Waiting for the Next Fed Apology

By Simon Johnson

In November 2002, Ben Bernanke apologized – for the Fed’s role in causing the Great Depression of the 1930s. “I would like to say to Milton [Friedman] and Anna [Schwartz]: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again” (conclusion of this speech).

Bernanke’s point, of course, is that the Fed tightened monetary policy inappropriately – and allowed banks to fail – in 1929-33. And much has been made of his strong focus, over the past year, on avoiding a repeat of those or closely related mistakes (including here).

But today we need a different kind of apology, or at least a statement of responsibility, from Ben Bernanke and the Fed.

From the Federal Open Market Committee meeting transcript of August 2003, we know that Bernanke said, “Despite the good news, I think it’s premature to conclude that we should not consider further rate cuts, if not at this meeting then at some time in the near future depending on how the data play out” (p.63).

He was concerned not just to keep interest rates low for a prolonged period but also to signal this to financial markets, “To the extent that we can sharpen our message that economic growth no longer implies an immediate and automatic policy tightening, we should make every effort to do so” (p.65; see also his role in the broader discussion around p.93).

This was, of course, at a time that the speculative fever and outright malpractice in the housing market was really taking off. The build-up of financial market risk was starting to head towards system-threatening dimensions. And many consumers were being set up for a trampling of epic proportions. It is striking there is barely a mention of these issues in the FOMC transcripts.

And that’s the issue. We can argue for a long time about whether the Fed should have tightened earlier. Defenders of the Fed will say the data were ambiguous – and will point to the serious discussion of these issues in the FOMC transcript.

We can also dispute whether or not the Fed should have said anything in public about the impending housing-financial-consumer-taxpayer doom, or tried to tighten regulation. “It’s not our job” or “we don’t have the powers,” or “the politicians wouldn’t have supported us” is what senior Fed people now whisper around Washington.

But this and other FOMC transcripts make it clear that the senior Fed decision makers were not even thinking about the first order financial sector issues. They weren’t aware of what the big investment banks were really doing – show me the intelligence reports before the FOMC or the analytical discussion that indicated any degree of worry. No doubt someone somewhere in the Federal Reserve system was thinking critically about finance – feel free to send me any relevant details - but from the point of view of evaluating the institution, it only counts if the top decision-making body at least has the issues on the table.

We have transcripts so far through the end of 2003. Others should be forthcoming soon; there is supposed to be only a 5 year lag in their publication. But, given their likely content, it would not be a surprise if the appearance of these transcripts slows down.

At this moment of potential regulatory reform, who within the Fed really wants us to know that their leadership in the Greenspan era completely framed the problem wrong, didn’t understand what was happening, and repeatedly, brazenly, and callously ignored the damage being done to consumers?

I fully understand that financial market considerations are not the established focus of central bank interest rate deliberations. But the scope and nature of such deliberations has changed a great deal since the founding of the Fed almost 100 years ago. As the economy changes, central banks have to adapt their conceptual frameworks and our broader regulatory frameworks need to change also. We’ve done this many times before, and we need to do it again.

Huge problems were missed by people using anachronistic conceptual frameworks. Those frameworks should change. This was the assessment of Ben Bernanke, building on Friedman and Schwartz, for 1929-33, and this should be our assessment today.

Our top monetary policy makers completely missed the true nature of the Great Bubble and its consequences, until it was far too late. They should apologize for that and we can start work on redesigning the institution, its decision-making, and how financial markets operate, to make sure it won’t happen again. And it would also be nice if the Fed could avoid adding insult to injury – and stop opposing the administration’s consumer protection proposals.

Hopefully, this time the Fed’s apology won’t take 70 years.

Comments

[Ransome:]

I have some different views. Traditionally, cheap money should fuel investment. At some point, access to cheap money fueled consumer debt and flowed to China, fueling investment and growth in China. This was considered a triumph in globalization.

I think Greenspan was focused on inflation. As long as inflation was contained inexpensive money would be available. I also think that Greenspan was seeing some disconnects but I don't know what they were. It may have been the increase in securitization and money becoming available outside of the regulated environment. At some point, faulty lending looking for more borrowers kept the game going, creating the unstable bubble and sector inflation.

