Alan Blinder draws some interesting and important distinctions that deserve a hearing about the Fed's ability to tap the public purse in order to bail out insolvent private financial institutions.
The power to issue money, the power to maintain the national currency, without audit or signifcant outside interference, is a weighty responsibility and a privilege. The amount of discretion permitted the Fed is an important policy question that is likely to be lost on the American professional economists, who have become so focused on the photons of detail that they can barely see what is shown by the light.
This Republican Administration is hardly laissez-faire as Dr. Blinder asserts. Rather, they prefer to outsource their venality and constitutional indiscretions to private companies, who later can plead that they were merely 'following orders.' What we have is a crisis of accountability, from the government regulatory agencies to the corporate boardrooms.
The root of the problem is reckless disregard for the public welfare and financial legerdemain in the style and manner of the 1920's. The Fed is no bystander, but was the sine qua non of this type of bubble and bust.
It was a deadly mixture of excessive credit expansion, lax regulation, and technological innovation that brought us to where we are, starting with a vengance in the Clinton administration but brought to full flower under the Republicans.
We need to restore some regulatory decency to our financial markets. All that the professor seems to be recommending is a new coat of paint on what has become a disreputable casino. How many crises triggered by regulatory dodging, if not fraud, is it going to take before the people and the Congress get the message? The world is watching.
Dr. Blinder recommends we turn to Barney Frank and Chris Dodd to fix this for us. Fine men, but it might be more effective to serve the banks a generous portion of the aggressive activism of Andrew Jackson backed with the principled judgement of Thomas Jefferson as the prescription for fixing this crisis of those who cannot seem to abide the law and keep their hands out of other people's pockets.
The Fed Can't Do It Alone
By Alan S. Blinder
Tuesday, March 18, 2008; A19
Psychology has now overwhelmed economics. What started last summer as a serious problem in a little-known -- but not so little -- corner of the U.S. mortgage market has blossomed into a worldwide financial panic, the sort we read about in history books. Except within the Republican Party, laissez-fairy tales have been discarded, and government support is being both sought and given.
The financial markets live or die on confidence. If you sell a security, you must believe the other guy will pay. You must also believe that something worth $30 at Friday's close, such as shares of Bear Stearns, will not be worth $2 at Monday's open. Such confidence looks to be draining from the system.
Who can restore it? Once upon a time, it was J.P. Morgan -- the man, not the company. Today, it must be the world's leading central banks and treasuries, starting with our own.
Unfortunately, this past weekend was a bad one for Team USA. On Friday, President Bush gave a speech at the Economic Club of New York that left people wondering whether he was in touch. On Sunday, Treasury Secretary Henry Paulson, who has been eerily silent as this crisis unfolded, made the rounds of the morning talk shows. It was not reassuring to see this former titan of Wall Street recite his talking points. Wolf Blitzer asked him five times, "Why did you bail out Bear Stearns?" He never got an answer.
Actually, the Treasury didn't bail out Bear Stearns; the Federal Reserve did. Chairman Ben Bernanke and the Fed have been working overtime; they have slashed interest rates and lent or offered money to almost everyone potentially involved in this mess. On Sunday, the Fed even put its own balance sheet at risk to smooth the way for J.P. Morgan (the company, not the man) to "buy" Bear Stearns. But the stunningly low purchase price, far below even the value of Bear Stearns's Manhattan building, did not exactly inspire confidence.
Earth to the White House and Congress: The Fed cannot do this job alone. (The Fed is integral to the problem, and cannot be the solution - Jesse)
But isn't the central bank the fabled "lender of last resort"? Yes, and the Fed is performing that role extensively. But central banks are designed to lend money to banks that are illiquid but not insolvent. It is not supposed to spend taxpayer money or even put much of it at risk. Those political decisions are properly made by elected leaders.
So what can be done now?
First, everyone should take a deep breath. To those living far from the canyons of Manhattan, the sky is not falling. If you don't want to sell your home, forget about falling house prices. Even on paper, it's unlikely that you've "lost" anything near what you "gained" in the run-up. Yes, the economy is limping, but it's not collapsing. And the effects of the Fed's interest rate cuts and the stimulus package that Congress enacted last month are still to come.
