« Announcement: The Becker-Posner Blog Has Moved | Main | Should the Fed Remain Independent? Becker »

12/07/2009

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Ted H

Posner, while I agree Bernanke was not perfect, I surely believe Greenspan is far more responsible. As I stated in the comments on Becker, I think Bernanke did have "new kid" timidity coming in 2006, he didn't want to shake it up too badly. While it was a mistake, it's, at least, an understandable one. I also think because he saw a slow-down going into his term (housing construction fell dramatically, median prices fell about 3%) he might have read this as the bubble being overplayed. Also, one cannot change the regulatory framework overnight, and often they didn't fully have the tools available to them (for example, they couldn't properly investigate some of the derivatives trading). Political pressure is a reality also, as you said. They are only semi-protected from political influences and it's not particularly easy to rapidly raise rates during boom times (and if you do it too rapidly there are negative ramifications also).

So, while I think Bernanke made mistakes; I don't think he was responsible nearly as much as Greenspan and I don't believe this crisis would have been as bad (at least in the rates department, I don't know about the regulatory department). I also believe, based on his statements, he's learned how to reform the Fed and is going to make a serious effort to reform its operations; but perhaps I'm too trusting.

Anyway, I 100% agree that short-term political influences should play no role in monetary policy and giving Congress too great authority over this would be disastrous. What we need is an extensive review, possibly by the Government Accountability Office, into what went wrong in the regulatory department and how to improve this; but Congress is surely not the answer.

Bernanke argued over six years ago that this was the role of the Federal Reserve:

"Can the Federal Reserve (or any central bank) reliably identify "bubbles" in the prices of some classes of assets, such as equities and real estate? And, if it can, what if anything should it do about them?... The Fed likewise has two broad sets of policy tools... monetary policy... setting... the overnight interest rate... [and] rule-making powers, supervisory oversight, and a lender-of-last resort function.... [T]he Fed will do best by focusing its monetary policy instruments on achieving its macro goals--price stability and maximum sustainable employment--while using its regulatory, supervisory, and lender-of-last resort powers to help ensure financial stability....

The Fed should ensure that financial institutions and markets are well prepared for the contingency of a large shock to asset prices... banks be well capitalized and well diversified... contribute to reducing the probability of boom-and-bust cycles... more-transparent accounting and disclosure practices... financial literacy and competence... integrity of the financial infrastructure--in particular, the payments system....

Aggressive bubble-poppers would like to see the Fed raise interest rates vigorously and proactively to eliminate potential bubbles in asset prices. To be frank, this recommendation concerns me greatly.... [T]he Fed cannot reliably identify bubbles in asset prices... monetary policy is far too blunt a tool for effective use against them.... I worry about... if the Fed attempts to substitute its judgments for those of the market... increase the unhealthy tendency of investors to pay more attention to rumors about policymakers' attitudes than to the economic fundamentals.... A truly vigorous attempt by a central bank to rein in a supposed speculative bubble may well succeed but only at the risk of throttling a legitimate economic boom or, worse, throwing the whole economy into depression.....

The stock market was as much a victim as a cause of the Depression... the stock market boom of the 1920s was surprisingly hard to kill... only began to plummet when the depth of the general economic decline became apparent.... The correct interpretation of the 1920s, then, is not the popular one--that the stock market got overvalued, crashed, and caused a Great Depression. The true story is that monetary policy tried overzealously to stop the rise in stock prices. But the main effect of the tight monetary policy, as Benjamin Strong had predicted, was to slow the economy--both domestically and, through the workings of the gold standard, abroad. The slowing economy, together with rising interest rates, was in turn a major factor in precipitating the stock market crash. This interpretation of the events of the late 1920s is shared by the most knowledgeable students of the period, including Keynes, Friedman and Schwartz, and other leading scholars of both the Depression era and today.... The Federal Reserve went on to make a number of serious additional mistakes that deepened and extended the Great Depression of the 1930s... little or no effort to protect the banking system from depositor runs and panics... permitted a severe deflation....