My intuition believes that having the Fed back the banks was a half measure. It prevented immediate collapse. It was just as important to modify the faulty loans and de-lever the consumer as well as banks, as it is the actual loans that are the etiology of all that followed. A bad bank could have purchased the loans at market and restructured them. Buying bad securities as proposed, would have helped the banks but would do nothing for the bad loans. Buying the loans would fix the bad securities and the loans. It is the inattention to the wide spread bad loans and consumer debt that caused the overall long term collapse of the economy. Unhampered speculation in oil pushed the consumer over the edge, destroying all confidence.

It is a bit like mishandling poisoned pet food. You identify the source, contain it, and bail out the factory, while leaving the poisoned food on the market. Relying on banks to repair the loans was a faulty assumption. The banks themselves are not responsible for the economy, they are responsible for themselves.

Aug 15 10:54 AM

[joebhed:]

Simon and derryl both hit on important points.
More so darryl.
The problem I see with Simon's analysis is his failure to make the connection that he seemed to imply that Bernanke was missing.
That of the BIG financial picture.
The Fed is ONLY the central bank US and the commercial banking system (begging the question of how the IBs have all recently moved in next door).
So, we have a completely fractured money-creation system in this country.
Over the period being discussed, it is claimed that the IBs, working at their 40:1 ratio, CREATED MORE MONEY, colloquially-speaking, than did the entire Fed commercial banking suystem working up to their paltry 20 to 1 ratios.
How can you have financial stability when the private central bank has the limited role of creating only half the nation's money, and the bankers that create the other half are completely unregulated.
derryl points out the BIS' warnings, which included the entire financial services sector.
So, actually , as a guy who sat in the IMF's "catbird" seat on global economics and finance, I would say it is Simon that owes US an apology for not recommending that money-creation be limited to the central bankers' role, and that role be one under the control of the government. Period.
The Money System Common.

Aug 15 10:59 AM

[Ransome:]

Which is why there is little inflation. The printing presses are replacing real money for leveraged money. Money created during securitization of faulty assets and the generous proposal to buy bad securities at elevated prices. It is still a half measure.

Aug 15 11:26 AM

[Stepbear7:]

Accept This As The Truth The Whole Truth & Nothing But The Truth



You people still don't get it.
The Central banks along with the Federal Reserve, Fractional reserve banking procedures, and absence of the Gold standard are the spring boards of happiness for these cartel counterfeiters to rake the entire world over the coals and out of existence.
Federal Reserve Notes are near extinction. Rightfully so, because they(FRN) are worthless paper not soft enough for biological purposes and have no value without Gold standard backing it.
The rest of the world is starting to realize the USD (Federal Reserve Note) is the ROOT CAUSE OF PRESENT GLOBAL CHAOS.
Use the Gold Standard and get rid of Federal Reserve Notes and start having the U.S Government Treasury print United States Notes backed by gold reserves only producing allotments as needed to balance goods and services.

Abolish the Federal Reserve Act of 1913,Fractional Reserve Banking, the IRS, Ben Bernanke and the entire Federal Reserve System.
Then you will be able to understand and open your mind and eyes and move on to a better economic level of survival.
In other words remove 96 years of bend over vaseline jobs from the Federal Reserve System.
Just a thought ............. Have a good day,week,month,year and next decade.


Stephen

Aug 15 11:34 AM

[Idaho:]

Allowing the Fed to have the "control" it does over the markets and monetary system is like putting a steering wheel on a train engine.
The last wreck they made a right turn, so this time they will bank left.
Who has the skill to steer your train, or would you rather just follow the tracks?

Aug 15 12:49 PM

[CLH:]

The govt. is no smarter than the man in the street. Actually they are just humans like all of us. Its also not up to th govt. to tell the people what to do.

Face up to the fact this credit crisis was caused by the idiots who bought houses and other things they couldnt pay for. Who should you blame? Look in the mirror.

Aug 15 01:01 PM

[Crude Oil T...:]

We are only doing more of what got us in this mess to try to get us out of this mess. It won't work, it's time to take our medicine even if some politicians lose their jobs. Vote your incumbents out, all of them. I won't even vote for a democrat or republican again.

Aug 15 01:47 PM

[JMP:]

An apology? That is the problem. These people are not held accountable. This bust was predicted by many, Mike Stathis and Wolf to name just 2. They chose to ignore these folks. And it caused every day Americans to lose BIG. Tens of Billions of dollars or more, out the window, because the people in charge can see the forest for the trees. Retirement funds nearly wiped out for many middle class Americans.

