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To Get a Systemic Risk Regulator, Fire Bernanke

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Dean Baker
TPMCafé (Talking Points Memo), May 31, 2009

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Everyone in Washington policy circles agrees that we need a systemic risk regulator to prevent another economic disaster like the one we are now experiencing. This quest ignores the fact that we already have a systemic risk regulator. It's called the Fed.

The Fed has often stepped outside the narrowly defined realm of monetary policy when it perceived larger risks to the economy. The two most obvious examples are its efforts to stem the stock market crash in 1987 and its intervention in the unraveling of the Long-Term Capital hedge fund in 1998. In both cases the Fed acted because it argued that there would be much greater damage to the economy if it just let the market run its course.

The problem in the current situation was not that the Fed did not have the responsibility to prevent the $8 trillion housing bubble that caused this crisis. The problem was that the Fed either did not see the bubble or somehow did not think there would be serious consequences from its collapse. In short, the Fed blew it - big time.

Just to be clear, this was not a minor error. It was as bad a mistake as you could possibly make on the job. This is like the cook who leaves the stove on and causes the restaurant to burn down. It's comparable to a nurse administering the wrong medicine, not once or twice but hundreds of times, leaving a lengthy trail of illness and death in his wake. The Fed's performance is like a school bus driver who drunkenly heads into oncoming traffic, causing the death of all of his passengers. In short, this is really serious.

But, in the clubby world of high level Washington no one would ever be so rude as to suggest that Ben Bernanke should be fired for his mistakes. In fairness, his predecessor Alan Greenspan deserves more blame. But Bernanke still could have mitigated the damage even as late as January of 2006, when he took over as Fed chair.

Furthermore, Bernanke had been a member of the Fed's Board of Governors prior to becoming Fed chairman. If he ever made any effort in this important position to stem the growth of the bubble he has kept it a secret.

Firing Bernanke is not just a question of justice, although the millions of workers who have lost their jobs because of his mistake may see it that way. It is also an essential step in creating regulators who are actually held accountable for the quality of their work and therefore have a reason for taking their job responsibilities seriously.

As things work now, there is no risk for simply going with the flow. If you just repeat what everyone else is saying, and it turns out to be wrong, the Washington elite steps in for you with a supportive chorus of "who could have known?"

However, if a regulator were to step out line - imagine someone at another regulatory agency began to openly challenge Alan Greenspan and warn about the enormous danger created by an $8 trillion housing bubble - then they would be risking their future career path and their current job. It is an extremely rare public servant who will put their career path in jeopardy to promote the public good.

This is why none of the other regulators could see an $8 trillion housing bubble. They would have borne enormous career risk to make an issue out of the bubble after Alan Greenspan and Co. at the Fed had said that everything was fine.

It is not the responsibilities of the regulatory agencies that needs to be changed, but the incentives for the regulators. If the regulators face no sanction for just going along - even when they thereby get it horribly wrong - then they will always just go along.

In short, if we want regulators that actually police against systemic risk rather than ignore it, then we have to fire the regulators who failed horribly in the past. If we are serious about getting a real systemic risk regulator then Ben Bernanke must go.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.