Even putting aside the great difficulty of identifying bubbles in asset prices, monetary policy cannot be directed finely enough to guide asset prices without risking severe collateral damage to the economy.

A far better approach... supervisory action to ensure capital adequacy in the banking system, stress-testing of portfolios, increased transparency in accounting and disclosure practices, improved financial literacy, greater care in the process of financial liberalization, and a willingness to play the role of lender of last resort when needed..."

(his view on asset bubbles is based partially on his research with Mark Gertler where he argues that the Fed should not attempt to micromanage asset bubbles because it is impossible to fine tune monetary policy with such precision, meaning the action would either be counterproductive or ineffective. However, he did not argue keeping rates artificially low; simply just not micromanaging bubbles should they arise independent of the Fed's actions to stimulate growth and maintain target inflation during normal times. For example, his research does not support keeping rates at near zero bound for years without justification. It's like if a bubble popped up at normal target inflation, he wouldn't raise rates to pop it, a view I happen to agree with).

I have to say, I think this would be an excellent way to govern the Federal Reserve and Congress should help Bernanke facilitate this vision - rather than give themselves more power. Bernanke should read this speech before the Senate and ask them to work with him and the Fed to reform the system and give them the tools to execute this policy. I think this might actually make a difference for our system, and if Bernanke still believes this the Congress should give him the tools, support, and help to reform the Fed and execute his vision - not do it themselves which they surely will screw up.
(here is the speech in it's entirety: http://www.federalreserve.gov/BoardDocs/Speeches/2002/20021015/default.htm, the snippet version came from Delong).

Transor Z

Congress would undoubtedly have wanted interest rates to stay low throughout the past decade and thus would have fought the Fed had the latter heeded warnings of a housing bubble and raised interest rates.

Proof?

In fact there was inflation—asset-price inflation, the assets being houses and common stock, and at times oil and other commodities.

Manipulation of commodities prices? See Mr. Buffett and silver. A bit more involved than interest rates and money supply, no?

The Fed should have raised interest rates higher and earlier, and probably would have done so if it had realized that there was asset-price inflation. But had it done so, it would have caused a slowdown in economic activity, and Congress would have intervened had it not been for the Fed’s independence.

Greenspan and Bernanke refused to see the housing bubble. And then further refused to believe that the Fed has any role to play in resolving bubbles -- even where they do exist. In fact, the Fed has an important bank-regulatory/consumer protection role to play which it refused to play. Mortgage lending was a horror show. They even PRAISED Alt-A and exotic lending and the disastrous secondary market for MBS (with CDO, CDS) as "financial innovations."

Elected officials have short time horizons.

Unlike, say... corporate CEOs?

Jack

"In fact there was inflation—asset-price inflation, the assets being houses and common stock, and at times oil and other commodities.

Manipulation of commodities prices? See Mr. Buffett and silver. A bit more involved than interest rates and money supply, no?"

It strikes me that the Fed's "tools" are a bit cumbersome for dealing with a "housing bubble". Consider, that a tightening, if it succeeded in raising interest rates would have drawn more international "hot" money to our shores, both strengthening the dollar as our exports became even less attractive and at only slightly higher cost provided yet MORE money for Sachs and others to play the securitized mortgage derivative game.

"Inflation" of the 2000-2008 era was modest and especially so if we backed out housing prices and the "curious" flight of oil prices(most likely manipulated by gobs of international hot money finding few worthy investment opps) ... and oil's effect on related energy intensive products.

I was close to the new home industry in those years and watched as "investors" would fly into, say LV with a few hundred bucks to deposit on a yet to be finished home. The delighted builder would then be off to his bank to start another group based on the frenzied "demand".

Trouble was the "investor" was planning to hold only until the home was finished and "flip" it for a substantial profit. In effect the home was still on the builder's inventory as it had no ultimate consumer nor an investor in the traditional sense of one holding for rents and longer term equity build. Ponzi-ish and while we at street or industry level looked on with amazement at these practices much further enabled by NINJA and all sorts of utterly flaky loan schemes including 105% of "appraised" value it seems, well, beyond "curious" that no one in the bank regulatory structure, including the Fed with all its computer and modeling power noticed.