In what world is GREED not a factor. Man is inherently the stops, the people in charge run amuck. greedy...Did Greenspan never read Aesops fables about the woldf who drowned by seeing his reflection in the water, and wanting the juicy piece of meat in the reflections mouth? Has he never watched children at play? Mankind tends toward "get away with anything you can"...and that is especially so in the corporate world.

JMHO Bankers are the worst of the lot...While I do not believe in socialism, there needs to be better control over our banking system. It is essential that banks are careful about what they do...and history has shown that when you take out the stops, greed takes over.

These foks who bought houses they really could not afford were as much a victim of the banks as anything else. Having had several home loans in my lifetime, I KNOW the banks will give you enough money to sink yourself. If you don't have the knowledge about loans, ARMS, and even worse loan packages, the banks will destroy you. Many people think "the bank would not give me that loan if I couldn't afford to pay it"....wrong answer....I have been offered loans several times in my life that I knew I could not comfortably afford. There is not enough disclosure about loan packages. People don't know the right questions to ask, and the loan people sure don't offer that info...because they would be writing smaller loan packages...

Funny, about 10 years ago, a lot of legislation that was put in place after the crash of 29 was thrown out the window? What did they think was going to happen? Bernanke of all people should have been aware if he is such a master of the great depression as he claims. These people need to stop playing politics, and get down to business. Lobbying should be made illegal. How many laws are on the books due to bought and paid for politicians? Corporations are running this country to their own benefit. "By and For the People" went out the window a long time ago.

The Fed creates more problems than it solves. And inflation? The govt very conveniently skews those numbers as to show very little inflation...but you cannot hide the increase in the costs of every day commodities such as milk, gas, butter etc. This is a result of "hedonic pricing" wherein the govt gets to ignore the truth and hide it from us. We may not know WHY things are getting more expensive, but we certainly know they are. Ask any housewife.

We need to look really closely at who we are electing...what is theri education level, what is their background. Elections need to stop being personality contests, and the truth about candidates needs to be shown to the public...not the distorted lies in TV ad campaigns...

We need so much reform, and the Congress doesn't have the guts to do it, because they might lose precious campaign funds...

How did we let things go so awry? A little common sense goes a long way...

If it walks like a duck, and talks like a duck...guess what folks, it is NOT a swan...it's a duck

Aug 15 02:59 PM

[JMP:]

Woops I see I did not get the text back in that got deleted somehow...should read

Man is inherently greedy...

and don't remember what I was saying about the people in charge running amuck, but I'm sure you get the drift of my comments...


On Aug 15 02:59 PM JMP wrote:

> An apology? That is the problem. These people are not held accountable.
> This bust was predicted by many, Mike Stathis and Wolf to name just
> 2. They chose to ignore these folks. And it caused every day Americans
> to lose BIG. Tens of Billions of dollars or more, out the window,
> because the people in charge can see the forest for the trees. Retirement
> funds nearly wiped out for many middle class Americans.
>
> In what world is GREED not a factor. Man is inherently the stops,
> the people in charge run amuck. greedy...Did Greenspan never read
> Aesops fables about the woldf who drowned by seeing his reflection
> in the water, and wanting the juicy piece of meat in the reflections
> mouth? Has he never watched children at play? Mankind tends toward
> "get away with anything you can"...and that is especially so in the
> corporate world.
>
> JMHO Bankers are the worst of the lot...While I do not believe in
> socialism, there needs to be better control over our banking system.
> It is essential that banks are careful about what they do...and history
> has shown that when you take out the stops, greed takes over.
>
> These foks who bought houses they really could not afford were as
> much a victim of the banks as anything else. Having had several home
> loans in my lifetime, I KNOW the banks will give you enough money
> to sink yourself. If you don't have the knowledge about loans, ARMS,
> and even worse loan packages, the banks will destroy you. Many people
> think "the bank would not give me that loan if I couldn't afford
> to pay it"....wrong answer....I have been offered loans several times
> in my life that I knew I could not comfortably afford. There is not
> enough disclosure about loan packages. People don't know the right
> questions to ask, and the loan people sure don't offer that info...because
> they would be writing smaller loan packages...
>
> Funny, about 10 years ago, a lot of legislation that was put in place
> after the crash of 29 was thrown out the window? What did they think
> was going to happen? Bernanke of all people should have been aware
> if he is such a master of the great depression as he claims. These
> people need to stop playing politics, and get down to business. Lobbying
> should be made illegal. How many laws are on the books due to bought
> and paid for politicians? Corporations are running this country to
> their own benefit. "By and For the People" went out the window a
> long time ago.
>
> The Fed creates more problems than it solves. And inflation? The
> govt very conveniently skews those numbers as to show very little
> inflation...but you cannot hide the increase in the costs of every
> day commodities such as milk, gas, butter etc. This is a result of
> "hedonic pricing" wherein the govt gets to ignore the truth and hide
> it from us. We may not know WHY things are getting more expensive,
> but we certainly know they are. Ask any housewife.
>
> We need to look really closely at who we are electing...what is theri
> education level, what is their background. Elections need to stop
> being personality contests, and the truth about candidates needs
> to be shown to the public...not the distorted lies in TV ad campaigns...
>
>
> We need so much reform, and the Congress doesn't have the guts to
> do it, because they might lose precious campaign funds...
>
> How did we let things go so awry? A little common sense goes a long
> way...
>
> If it walks like a duck, and talks like a duck...guess what folks,
> it is NOT a swan...it's a duck

