Does WSJ's Greg Ip Still Have an Inside Line to the FOMC?

During the tightening era, a number said that the Federal Reserve Open Market Committee [FOMC] would telegraph their views through Greg Ip of the Wall Street Journal. If so, today’s article should be a concern to those favoring the view that the FOMC must loosen in order to keep the speculative frenzy going preserve the integrity of the markets.

Leaving aside the issue of whether it is even desirable to have any intervention in the market, such as Fannie and Freddie buying more mortgage loans, it seems like the debate has shifted to the question of encouraging moral hazard, something foreign to Alan Greenspan, who thought he could micromanage monetary policy.

The consistent throwing of liquidity at crises lulled investors into complacency over financial risk. Economies work best in the long run when risk-taking is moderate, not absent or crazed. It is good to have a bear market every now end then; it keeps investors honest. It is even good to allow failures of financial institutions, particularly risky ones at the fringe of the financial system for the same reason. Financial firms are opaque by nature, and investors should be skeptical of those furthest out on the risk spectrum, particularly when credit spreads are tight.

To those who favor using monetary policy to bail out dud (primarily) non-banks, I say two things: first, are we capitalists only for our profits and not for our losses? Are we the hypocrites who privatize our gains and socialize our losses? Second, it’s not in the FOMC’s charter. Alan Greenspan violated the purposes of the FOMC when he used it for any thing other than low inflation, low unemployment, and preservation of the portion of depositary financial system overseen by the Federal reserve.

Score me in the camp that sees no substantive change in the FOMC’s direction, but sees a nod in the statement toward the current troubles, and a little more in the minutes, but keeps the focus on inflation. I still don’t think the FOMC is moving in 2007.

Comments

[Ross]

Paul McCulley of Pimco fame wrote in his Feb 2002 Fed Focus article:
“Put more bluntly, successful capitalism in a democracy is about privatizing much of the upside of booms and socializing the downside of busts. Yes, I know that sounds terrible, and it is politically incorrect to offer such a view. But that doesn’t make it any less true: capital markets-driven capitalism in a democracy runs on moral hazard. The only issue for debate is choosing the “right” octane of moral hazard to put into the tank.”

I recently emailed him to ask...
....With the US housing market unraveling leaving the “Mums and Dads” holding the bag after the Fed sucked them all into borrowing too much via “option ARMS” and the like. Do you still agree with the statement from your Fed Focus 2002? This was, if I recall correctly, about shifting corporate errors to the people via artificial low rates (printing cash).
If you do, then would you say that the “mums and dads” were (trying to) participating in the upside and now should be bailed out as well by the broader populace via the government?.....

I am yet to receive a reply.

2007 Aug 08 06:21 PM

[omooc]

So this is American capitalism: gain is private and loss is the society's. Is this the version exported to other countries as well? omooc

2007 Aug 08 11:05 PM