Second, it would be nice to see some patient capital step up to the plate. With so many assets on fire sale, buying opportunities abound. Highly leveraged public companies with mark-to-market accounting and daily liquidity drains are too petrified to buy. But patient investors who don't need liquidity and don't have to worry about mark-to-market accounting have a chance to be the J.P. Morgans of our day. (Should we view this in the same light as Alan Greenspan's admonition to the public to participate more aggressively in ARMs to finance their homes, at an historic low in interest rates - Jesse)
Third, our nation's great financial houses need to use the breathing space the Fed is providing to put themselves in order -- post haste. They need to come clean, book the losses and, in many cases, raise new capital. If the capital must come from abroad, Americans must set aside their pride and/or xenophobia. (By the way, why are some of these companies still paying large dividends and enormous bonuses to their top executives?) (That's Professor Blinder's question not mine, but its the best one he asks. - Jesse)
Fourth, we need leadership from political Washington. Forget the president. We need the Treasury secretary to take charge, not just to "support the Fed." While Paulson repeats his "strong dollar" mantra, confidence in the dollar ebbs. How about doing something about it -- such as a dramatic currency market intervention in concert with other nations? (What good would a dramatic currency intervention do? Except perhaps to further line the pockets of Wall Street banks? The problem is that our markets are riddled with fraud, insider trading, and croney capitalism. - Jesse)
Fifth, I'd like to hear the Fed, which has the credibility the administration lacks, talk more -- and in plain English. For example, I'd like to hear it answer Wolf Blitzer's question -- and others. I'm sure Bernanke can do it better than Paulson. (Leadership starts from above. The Fed's Bernanke cannot and should not be the patsy for the failings of this administration - Jesse)
But our best hope for leadership from Washington may now be in Congress. Rep. Barney Frank (D-Mass.) and Sen. Chris Dodd (D-Conn.) are working on a fine bill that, by easing some of the stresses in the mortgage market, could do some real good. I urge Frank, Dodd and the Democratic leadership to expedite the process, and congressional Republicans should stop standing in the way.
In 1933, Franklin Roosevelt famously told Americans that "the only thing we have to fear is fear itself." Unbridled fear is gripping today's financial markets. We need some soothing words right now -- followed by actions, as FDR's words were. Who will step forward?
Alan S. Blinder, a vice chairman of the Federal Reserve from 1994 to 1996, is an economics professor at Princeton and vice chairman of the Promontory Interfinancial Network
"The Fed Can't Do It Alone - Alan Blinder - The Washington Post
"The core problem is that the Fed is still not acknowledging that triple A rated CDOs are not triple A. Until it does, the market is just seeing through all of its interventions. The Fed is trying to portray this as a liquidity problem but it’s an insolvency problem based on deteriorating assets."
The Fed is not acknowledging the problem because they do not wish to acknowledge the problem, because its a big one, with deep roots, and lots of nasty non-sexual scandals. And besides, where are the cops? Where is the Justice Department, the FBI, the SEC, the CFTC? Out chasing Elliott Spitzer.
And what is the point of a coordinated central bank effort to pump billions of liquidity into the system and even stronger government action as the IMF's Lipsky suggest? In order to start the music playing again so those too big to fail and too connected to jail can pass their junk paper along to the public according to plan? Is this liquidity flowing into useful productive enterprise, or just to sustain the continuing transference of wealth from the many to the few?
By all means, let us ameliorate the collateral damage to the public by government intervention. But that intervention should NOT be limited to handing over money into the existing corrupted system. The only way to resolve this is that any government intervention to resolve this must include:
1. A formal reinstatement of the Glass-Steagall restrictions on ALL banks doing business in the US including multinationals. A revocation of 23A exemptions and removal of the Fed's latitude to overrule any written law on their own volition. An end to self-regulation and revolving door government regulation by non-civil service political appointees.
2. A return to the concept of regional and local banks through a reinstatement of laws limiting bank ownership across state lines
3. A national usury ceiling for all interest rates and fees on all debt, both revolving and non-revolving, to prevent banks from perpetuating predatory interest rate schemes based on extending individual state laws.
4. A significant set of Congressional hearings and the appointment of a special prosecutor assigned to investigate, with FBI support, the pervasive frauds in the US financial industry from Enron to Tech to Subprime, with special attention to RICO statutes and individuals as well as corporations. The insiders will seek to offer up some designated patsies. We have to try and go beyond that and strike the root and not just the branches.
The last point deals not with retribution, but restoring accountability and as a deterrence. This will happen again in a few years with some new Ponzi scheme. If we take no action it will happen again.The world is watching what we do next.
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."
Thomas Jefferson, Letter to the Treasury Secretary Albert Gallatin (1802)