Aug 15 03:03 PM

[Ray Lopez:]

Just the facts:

Go here for an explanation of why Ben and Hank caused (cause in fact, not proximate cause) the crash of last fall: tinyurl.com/q9demf

In the above link there is also the speech earlier this year by Alan Greenspan that argues the Fed did not cause the Housing Bubble. It's plausible.

Bottom line: Bubbles happen due to market forces. But the Fed precipitously popped this bubble and caused harm. Better to have done 'nothing' (or rather, bail out institutions as they fail, like the FDIC does today) rather than asked for a bailout which caused both a liquidity panic and a solvency panic

Aug 15 05:31 PM

[whidbey:]

Well said, and for my money fair minded too.

Now what are they doing? Why working on another bubble with interest rates around their ankles again they will stumble face down in the goo before we know it. Notice the EU refused to follow the recent Fed Policy. Clue?

One of the requirements of joining the Fed Board ought be:
1. at least one eye,
2. a shred of self doubt,
3. and half a brain.

We keep losing because the Fed is run by half wits!

Aug 15 07:35 PM

[User 469063:]

bernacke,paulson,bush 1,bush2,reed,greenspan... list goes on and on,..as it will,... until we see the truth in "no man shall by or sell except one who has the mark,..or the name of the beast,..or the number of his name.."
These men are pawns,,..the do exactly what they are told,,..
they are the instruments of the likes of CENTRAL ELITIST BANKERS (of old),...consider this from Amsel Bauer Mayer Rothschild : "LET ME ISSUE AND CONTROL A NATION'S
MONEY, AND I CARE NOT WHO MAKES IT'S LAWS"......as he and the Rockefellers and others infiltrated the U.S. banking systems,...
further consider this: Letter written from London by the Rothschilds to their New York agents introducing their banking method into America: "The few who can understand the system will be either so interested in its profits, or so dependent on its favours, that there will be no opposition from that class, while, on the other hand, that great body of people, mentally incapable of comprehending the tremendous advantage that Capital derives from the system, will bear its burden without complaint and, perhaps, without even suspecting that the system is hostile to their interests."
The fundamental solutions lie not in our "bickerings amongst
ourselves",....yet one is further compelled to ponder ancient
wisdom "we wrestle not against flesh and blood,.. but against principalities,..against powers,..against wicked spirits
in high places",.......and if the eyes that are currently reading this become scournful,....one is further compelled to
consider "who have eyes but do not see,...and having ears do not hear",............


On Aug 14 10:50 AM jeffz wrote:

> Bernanke's big experiment of printing money will fail miserably,
> although it might prop things up for a while, eventually it's a great
> depression in slow motion, the end result is the same, nothing can
> stop the deflation freight train, not even Bernanke.

