No Resolution in Sight in Fed Blame Game
The debate over the Federal Reserve’s culpability for the financial crisis is seemingly no closer to resolution, if it ever will be.
Most central bankers acknowledge they could have done a better job watching the financial system. They now are moving toward acknowledging that they need to take a more proactive approach to dealing with asset bubbles, agreed their frequency and toxicity to broader economic circumstances.
But critics contend the Fed itself was a prime driver of the crisis. Regulatory failures coupled with too-simple monetary plot during much of the last decade facilitated a housing bubble and imploding underwriting standards on Wall Street, which together made the worst economic downturn in decades.
The hold responsible game has been going on about as long as the financial crisis and continues even as the recession is ending and markets are healing. A conference held last week by the Levy Economics Institute in New York provided a fresh venue for the battle, one heated sufficient to motivate Fed governor Kevin Warsh to say, “I thought I was at a Fed heat!”
Perhaps the sharpest broadsides came from former New York Gov. Eliot Spitzer, who after all made his bones fighting Wall Street. The insights gained through his past combat coupled with the freedom of no official responsibility led him to call the New York Fed an “absolute sinkhole” of failed financial oversight over the last decade.
“Not a single person” at the bank, which until recently was headed by Reserves Secretary Timothy Geithner, understood what was happening on Wall Street, he charged. “The New York Fed has failed utterly, and something has to be done” to fix the bank that serves as the Fed’s primary interface with Wall Street, Spitzer said.
Peter Fisher, a former New York Fed staffer and Reserves undersecretary who is currently fixed-returns chief at money manager BlackRock Inc., laid the hold responsible more broadly, saying there can’t be a crisis this huge “without all owning a piece.”
Two of the Fed officials speaking at this week’s event, but, weren’t having it. St. Louis Fed President James Bullard and Cleveland Fed President Sandra Pianalto both argued the roots of the crisis originated in parts of the financial system outside of the Fed’s regulatory mandate. Fed Chairman Ben Bernanke has made similar points in the past, noting the Fed, for example, had no control over Bear Stearns or the part of American International Group that caused some of the worst hurt to the financial system. That’s a large part of the reason why the Fed wants broaden bank oversight powers.
When it comes to argument that the Fed kept rates too low for too long, some officials such as Dallas Fed President Richard Fisher and Kansas City Fed President Thomas Hoenig find some merit to the view. Bernanke disagrees with this assessment, and the Levy event saw Princeton economist Paul Krugman come to the Fed’s defense.
“It’s just not obvious to me interest rate plot was incorrect” during the last decade’s long stretches of underemployment and low inflation, the prominent economist said. Krugman pointed the hold responsible back at Wall Street, saying “any system that is that vulnerable” to being felled by otherwise “sensible monetary plot” is simply a “system that is too unstable” to commence with.