And ha! "Commodity manip?" I live in Alaska where "oil" is closely followed and where it was quite profitable at $18 in 1999, as it was in every oil venue I can think of. Even oil industry guys including T. Boone admit $40 is enough to seek and develop more deposits. So why then the other $40 of the $80 price? What sort of "markets" find a price equilibrium five times that of production costs? Ha! "inefficient" markets! Rigged, or at min overheated by perhaps the very sovereign funds that stand to gain even more when the underlying commodity sells at the rigged price.

Are there shortages anywhere leading too frenzied bidding? No, instead there are tankers laying offshore waiting for space to off load, the Valdez terminal is topped up with 8 million bbls -- said to be due to weather, but that is over two weeks of pipeline flow.

"In fact, the Fed has an important bank-regulatory/consumer protection role to play which it refused to play. Mortgage lending was a horror show. They even PRAISED Alt-A and exotic lending and the disastrous secondary market for MBS (with CDO, CDS) as "financial innovations."

Indeed, Transor it does. A working capitalism requires some regulation to keep hungry foxes out of the hen house!

David Williams

Everybody, even radio wonks, say that "printing" money is wrong. Altho one of you used "printing" money in your post, the Fed doesn't really do that. Our money is borrowed into existence, right?

Regardless, what is the legitimate way of bringing money into the system if "printing" it is wrong? If I cut down a tree and make 10 Windsor chairs, I have, through my time, talent, and trees, created something of value. Everybody is doing some version of this. How does that new value enter the economic system such that eventually those chairs can show up as money in my bank account?

You guys always decry the "printing" of money. So what's the proper way to increase demand accounts? How do my chairs get into my demand account so I can buy bread, boats, and booze? Where does the "money" come from for that?

Dr, Clifford Johnson

Posner,
I take issue with two presumptions that seem implicit in your analysis. The first is that allowing the government to issue debt and interest free money is unthinkable. The second is that the present FED statute is constitutional.
You apparently argue that the political branches are naturally incapable of reigning in inflation, even were they to have only the limited authority to order that money be printed by the FED, and then borrowed by the U.S. Such an opinion would seem to dismiss a fortiori the government’s option of printing entirely debt free money. But the colossal public advantage in issuing debt-free money is obviously well worth weighing against the well recognized perils of political overprinting. Could a transparent, publicly debated monetary policy in the public interest be that much worse than the private profit-driven secret policy that now exists? I doubt that it could be any worse, let alone so far worse as to outweigh the advantage of discounting the debilitating national debt. Besides, procedures could be enacted put the money-issuance mechanism at a professional, institutional arms-length away from politicians.
It is not clear what privately-pulled strings would attach to your proposed publicly appointed majorities, in governing FED committees. Is the printing of debt-free United States an option that your concept of reregulation would provide for? I would guess not from your argument, but would appreciate your direct comment.
It is more clear that you do presume the present FED act to be constitutional. Yet both congresspersons and legal scholars have grave doubt as to the constitutionality of the delegation of the congressional power to issue US currency to an entity – the FED -- that the 9th circuit has (albeit in a peripheral context) found to be even less controlled than a government instrumentality. LEWIS v. UNITED STATES, 680 F.2d 1239 (1982). True, the Supreme Court upheld the original act’s constitutionality as a governmental instrumentality, but it did so without the slightest discussion of the unique nature of this delegation. INTERMOUNTAIN RATE CASES, 234 U.S. 476 (1914). I would therefore dispute your presumption of constitutionality, and would hope that you would recognize that this legal issue is non-trivial and unresolved.

College Research Paper

I appreciate the work of all people who share information with others.

Soccer Gear

Useful information, I know many things after reading this article, because it gives you inspiration ...