Aug 15 10:20 PM

[BRUCE E. W.:]

seekingalpha.com/user/...:
Waiting for the Next Fed Apology [View article]
One of the great delusions created by central place theories in Economics is that the economy is a single ocean of homogenous and equilibrium systems. Economics and Financial monetary theories are not interchangable. Both are segmented, fractional and stratified into complex arrangements of virtuous spirals (open systems) based upon resources, reduction, production, market distribution and transformations with translations into categories of equity (which includes the abstract fiat of monetary values that store, distribute, and hopefully redistribute real equity and accomodate fluidity).
That is the ideal. In reality the virtuous systems interact and can transform into viscious cycles (closed systems or entropy) and there is a progressive deminishing return on the true value between fundamental subsistence and sustanance. Upper tier segmentation economies operate over literal many segments of economy markets that are reduced to scale. When supply economics was aggressively pursued it neglected to relate precisely what sectors of the gross economy would be open to development and what demand sectors would be allowed to entropy. As global finance became the primary objective "inventory gluts" (amazingly enough in a world starving for production) was perceived as a product of redistribution...to be solved by producing more currency which theoretically should help the stimulate production). Unfortunately this refinancing (debt) went to all the wrong places producing "FALSE ECONOMIES" which came and went in outsourced regions that were seen as grand success stories in the economics of scale. As problems within sectors of economic privilidge were experienced, they were labeled with jargon that rationalized and accomodated the circumvention of the contradictions for the sole purpose of extending the inner circle (the core bubble never bursts) of status quo. We are living in a complexity of mixed economies of reductive scale that enhance the propagation of false economies and viscious cycles (closed systems and entropy). Producing more money is equivalent to what the Fed was doing all along in supporting the financial sectors debt recycling and derivative accumulations. Think of this real life allegory. The Saudi Royal family has over a thousand grandchildren, all of which are presumably open to privilege. How does a single family grow to that size in a desert environment? How will that generation relate to the tribal people in Saudi Arabia?
Are we creating a Saudi America with our delusional belief that the disproportionate fiat of finacialization and economic strength of The United States OF America rests upon monetary predilections of power? Is THAT the kind of SAND we are made of these days?
Wake up America: these "OASIS" THEORIES (supply side) have shifted to the financial sectors and they are stealing your assets by devisive fiat and deceptive illusions of authority. The arrogant appeal to the Great Depression is one of legitimation from fear. The only purpose in that regard is to undo the corrective measures that were founded under that experience. Capture is the name of the day and the real policy of the Corporate Fed is simply CAR PAY DIAM. To which we might say in Caveat: Fortune is made of Glass; at one moment it shines and then it shatters.
Aug 15 09:51 am |Rating: +2 -2 |Report abuse |Link to Comment

Aug 15 10:30 PM

[User 469063:]

bernacke,paulson,bush 1,bush2,reed,greenspan, Obama,...the list goes on and on,..as it will,... until we see the truth in "no man shall by or sell except one who has the mark,..or the name of the beast,..or the number of his name.."
These men are pawns,,..the do exactly what they are told,,..
they are the instruments of the likes of CENTRAL ELITIST BANKERS (of old),...consider this from Amsel Bauer Mayer Rothschild : "LET ME ISSUE AND CONTROL A NATION'S
MONEY, AND I CARE NOT WHO MAKES IT'S LAWS"......as he and the Rockefellers and others infiltrated the U.S. banking systems,...
further consider this: Letter written from London by the Rothschilds to their New York agents introducing their banking method into America: "The few who can understand the system will be either so interested in its profits, or so dependent on its favours, that there will be no opposition from that class, while, on the other hand, that great body of people, mentally incapable of comprehending the tremendous advantage that Capital derives from the system, will bear its burden without complaint and, perhaps, without even suspecting that the system is hostile to their interests."
The fundamental solutions lie not in our "bickerings amongst
ourselves",....yet one is further compelled to ponder ancient
wisdom "we wrestle not against flesh and blood,.. but against principalities,..against powers,..against wicked spirits
in high places",.......and if the eyes that are currently reading this become scournful,....one is further compelled to
consider "who have eyes but do not see,...and having ears do not hear",............

Aug 15 10:45 PM

[User 469063:]

Dude,.....should i smoke dope before i try to decifer your verbal stream of ahhhh,,..."whatever". I "do" compliment you on what seems to be intellect,..however,..... ability to transfer your message in any meaningful way is "definitely"
going to be fruitless,.."in my opinion",..and I sincerely mean to be constructive within these words of "critique". (just a thought),..sustanance is best spelled "sustenance".


