcome.
One reason they have wielded it with much more care, is since the nineties their control over the money supply has been drastically diminished, which means they have fewer tools, and thus turn to blunt instruments like manipulating housing. Like I said, it is a topic I will develop more over the next few weeks, but investors especially attribute to the fed powers that they do not have. They do not really control the money supply anymore.
That has had good, as well as bad consequences. I personally think it is just as well, but in trying to do things which they are ill equipped to do we get clumsy policy such as we have seen over the last ten years. We would be better served if they just admitted the limits of their power. That would end much mischief by both them, and investors who try and make decisions based upon their actions.
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