Questions for Chairs Greenspan, Bernanke, Yellen:
–What has the Federal Reserve Learned?
by Larry Checco – Principal, Checco Communications
At his last public appearance before leaving office, Federal Reserve Chairman Ben Bernanke said: “We hope that as the economy improves, and as we tell our story…people will appreciate and understand what we did was necessary and in the interest of the broader public.”
Given that Wall Street is once again back on its feet and enormously profitable while millions of Americans remain unemployed, many having experienced near or total financial ruin from which they may never recover, Chairman Bernanke’s statement is arguable, at best.
Chairman Bernanke made his remarks as the keynote speaker, along with a bevy of high-ranking Federal Reservists and Fed watchers, all of whom were on hand to help launch the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy.
The event covered in highbrow fashion the yins and yangs of Chairman Bernanke’s unprecedented monetary daring-dos, including overseeing the big bank bailouts, taking short-term interest rates down to zero, purchasing more than a trillion dollars worth of government bonds and mortgage-backed securities, lending money to foreign central banks, and more.
Some speakers even looked to the future and brushed on the options that the Fed has for tapering, or reducing quantitative easing.
The one topic, however, that was not broached….
What could the Fed have done to prevent the Great Recession in the first place, and has it learned any lessons?
Prior to the collapse of the housing bubble, home prices in some regions were rising 10, 15, 20 percent and more annually. This, at a time when average annual wages had remained flat for a decade — or more.
People—both the greedy and unsuspecting—were encouraged to buy homes, or use the equity in their current homes as ATM machines, through usually-deceptive subprime mortgage products. Many of these loans required little or no money down — nor the need for borrowers to disclose their incomes or other information that would fall under the rubric of responsible underwriting practices.
Then there was the incidental detail that most of these loans would reset to rates many borrowers could not afford, resulting in millions of home foreclosures.
Red flags abounded.
Yet the Fed, with its hundreds of highly-educated economists, many with Ph.D.s after their names, and under the direction of former Fed Chairman Alan Greenspan, a true believer in minimal regulation and the invisible hand of the marketplace, did not, evidently could not or would not see this train wreck coming.
Instead, at a Congressional hearing in October 2008, Chairman Greenspan explained that the Federal Reserve was “…as good an economic organization as exists. If all those extraordinarily capable people were unable to foresee the development of this critical problem…we have to ask ourselves: Why is that?”
Chairman Greenspan answered his own question by saying “…that we’re not smart enough as people. We just can’t see events that far in advance.”
A more plausible response would have been the Fed had abandoned all common sense for the ideological position that free markets take care of themselves, or as Chairman Greenspan inimitably stated before Congress “…that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in their firms.”
Well, we all know now how that presumption ended! For most of us.
But perhaps the most logical explanation is that way too many people were making way too much money that was sloshing around —fees and bonuses for home appraisers, mortgage brokers, bundlers of collateralized mortgage obligations (CMOs) right on up to Wall Street investors who couldn’t get enough of what turned out to be terribly flawed investment vehicles.
And no one, including Chairman Greenspan or anyone else in the Federal Reserve system, had the cajones to break the expanding chain of greed.
During his tenure, Chairman Bernanke performed a yeoman’s task in keeping us from an economic depression. But now his time is over.
It’s encouraging that the newly-installed Fed Chairwoman Janet Yellen turns out to have been an early critic of what was then — in the early 2000s — a fledgling bubble in subprime lending. Unfortunately, few paid heed. We can’t afford to let that happen again.
If there is one common sense lesson many of us hope the Federal Reserve has learned from this latest economic fiasco is that when billions of dollars in potential profits are cast upon the financial waters our better angels do not descend from on high to help divvy it up. Rather, the sharks do ascend from the shadowy depths to engage in a feeding frenzy, oblivious to how many smaller, innocent fish are devoured in the process.
In short, should you read this commentary, Ms. Yellen, I hope you will agree that greed is NOT good, and common sense trumps whatever ideologies or economic models the Federal Reserve System may harbor.
BTW, a bit more regulation and oversight over the sharks wouldn’t hurt. They have proven time and again that they cannot control their bloodlust instincts.
Guest commentary by Larry Checco / Checco Communications
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