January 23, 2008
Here is Ben Bernanke, Federal Reserve Chairman, in May 2007, speaking at the FBA of Chicago annual conference on bank structure and competition when the subprime problems were spooking the markets:
Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime housing market will likely be limited, and we do not expect significant spillovers to the rest of the financial system. Markets can overshoot, but, ultimately, market forces also work to rein in excess. For some, the self-correcting pullback may seem too late ad too severe. But I believe that, in the long run, markets are better than regulators in allocating credit
So we have the FR chairman (the regulator) assuming the role Dr Pangloss genuflecting to the markets. What about the deceptive banking practices that misled consumers? What about the poorly structured and supervised derivative conduits in the financial markets? An isolated event that would have limited fallout? The current stock markets bloodbath is a good way to regulate?
The sub-prime mortgage crisis is only threatening the battered and bruised American banking system itself, the wider economy and global markets. What we have today is a growing sense of crisis in world financial markets and a judgment that Bernanke and the FR have been asleep at the regulatory wheel (regulation-lite) and have made a last minute response to the crisis.
There cannot be 'recession talk' by the FR can there? We cannot spook the markets, can we? We must keep their confidence up. We must talk up markets. We must defend capitalism Wall Street style and Republican style regulation. As David Leonhardt says in the New York Times:
Until a few months ago, it was accepted wisdom that the American economy functioned far more smoothly than in the past. Economic expansions lasted longer, and recessions were both shorter and milder. Inflation had been tamed. The spreading of financial risk, across institutions and around the world, had reduced the odds of a crisis.Back in 2004, Ben Bernanke, then a Federal Reserve governor, borrowed a phrase from an academic research paper to give these happy developments a name: “the great moderation.”These days, though, the great moderation isn’t looking quite so great — or so moderate.
It's been a poor performance by Bernanke--worse than even Greenspan's easy going monetary policy and regulation that contributed to the housing bubble.
The reality is that the sub-prime mess is a disaster, the US will not have a soft landing, the Federal Reserve will not be being able to ease and avoid the hard landing, and the rest of the world is not decoupling from the US hard landing.
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Gary,
America is still caught up in Reagan overhang. They seem to have forgotten Bill Clinton's words in 1991, when he began his presidential campaign:
George Bush's 'Reagan style' economics have seen the optimism of the 1990s disappear, wages to lag behind inflation, poor employment growth, increased debt, and a looming formal recession. And this is heralded as a great success by the Republicans.