Soccer Merchandise

I've been following your posts for a while now and I gotta say that your older articles don't offer as much insight as the newer articles. You have a lot more ideas and originality now, your writing is constantly improving.

coach handbags

As is well known, books teach us to learn life, truth, science and many other useful things. They increase our knowledge, broaden our minds and strengthen our character. In other words, they are our good teachers and wise friends. This is the reason why our parents always encourage us to read more books.

sesli chat

Everybody, even radio wonks, say that "printing" money is wrong. Altho one of you used "printing" money in your post, the Fed doesn't really do that. Our money is borrowed into existence, right?

Regardless, what is the legitimate way of bringing money into the system if "printing" it is wrong? If I cut down a tree and make 10 Windsor chairs, I have, through my time, talent, and trees, created something of value. Everybody is doing some version of this. How does that new value enter the economic system such that eventually those chairs can show up as money in my bank account?

You guys always decry the "printing" of money. So what's the proper way to increase demand accounts? How do my chairs get into my demand account so I can buy bread, boats, and booze? Where does the "money" come from for that

air yeezy

Come along,anyone can do that!

cheap jordans

Your dreams are waiting to be realized.

lower back pain

I think this would be an excellent way to govern the Federal Reserve and Congress should help Bernanke facilitate this vision - rather than give themselves more power. Bernanke should read this speech before the Senate and ask them to work with him and the Fed to reform the system and give them the tools to execute this policy. I think this might actually make a difference for our system, and if Bernanke still believes this the Congress should give him the tools, support, and help to reform the Fed and execute his vision - not do it themselves which they surely will screw up.

ugg outlet

what would be nice to see along with the tickets sold is the allotment each school was supposed to sell. For instance I see that Minnesota sold 3,000 tickets for last year's Insight Bowl, but how many were they required to sell? Did they meat their allotment or how short were they?

coach outlet canada

Envision yourself meeting Pauline. She will be so taken by your wit and sensitivity that she will invite you to an after hours cocktail parter. You'll meet her dad AND Rick Steeves and they will get in an argument and YOU will referee--they'll like your style and your resolution techniques and agree that you are the exception to the rule and can write for BOTH of them.

How's that for a vision?

web developer

They do know how to facilitate it properly. They have also enough experience about this.

Uggs Clearance

Great, practical and much needed advice.

mbt shoes

This article is very interesting, I like it. I will always come to visit after.I would recommend to friends more.

Base cap

Nine years! Fortunately, there is no statute of limitations on homicide.

booster cable

This is such a horribly sad story, but I love the way you told it. Thanks for not dragging us into a guns-or-no-guns debate and just allowing us to enjoy your wonderful writing.

dress bag

This is so sad. What a terrible crime. I am glad they found the killers. This was a great tribute to your friendship in a glimpse of your innocent young days together. I do love stories of the night crawlers, but you lost me when you picked the huge cockroaches off the wall to sell to your classmates! I mean that was enterprising, but Eeeuuw!!

non-woven fabric

What a terrible irony! I am so sorry you lost your friend this way. Your post was both gripping and poignant if that is possible.

dust mask

I think this is because we removed apex predators from many areas, and now tick-carrying deer and tick-carrying smaller mammals are proliferating in many rural and semi-rural, not to mention highly suburban areas.

alexana

crotalii suine
[url=https://www.siteconstruct.ro]crotalii suine[/url]

jordan cool grey

Thanks for sharing. This website is to I too have to help. Very good.

Verify your Comment

Previewing your Comment

This is only a preview. Your comment has not yet been posted.

Working...
Your comment could not be posted. Error type:
Your comment has been posted. Post another comment

The letters and numbers you entered did not match the image. Please try again.

As a final step before posting your comment, enter the letters and numbers you see in the image below. This prevents automated programs from posting comments.

Having trouble reading this image? View an alternate.

Working...

Post a comment

Become a Fan

March 2014

Sun Mon Tue Wed Thu Fri Sat
            1
2 3 4 5 6 7 8
9 10 11 12 13 14 15
16 17 18 19 20 21 22
23 24 25 26 27 28 29
30 31