It must feel rather crowded in the office of Federal Reserve Chairman Ben Bernanke. The pressures of being front and center in trying to...
NEW YORK — It must feel rather crowded in the office of Federal Reserve Chairman Ben Bernanke.
The pressures of being front and center in trying to tame a once-in-a-generation credit crisis is enough to make it seem like the office walls are closing in. Add the suddenly high-profile comments of the two previous occupants of that office in Washington, D.C., and you can’t blame Bernanke for feeling a tad claustrophobic.
Bernanke is busy, employing everything from the traditional policy moves (short-term interest-rate cuts) to the definitely nontraditional (direct lending to investment banks) to unstick frozen markets and get financial institutions onto sounder footing.
Alan Greenspan, who occupied the chair for 18 years before Bernanke took over a couple of years back, is busy defending his own record. He’s refuting claims that his regime’s decision to keep the federal funds target rate at a recession-resisting 1 percent kickstarted the housing price bubble or that lax Fed regulation is to be faulted for sloppy mortgage lending standards.
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Greenspan, who is entitled to earn a living post Fed service, has largely done so through book writing and speech giving. That has resulted, even if unintentionally, in a sort of shadow Fed during Bernanke’s time in office.
Paul Volcker, largely credited with breaking the back of stubborn stagflation in his time leading the Fed before Greenspan, has been more “old school” in his post-Fed life. He has not written or commented regularly on monetary policy or related issues.
That makes Volcker’s views, made public earlier this week, all the more intriguing, especially because they look to the long term and carry the emeritus tone of a wise and disciplined man forever disappointed with the weaknesses and profligacy of the human character.
“Simply stated, the bright new financial system — for all its talented participants, for all its rich rewards — has failed the test of the market place.”
And, “Mathematical modeling, drawing strong inferences from the past, has demonstrably failed to anticipate unexpected events of potentially seismic importance. … Part of the problem, as I understand it, is that mathematical modeling simply cannot deal with markets where it is not random or physically determined events but human instincts that cause self-perpetuating waves of unwarranted optimism or pessimism.”
Or, “It is the United States as a whole that became addicted to spending and consuming beyond its capacity to produce.” Volcker also thunders about executive compensation in financial services that lavishly reward success but impose no “symmetrical losses” when failures occur.
Those last comments reminded me of a recent quote from an ex-newspaper publisher who wrote a book about his travels across America. “America is much more fragile than we think,” said Carll Tucker, quoted in an article in the Journal News (White Plains, N.Y.). “It’s like the fourth generation of a family fortune, they don’t know where the fortune came from, and they misspend it. In many ways, we’re spending our inheritance.”
Volcker also employed the word fragile, saying “a demonstrably fragile financial system … needs repair and reform.”
Based on his speech text, Volcker seemed uncomfortable with the “emergency powers” recently employed by Bernanke’s Fed, calling them “neither natural nor comfortable for a central bank.”
He wondered why so much of the burden of restoring liquidity to the mortgage market is falling to the Fed, since housing is a “politically sensitive” area that he believes the Fed is best served staying away from.
Volcker certainly knows the political sensitivity of housing. In 1979, as he and his colleagues engineered an inflation-fighting policy that sent interest rates skyward, distressed builders suffering the business consequences of those high rates mailed two-by-fours in droves to the central bank to register their protest.
Bernanke is receiving a lot of advice, some presumably requested, much not. Volcker’s latest views are worth a serious read amidst this crisis and afterward as well.