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Two linked articles by L. Randall Wray - he is a professor of economics and research director of the Center for Full Employment and Price Stability at the University of Missouri–Kansas City. His current research focuses on providing a critique of orthodox monetary policy, and the development of an alternative approach......he is working to publish, or republish, the work of the late financial economist Hyman P. Minsky, and is using Minsky's approach to analyze the current global financial crisis
First
Mea Culpa Time: Rubin and Bernanke apologize (sort of)
The Newsweek Rubin article here
As for Bernanke - Bernanke’s Apology Doesn’t Cut It
The NYT Bernanke article here
First
Mea Culpa Time: Rubin and Bernanke apologize (sort of)
The Newsweek Rubin article here
Why does Rubin have the ear of the Prez when his economic song is out of tune? Roosevelt Institute Braintruster L. Randall Wray investigates.
Alan Greenspan has already apologized for the damage he wrought, admitting the crisis reveals that his approach to economics is fundamentally flawed. Apparently it is now time for mea culpas from the rest of the team most responsible for creating this mess: Rubin, Summers, and Bernanke. Rubin and Bernanke just provided theirs — albeit somewhat half-heartedly, a bit more Tiger Woods than David Letterman. Don’t hold your breath for an apology from Summers, who never owns up to his mistakes, ranging from his proposal to use developing nations as toxic waste dumps to his argument that females suffer from congenital handicaps that render them incapable of doing science. Still, with three out of the four acknowledging errors, this could indicate a New Year’s trend. Next we can hope that the University of Chicago — the institution most responsible for producing the theories that guided our misguided policymakers — will apologize for its indiscretions. That could set an example for all mainstream economists who, as the Queen pointedly put it, failed to foresee the crisis.
The statements by Rubin and Bernanke are quite interesting — both for what they say and for what they leave out. Rubin claims to have learned that we “need to reform the financial system to better protect against systemic risk and devastating crises in the future.” Nice deduction, Sherlock! But he goes further, admitting he has long had misgivings about the shape of the financial system: “About four years ago, a well-known London investor said to me that the only undervalued asset in the world was risk. I had the same view, as did many others, and often said that markets, including credit, had gone to excess and that would probably be followed by a cyclical downturn-perhaps a sharp one-though the timing, as always, was unpredictable.” Really? Four years ago? Did he try to warn the Bush administration’s regulators? Or his protégé, Timmy Geithner at the NYFed who was busy (by his own admission) NOT regulating banks? At that time did he feel any guilt, since he was among the most important deregulators who had created the conditions that would ensure undervaluation of risk? Did he push for re-regulation of the financial institution he was running into the ground?
To be fair, Rubin notes other problems with the “free market” approach he used to advocate, indeed, his complaints sound remarkably similar to the arguments long made by progressives (including heterodox economists). For example, the market should not be counted on to determine income distribution:
.
.
.
.
Alan Greenspan has already apologized for the damage he wrought, admitting the crisis reveals that his approach to economics is fundamentally flawed. Apparently it is now time for mea culpas from the rest of the team most responsible for creating this mess: Rubin, Summers, and Bernanke. Rubin and Bernanke just provided theirs — albeit somewhat half-heartedly, a bit more Tiger Woods than David Letterman. Don’t hold your breath for an apology from Summers, who never owns up to his mistakes, ranging from his proposal to use developing nations as toxic waste dumps to his argument that females suffer from congenital handicaps that render them incapable of doing science. Still, with three out of the four acknowledging errors, this could indicate a New Year’s trend. Next we can hope that the University of Chicago — the institution most responsible for producing the theories that guided our misguided policymakers — will apologize for its indiscretions. That could set an example for all mainstream economists who, as the Queen pointedly put it, failed to foresee the crisis.
The statements by Rubin and Bernanke are quite interesting — both for what they say and for what they leave out. Rubin claims to have learned that we “need to reform the financial system to better protect against systemic risk and devastating crises in the future.” Nice deduction, Sherlock! But he goes further, admitting he has long had misgivings about the shape of the financial system: “About four years ago, a well-known London investor said to me that the only undervalued asset in the world was risk. I had the same view, as did many others, and often said that markets, including credit, had gone to excess and that would probably be followed by a cyclical downturn-perhaps a sharp one-though the timing, as always, was unpredictable.” Really? Four years ago? Did he try to warn the Bush administration’s regulators? Or his protégé, Timmy Geithner at the NYFed who was busy (by his own admission) NOT regulating banks? At that time did he feel any guilt, since he was among the most important deregulators who had created the conditions that would ensure undervaluation of risk? Did he push for re-regulation of the financial institution he was running into the ground?
To be fair, Rubin notes other problems with the “free market” approach he used to advocate, indeed, his complaints sound remarkably similar to the arguments long made by progressives (including heterodox economists). For example, the market should not be counted on to determine income distribution:
.
.
.
.
The NYT Bernanke article here
Bernanke’s attempts to defend himself against critics is unconvincing, argues L. Randall Wray.
As discussed in Part 1 here, some of the policymakers responsible for this calamity have started to apologize. On January 3, Chairman Bernanke admitted that rather than using rate hikes back in 2004 to deflate the housing bubble, the Fed should have used “[s]tronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management”.
There appear to be at least three reasons for Bernanke’s admission that the Fed did not do its job. First, and most obviously, Bernanke is up for reappointment (his term expires January 31)-and he will not sail through. The public is mad as hell, and politicians will have to put him through the wringer or face voter’s wrath in the next election. So Bernanke will have to appear contrite, and will apologize for his misdeeds many more times while Congress makes him sweat it out.
