by Chidem Kurdas
After causing a debacle by flooding the system with oodles of easy money, the Federal Reserve is to morph into the enforcer of systemic prudence. We’re told that Treasury secretary Tim Geithner wants to create a single systemic risk regulator to oversee the whole financial system and the Fed will probably get the job.
Current conventional wisdom holds former chairman Alan Greenspan responsible for the Fed’s mistakes— such as keeping interest exceptionally low in 2002-2006 and not tamping down on excessive lending by banks. That staved off the recession in the aftermath of the stock market collapse, but created the twin credit-property bubbles and the current mess.
John Taylor’s analysis of Fed’s easy money policy shows the central bank’s pivotal role in causing the crisis. And Gerald O’Driscoll of the Cato Institute makes short shrift of Greenspan’s responses to Taylor’s critique.
But how can the blame rest on Mr. Greenspan alone? The Fed is not supposed to be ruled by the mistaken whims of one man; it’s an institution with checks and balances. The men who now propose to restrain too much financial revelry were already in positions to influence policy during the period the Fed provided the punch bowl. The current chair, Ben Bernanke, was a member of the board of governors of the Federal Reserve System from 2002 to 2005. Mr. Geithner became president of the New York Federal Reserve Bank in 2003.
No question, Wall Street drank deeply and to its detriment. But that’s what financial people do, they make money from whatever opportunity that offers. It’s the Fed that created the opportunity, watched the party get out of hand and now will run a rehab center, further extending its reach. Great for the Fed.
For the rest of us, until we learn to impose limits and controls on government agencies, we will remain at the mercy of wrong-headed interventions, which create the problems that then lead to more interventions, more problems and so on. The Fed’s brief should be limited, not expanded. We appear to be going in the wrong direction.