On Aug 15 10:30 PM BRUCE E. W. wrote:

> seekingalpha.com/user/...:
> Waiting for the Next Fed Apology [View article]
> One of the great delusions created by central place theories in Economics
> is that the economy is a single ocean of homogenous and equilibrium
> systems. Economics and Financial monetary theories are not interchangable.
> Both are segmented, fractional and stratified into complex arrangements
> of virtuous spirals (open systems) based upon resources, reduction,
> production, market distribution and transformations with translations
> into categories of equity (which includes the abstract fiat of monetary
> values that store, distribute, and hopefully redistribute real equity
> and accomodate fluidity).
> That is the ideal. In reality the virtuous systems interact and can
> transform into viscious cycles (closed systems or entropy) and there
> is a progressive deminishing return on the true value between fundamental
> subsistence and sustanance. Upper tier segmentation economies operate
> over literal many segments of economy markets that are reduced to
> scale. When supply economics was aggressively pursued it neglected
> to relate precisely what sectors of the gross economy would be open
> to development and what demand sectors would be allowed to entropy.
> As global finance became the primary objective "inventory gluts"
> (amazingly enough in a world starving for production) was perceived
> as a product of redistribution...to be solved by producing more currency
> which theoretically should help the stimulate production). Unfortunately
> this refinancing (debt) went to all the wrong places producing "FALSE
> ECONOMIES" which came and went in outsourced regions that were seen
> as grand success stories in the economics of scale. As problems within
> sectors of economic privilidge were experienced, they were labeled
> with jargon that rationalized and accomodated the circumvention of
> the contradictions for the sole purpose of extending the inner circle
> (the core bubble never bursts) of status quo. We are living in a
> complexity of mixed economies of reductive scale that enhance the
> propagation of false economies and viscious cycles (closed systems
> and entropy). Producing more money is equivalent to what the Fed
> was doing all along in supporting the financial sectors debt recycling
> and derivative accumulations. Think of this real life allegory. The
> Saudi Royal family has over a thousand grandchildren, all of which
> are presumably open to privilege. How does a single family grow to
> that size in a desert environment? How will that generation relate
> to the tribal people in Saudi Arabia?
> Are we creating a Saudi America with our delusional belief that the
> disproportionate fiat of finacialization and economic strength of
> The United States OF America rests upon monetary predilections of
> power? Is THAT the kind of SAND we are made of these days?
> Wake up America: these "OASIS" THEORIES (supply side) have shifted
> to the financial sectors and they are stealing your assets by devisive
> fiat and deceptive illusions of authority. The arrogant appeal to
> the Great Depression is one of legitimation from fear. The only purpose
> in that regard is to undo the corrective measures that were founded
> under that experience. Capture is the name of the day and the real
> policy of the Corporate Fed is simply CAR PAY DIAM. To which we might
> say in Caveat: Fortune is made of Glass; at one moment it shines
> and then it shatters.
> Aug 15 09:51 am |Rating: +2 -2 |Report abuse |Link to Comment

Aug 15 11:11 PM

[allan skye:]

Wow,Bruce ew. That goes down as one of the most impenetrable pieces of text I have ever had the privilege of reading.If I get this right you are against the bestowing of oodles of new money printed at our expense apon an innercircle of wall st buddies having the effect of making more divided an already divided society .Im sure most would agree.What do you suggest instead? Perhaps auditing the fed would be a start.
The big problem is that as long as America and her allies have military supremacy America is able to extract value from having the worlds reserve currency and get first use of the new money they print allowing the western world to get everything made in china and abroad .Generally speaking that beats work! Therefore as our industries decline due to our high overhead theres less investment in the next generation of higher technology industry,expectations are continually raised regarding standard of living and we become more dependant on extracting value from abroad which cant go on for ever.The pendulum must start to swing back at some point and that is a point of extreme pain for hundreds of millions of people who produce nothing that otherpeople will voluntarily pay for but who expect to have a middle class lifestyle.By all the inflating we are bringing that day of inflexion closer.Reflexivity is at work here.Since reading George Soros books I now see that reflexivity is a continuous process which may cause but definately enhances cycles.THis idea is very interesting when applied to the state and its attempts to influence reality.