Second, Congress is actually considering whether it should strip the Fed of all regulatory and supervisory authority, given its miserable performance over the past decade-during which the Fed has consistently demonstrated that it has neither the competence nor the will to restrain Wall Street’s bankers. Since Greenspan took over the helm, the Fed has never seen a financial instrument or practice that it did not like-no matter how predatory or dangerous it was. Adjustable rate mortgages with teaser rates that would reset to levels guaranteed to produce defaults? Greenspan praised them. Liar loans? Bring them on! NINJA loans (no income, no job, no assets)? No problem! Credit default swaps that let one gamble on the death of assets, firms, and countries? Prohibit government from regulating them! So Bernanke has to grovel and beg Congress to let the Fed retain at least some of its authority.
Third, many commentators blame the Fed for the crisis, arguing that it kept interest rates too low for too long, fueling the real estate bubble. Bernanke argues “When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment”. If he can convince Congress that the problem was lack of oversight and regulation he can shift at least some of the blame to Treasury and Congress — since it was Treasury Secretary Rubin, and his protégé Summers, as well as Barney Frank, Christopher Dodd, and many others (significantly, Democrats who will now decide the Fed’s fate) who pushed through the deregulation bills in 1999 and 2000. He figures that if the Fed now supports re-regulation, he will be forgiven and the Democrats will be too embarrassed to admit their own misdeeds. (Significantly, Dodd has announced his retirement, in recognition of the role he played in creating the crisis. Another mea culpa on the way?)
While I do believe the Fed should be stripped of all such authority, I am sympathetic to his argument about monetary policy. Low interest rates do not cause bubbles. The Fed kept interest rates low after the NASDAQ crash because it feared deflation in the face of significant downward pressures on wages and prices globally. here The belief was that low interest rates would keep borrowing costs low for firms and households, helping to promote spending and recovery. In truth, spending is not very interest sensitive and the economy stumbled along in a “jobless recovery” in spite of the low rates. What was actually needed was a fiscal stimulus (if anything, low rates are counterproductive because they reduce government interest spending on its debt-as Japan’s experience taught us over the past couple of decades-but that is a point for another blog).
Still, the Fed was following conventional wisdom, and only began to gradually raise rates when job growth picked up in 2004. Over the following years, the Fed kept raising rates, and economic growth improved. (So much for conventional wisdom!) The worst excesses in real estate markets began only after the Fed had started raising rates, and lending standards continued their downward spiral the higher the Fed pushed its target interest rate. In other words, contrary to what many are arguing, the Fed DID raise rates but this had no impact in real estate markets.
Why not? Two main reasons.
.
.
.
.
.
As discussed in Part 1 here, some of the policymakers responsible for this calamity have started to apologize. On January 3, Chairman Bernanke admitted that rather than using rate hikes back in 2004 to deflate the housing bubble, the Fed should have used “[s]tronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management”.
There appear to be at least three reasons for Bernanke’s admission that the Fed did not do its job. First, and most obviously, Bernanke is up for reappointment (his term expires January 31)-and he will not sail through. The public is mad as hell, and politicians will have to put him through the wringer or face voter’s wrath in the next election. So Bernanke will have to appear contrite, and will apologize for his misdeeds many more times while Congress makes him sweat it out.
Second, Congress is actually considering whether it should strip the Fed of all regulatory and supervisory authority, given its miserable performance over the past decade-during which the Fed has consistently demonstrated that it has neither the competence nor the will to restrain Wall Street’s bankers. Since Greenspan took over the helm, the Fed has never seen a financial instrument or practice that it did not like-no matter how predatory or dangerous it was. Adjustable rate mortgages with teaser rates that would reset to levels guaranteed to produce defaults? Greenspan praised them. Liar loans? Bring them on! NINJA loans (no income, no job, no assets)? No problem! Credit default swaps that let one gamble on the death of assets, firms, and countries? Prohibit government from regulating them! So Bernanke has to grovel and beg Congress to let the Fed retain at least some of its authority.
Third, many commentators blame the Fed for the crisis, arguing that it kept interest rates too low for too long, fueling the real estate bubble. Bernanke argues “When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment”. If he can convince Congress that the problem was lack of oversight and regulation he can shift at least some of the blame to Treasury and Congress — since it was Treasury Secretary Rubin, and his protégé Summers, as well as Barney Frank, Christopher Dodd, and many others (significantly, Democrats who will now decide the Fed’s fate) who pushed through the deregulation bills in 1999 and 2000. He figures that if the Fed now supports re-regulation, he will be forgiven and the Democrats will be too embarrassed to admit their own misdeeds. (Significantly, Dodd has announced his retirement, in recognition of the role he played in creating the crisis. Another mea culpa on the way?)
While I do believe the Fed should be stripped of all such authority, I am sympathetic to his argument about monetary policy. Low interest rates do not cause bubbles. The Fed kept interest rates low after the NASDAQ crash because it feared deflation in the face of significant downward pressures on wages and prices globally. here The belief was that low interest rates would keep borrowing costs low for firms and households, helping to promote spending and recovery. In truth, spending is not very interest sensitive and the economy stumbled along in a “jobless recovery” in spite of the low rates. What was actually needed was a fiscal stimulus (if anything, low rates are counterproductive because they reduce government interest spending on its debt-as Japan’s experience taught us over the past couple of decades-but that is a point for another blog).
Still, the Fed was following conventional wisdom, and only began to gradually raise rates when job growth picked up in 2004. Over the following years, the Fed kept raising rates, and economic growth improved. (So much for conventional wisdom!) The worst excesses in real estate markets began only after the Fed had started raising rates, and lending standards continued their downward spiral the higher the Fed pushed its target interest rate. In other words, contrary to what many are arguing, the Fed DID raise rates but this had no impact in real estate markets.
Why not? Two main reasons.
.
.
.
.
.
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