Regulatory failure, not low interest rates, was responsible for the housing bubble and subsequent financial crisis of the last decade, Ben S. Bernanke (pictured left), the Federal Reserve chairman, said in a speech on Sunday. Ben S. Bernanke is expected to be reconfirmed this month as the Federal Reserve chairman. Mr. Bernanke's remarks, perhaps his strongest language yet assessing the roots of the financial crisis, came as he awaited confirmation for a second term as Fed chairman and as he sought greater regulatory authority from Congress. "Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates," Mr. Bernanke said in remarks to the American Economic Association. Mr. Bernanke, addressing accusations that the Fed contributed to the financial crisis, argued in his speech that the interest rates set by the central bank from 2002 to 2006 were appropriately low. He was a member of the board of governors of the Federal Reserve system for most of that period. – NY Times
Dominant Social Theme: Better late than never.
Free-Market Analysis: You have to hand it to Ben Bernanke, he is a most persistent man. He has decided that the Fed has to combat the bubbles it blows – or at least sound contrite and responsible and has been grappling publicly with ways to do so for some time. The trouble with combating market bubbles through rate hikes is that it is bad PR, among other things. For the Fed to announce that a bubble is forming and that the bubble is to be combated by raising rates only tends to remind observers that the Fed is responsible in the first place. Bad PR.
Much better to combat bubbles through regulation. This gives the Fed the option of announcing that it has noticed a certain marketplace has become "speculative" and that it, the Fed, is going to crack down on the speculation through various regulatory means. This is a great statement from the Fed's point of view because it puts the bubble at arms length from the Fed – allows it to speak of speculation (the private market) instead of its own culpability in printing too much money. Second, the use of regulatory palliatives further obscures the reality of the money mechanism since it gives people the idea that, once again, the private market is somehow at fault through lack of discipline, etc. Here's some more from the article:
Mr. Bernanke is likely to face further political challenges over financial regulatory reform and the governance of the Fed.
The House passed a provision to audit the Fed as part of a larger financial reform package last month. Representative Ron Paul, Republican of Texas, has been carrying the banner for such an audit for decades. The debate over what caused the financial crisis comes as the economy shows signs of recovery and as Congress considers a wide-ranging overhaul of financial regulation.
In a separate talk on Sunday at the conference, Donald L. Kohn, the Fed's vice chairman, listed several measures the central bank was likely to take to shed the problematic assets it took from banks during the financial crisis. He said "the appropriate use and sequencing of these tools is under active discussion" by regulators.
But, as members of the rate-setting Federal Open Market Committee said last month, he noted that the fragile economic recovery and weak job market would "warrant exceptionally low" interest rates "for an extended period." Mr. Bernanke, in his talk, echoed his previous calls for Congress to grant the Fed greater oversight powers over the financial system, like the ability to help monitor and regulate against "systemic risk." The implication is that the Fed believes that regulation and supervision, rather than tighter monetary policies, should be used to address asset bubbles in the future.
Bernanke has a lot of problems on his plate. It may be that the various "Audit the Fed" efforts fail or, more likely are watered down. But this isn't the big problem the Fed faces. There are actually three big problems the Fed and other central banks need to deal with. First, central bankers have to figure out how to mop up trillions injected into the economy in a desperate race to prop up key financial institutions. Second, central bankers have to deal with the continual cloudy outlook of economies themselves and the increasing problems of joblessness. Third, and interrelated, is the growing crisis of credibility that central banks are suffering from these days.
What central bankers like Bernanke are obviously hoping for is that Western economies rebound quickly enough so that the other two problems that central banks face – mopping up money and retaining credibility – become far less of an issue. But this does not, in our opinion, seem likely to happen as the damage to Western economies is too great and stock market stimulation and statistical propaganda are not going to suffice in an environment of such fiscal injury.
It is likely that some of level of inflation will creep into Western economies before central banks act. This is because the alternative, trying to mop up excess money too soon, risks snipping whatever small green shoots have begun to grow. This is a risk that central bankers are currently unwilling to take. Why are central bankers so skittish? Because central banking's stock has never been lower than it is today. Both the EU and the American Fed are facing substantive skepticism and ill-will from their various populations.
Bernanke's proposal to use regulatory means to puncture bubbles is likely an ineffective solution. First, the Fed has to recognize the bubble – and bubbles are nearly unrecognizable until after the fact. Second, the Fed has to have the willingness to do something about the bubble at a time when most involved are receiving a maximum benefit from the bubble. It is doubtful, even were the Fed to have recognized a bubble, that the Fed would have the political will to bring to bear the appropriate regulatory arsenal. Third, the regulatory approach actually has to work – and there is nothing in the record to suggest it does as it has never been tried before.
We find this whole process fairly hypocritical. The whole purpose of a central bank is to inflate and allow those who are "insiders" to profit from additional money printing and bubble creation. The idea that central bankers are uber-market supervisors whose ministrations are needed to keep capitalism on the straight and narrow is laughable in the extreme.
The real problem that central banks have these days – and the Fed more than most – is that the Internet has exposed the history of central banking and the mechanism itself for what it is, the patient development of a mercantilist enterprise designed to loot the economy under the color of law. Today, too many people understand what central banking is, the power elite that has cultivated the promotion and how a handful of individuals benefit from the ruin of everyone else. The collapse of central banking, were it to take place, would likely usher in some sort of money metal standard, hopefully a private one of gold and silver such as has been used successfully by citizens down through the ages.