Aug 16 06:11 AM

[AllStreets:]

What the Fed and all the other banking regulators should apologize for most is the little known, but crucial act that lit the fuse to the mortgage powder keg: on September 28, 2006, practically to the day the housing market peaked, they issued "The Interagency Guidance on Nontraditional Mortgage Products" [subprime ARMs, option ARMs, interest-only products and low documentation residential mortgage loans]. The Interagency Group, is a consortium of the Federal Reserve Board, the U.S. Treasury and all the federal regulators of banks, thrifts and credit unions. They also enlisted the unanimous agreement of all state regulators of mortgage lenders and state chartered lenders. The Guidance had a provision that absolutely guaranteed that hardly any homeowner who had a subprime ARM would be able to refinance their dangerous loan either before or after the interest rate would reset to an unmanageable rate. The provisions also meant that even prime borrowers would have a much tougher time getting any kind of ARM or interest-only loan, at least in absence of a big drop in short-term index interest rates. It also instructed lenders to discontinue low doc mortgage loans such as stated income, no ratio and no doc. The Guidance was issued at the worst possible moment in the housing and credit cycles.

Anybody with basic knowledge of mortgage loan origination and the typical terms of subprime ARMs could easily understand that the Guidance would directly lead to huge trouble soon for subprime borrowers and the housing market. It virtually guaranteed a subprime mortgage crisis with the attendant decimation of collateralized subprime mortgage securities and negative marginal effects on housing values. Within months of its issuance, by about March, 2007, there were virtually no subprime ARMs or subprime lenders available, and Alt-A (low doc) lenders began shutting down too. Wall Street pulled the plug on mortgage securitizations for many kinds of mortgage loans. Mortgage lenders of all kinds began collapsing in droves. New Century, a New York Stock Exchange traded major subprime lender, was one of the first to go bankrupt. As subprime loans had rates reset to unaffordable levels, and no refinances were available, subprime defaults skyrocketed, a totally predictable outcome that Ben Bernanke himself warned Congress about in December, 2006. Home equity loans for 90% or more combined loan-to-value quickly became scarce and disappeared almost completely by Summer, 2008. Also, now millions of prime borrowers who have never had a late payment and have good credit and could benefit from a low doc refinance, such as was formerly available, are also trapped in their current ARM loans and will have big problems if short term interest rate indexes, notably the 1-year LIBOR rate, goes up before they can escape their loans. Of course, millions of homeowners with mortgages of all different kinds are now trapped in homes with mortgage balances more than the home is worth, some 25% of all homeowners, or about 30 million, by some estimates.

Arguably the Guidance could have prevented the mortgage and housing bubble from becoming so severe, if it had been issued three or four years earlier, but, coming at a time of record homeownership, some 69% of households, with an already weakening housing market, it almost single-handedly guaranteed a subprime mortgage crisis and a general housing crisis. While the Group was acting responsibly, but not timely, to stop the mortgage bubble, apparently the Group didn't foresee that the default of subprime loans could be a tipping domino leading to a worldwide financial crisis and a general housing crisis. The consequence of the elimination of low doc lending in particular will guarantee that for many years the qualified pool of mortgage borrowers is about half of what it was before the Guidance, and that, along with adverse demographic factors, guarantees many years of supply/demand imbalance for housing.

I find it impossible to believe that the Fed and the economists in all the other bank regulatory agencies couldn't foresee the likely dire consequences of their ill-timed regulation. An apology is in order. Congress should also apologize for completely ignoring the subprime crisis and leaving matters to the Hope Now Alliance who did virtually nothing. Congress could have greatly contained the subprime crisis by simply limiting the interest rate reset terms of the loans.

Aug 16 11:15 AM

[Gem Hudson:]

Is their social justice equality for all of just us? If gang banging flashing their gang single on the Obama green car lot is not bad engought, selling stimulous money need more of your money to make them more of their money but what are they selling? Buying into their cash for your clunker are an trade in for exchange your cash incentive for them to buy into their own sales. Because they spend more of your cash to make less of their cash.

Socialism could not even make the money on a scam.

Aug 16 11:41 AM

[stockhawk:]

Taking the macro view, and understanding this may sound conspiracy-theorist, don't forget at the time all this was happening we were at war and spending money we didn't have. But is it not possible the administration at the time could have influenced the Fed to keep quiet? We were unilaterally in Iraq and Afghanistan, could not get foreign financial support due to objections to how we entered into it. What other options did we have other than inflate the American consumer/home equity bubble? Many things happen in Washington which never leak out, who knows?

Aug 18 07:15 AM

[PalmGuy:]

Sadly, “We the People” are collectively stupid.

The only way that you can motivate them in any direction is by pandering to that stupidity as the Limbaugh-forms do.

“We the People” have never and will never provide any structural input to complex problems, They will only provide static.

Smart people will find a way out of this.

Aug 19 06:55 PM