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Home Publications Blogs Beat the Press The Post Tries to Get the Fed Off the Hook

The Post Tries to Get the Fed Off the Hook

Saturday, 26 June 2010 07:51

In a chart accompanying an article on the financial reform bill approved by the House-Senate Conference Committee the Washington Post told readers that:

"Ahead of the crisis, there was no agency in the government responsible for monitoring the financial system as a whole and looking for potential threats to its health."

This is not true. There was an agency that had responsibility for the monitoring the financial system as a whole and looking for potential threats to its health. It is called the "Federal Reserve Board." This is a main purpose of the Fed and it has fulfilled this role on several occasions, most notably when it intervened to halt the stock market crash in 1987 and to arrange the orderly unraveling of the Long-Term Capital Hedge Fund in 1998.

This point is important, because the problem that led to this crisis was not a lack of regulatory authority as this assertion implies. Alan Greenspan and Ben Bernanke had all the power they needed to rein in the housing bubble before it grew large enough to threaten the health of the economy. They chose to not use this authority either because they did not recognize the bubble or did not consider it a serious problem.

There is absolutely no reason to believe that if we had the newly created "Financial Services Oversight Council" in place in the years 2002-2007, when the housing bubble was inflating, that anything would have been different. Greenspan and Bernanke both repeatedly insisted that everything was fine in the housing market and the financial system more generally.

There were very few dissenting voices to the Greenspan-Bernanke position. Those in authority (and newspapers like the Washington Post) had no problem ignoring these dissenting voices. If there had been a Financial Services Oversight Council in the years when the bubble was inflating it almost certainly would have been staffed entirely by people who shared the Greenspan-Bernanke view. There is no reason whatsoever to believe that it would have done anything to avert the current economic crisis.

Comments (9)Add Comment
written by skeptonomist, June 26, 2010 8:21
If there had been a Board of Governors of the Federal Reserve in the years when the bubble was inflating it almost certainly would have been staffed entirely by people who shared the Greenspan-Bernanke view.

The only way to prevent bubbles is to put restraints beyond the "choice" of authorities, by eliminating the institutions and practices which are at the root.
written by izzatzo, June 26, 2010 10:39
So Baker claims that Greenspan and Bernanke had the necessary authority all along to stop the bubble and no more regulation is necessary.

Wow, what a far left commie pinko position that is, the same one spewed by conservatives day in and day out against newly proposed regulations of all kinds. If government would just enforce existing regulations on the books, new ones aren't necessary.

It's like the BP oil spill. The Dept of Interior had all the authority it needed to stop it but didn't, and Obama had the authority necessary to step in the control the damage after the fact but didn't. And whose playing this up big time? Rush Limbaugh and crowd, as Obama's Katrina for not using his authority.

But when Dean Baker applies the same concept to the housing bubble disaster that conservatives wail about for the oil spill, the authority that could have stopped the bubble is conveniently sidestepped with "who could have known" excuses, and the authority to govern its aftermath is heralded as necessary to enact austerity programs undertaken by the same ones who enabled the bubble by ignoring it.
written by diesel, June 26, 2010 12:19
It's like that coin Izzatzo, "Heads I win, tails you lose."
written by Queen of Sheba, June 26, 2010 3:09
The Fed was in charge of protecting consumers from predatory mortgage lenders? Who knew?!

Now the new Consumer Financial Protection Agency is going to be housed in the Fed, but we're assured the Fed won't have any control over any of the agency's workings. So why house it in the Fed? Is D.C. running out of office space? Not that I think the conference committee members would lie to us....
written by MarkJ, June 26, 2010 4:56
One more reason why one should not trust a mainstream media corporation for true and accurate reporting.

Let's play Jeopardy. What institution lists one of its responsibilities as "maintaining the stability of the financial system and containing systemic risk that may arise in financial markets" on its website?

And the answer is (drum roll please) "What is the FED"?

Very strange claims on Great Depression
written by Rich2506, June 26, 2010 6:59
We've got a fellow who's making some really http://www.philly.com/inquirer...ditor.html outlandish claims about how the Great Depression got started in the comments section after the printed letters to our paper. Anyone have the knowledge/expertise on that period to either post something or tell me so that I can post something tomorrow? Thanks!
written by diesel, June 26, 2010 8:54
Greenspan testifying before Congress said, "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief."

Why should any intelligent person be shocked when the powerful make decisions that are inimical to their own long term self interest? Socrates used just this point to trash Thrasymachus' argument in The Republic in which Thrasymachus asserted (with cynical irony) that" justice" was nothing but the self interest of the stronger party, which could impose its will on the weaker. There follows a seeming digression in which Socrates forces Thrasymachus to concede that when the powerful imposed their ultimately misguided policy on the weaker they could not have been, strictly speaking, more powerful. At first reading, this seems to be a word game or merely semantics, but something deeper is going on here. The very definition and therefore one's understanding of "power" and powerful people is at stake. If they are not more powerful, then what are they? In a word, they are greedy. They were 'wage earners' first and bankers second. So, strictly speaking, when they made their ill-fated decisions, they were not bankers at all.

"Powerful" as Thrasymachus used the term was an after the fact description of those who had succeeded in controlling other contending groups. It described whoever emerged on top, who then rewrote the rules to ensure the perpetuation of their domination. Utterly lacking is a sense of foresight concerning the viability and welfare of the whole. Guided solely by self interest against contending factions, such a person or group cannot attend to the welfare of the larger system of which it or (s)he is a part. In the present context, that would have been Greenspan's job. So his plaint was disingenuous--or so it would appear to anyone who had an education that included the fundamental ideas of western civilization.
written by AndrewDover, June 26, 2010 8:58
See if you can work in the housing price decline post-WWI:


written by Rich2506, June 26, 2010 9:41
Thanks, Andrew!

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.