At lunch today I disgraced myself. I lost my temper and blew the head off some poor fund’s manager - metaphorically. So why did I get upset?
Maybe I have heard the “It’s the Fed's fault for keeping interest rates too low” story one too many times. There is a view industriously peddled through the financial community that during the last ten years, every time the market got into trouble, (Russian Bond crisis, tech wreck, 9/11, 2001 Recession, 2002 Telco melt down) the Fed would lower interest rates to reduce the financial impact. It is argued that by saving the markets every time the going got tough, central banks (and the Fed in particular) “de-risked” the credit markets and created the conditions for a credit bubble that ultimately collapsed in what we now refer to as the Global Financial Crisis.
So it’s the Governments fault. If the Government had stayed out of the market and let the market feel the pain of its own folly none of this bad stuff would have happened!
I don’t buy this story at all!
The underlying assumption is that movement in the Fed Funds Rate is the key factor in credit decisions. I accept that if interest rates on loans are low, that may fuel the demand for credit. But the supply of credit should ultimately be based on credit decisions. Credit decisions are based on assessments of asset valuations, interest cover, and likely recovery rates. In the past ten years good lending practices have been abandoned, not by the Government, but by the banks and the fund managers who often purchased the loans arranged by banks.
The Fed cannot be blamed for the fact that Bankers and fund managers threw money and anyone who put their hand out. If anyone in government is culpable, it might be the OCC (Office of the Comptroller of Currencies – the agency responsible for Bank supervision in the US) who arguably should have intervened to curb the insanity.
By the end of lunch I had recovered myself enough to apologise.
Richard Oakes
Discuss
tim hall on August 21, 2009, 12:10 PM
Hey, Richard, It is nice to hear perspective from someone who fully understands the function of manipulating rates to help markets stay in check. There is plenty of blame to go around. And we are sick of hearing that one too.
I am not in finance so please bare with me and inform my liquidated asset.
I pulled my security funds to the side July 07. I said that this market is out of tools. But I was wrong, they had one more tool. Was that the OCC that failed to regulate banks. It seems that the rating industry toting theer info to the banks (Stanley Morgan) were either threatened in some way or flat out lied, in order to stave off competition. But there again, it would be threat. “Threat that Stanley Morgan would drop them for a more liberal.” But was that whole scenario not just another desperate reaction to a failed economy and folks trying to keep their jobs? If you have a wonderful home, family and in debt up to your arse, would you be willing to let your job go or rather play along with false hope of markets overcoming bad debt? Maybe you could buy time to get your ducks in a row?
But I see a greater 30 year old system to blame. Richard Nixon who was known for fits of anger when he could not get his way said " If we are not careful going down this road of deregulation we may spoil the market place beyond repair" or something to that extent.
What I witnessed was technology and edu. making progress in leaps and bounds for a rather small minority, while holding wages down for the mass purchasers. By the use of creating new credit instruments this minority could cause markets to continually thrive. The masses never really paying for acquired product through wages, rather falsifying net worth (outcome of labor) mostly with the big ticket idems Real-Estate. I was in home costruction during Regonomics. I watched families trade up every three years, making enormous profits from Real-Estate while at the same time crushing legislature in the house to raise minimem wage. My pool of uneducated apprentice kept diminishing as they wacthed there uncles unable to reap much of a reward from there efforts of struggling through 8 years of hard labor to learn a trade. Whine Whine Whine.
There are so many things at work here. The industrial boom and it’s women going to work to buying second cars. The uneducated being able to purchase more than staples. Then the slow movement to educate the masses for foreseen tech replacing industry. Third world economies growing up.
We had better understand everything in this list or we will end up trying to apply similar patches going forward. At some point does trade of work for work have to have some degree of stability to sell product and move markets without false hope?
Enlighten Me! Yell at me! Vent! I am an economics ignoramous!
JAMES RAIDER on August 21, 2009, 2:13 PM
Bernanke had the gall to threaten Congress and the American people with economic destruction. Get this arrogance out of the Fed, … just for a start.
The Kings of Wall Street have long coveted the absolute supremacy they now enjoy over the largest economy in the world. The debt is a problem, but vast change is necessary throughout the banking system. A radical change is needed on Wall Street.
It starts with the taxpayer’s attitude adjustment.
http://pacificgatepost.com/2009/08/america-end-your-fear-of-wall-street.html
– - – Quit fearing Wall Street.
Richard Oakes on August 21, 2009, 11:35 PM
Hi there Tim,
I have to catch a plane in a few hours and still have to pack for three weeks away, so sitting on BigT discussing monetary policy and bank regulation is likely to send my wife over the edge. Two comments: on general and one specific…
The real issue that interests me is finding the balance between free market economics and command economics. Neither works in their purist form. I won’t bother discussing the collapse of the Soviet Union. Free markets are fine in theory, but in practice they are irrational, inefficient and corrupt. There needs to be some level of regulation by an independent entity who represents the broader interests of society. I think that the Government is the only qualifier…. They are not perfect, but there is no one else.
With respect to the OCC, I don’t think that politically, certainly during the Bush regime, they could have entered the market and introduced credit rationing. They are off the hook on that one. What bothered me was their interpretation of the Basil Capital Accords, particularly where AAA rated assets were given a zero risk weighting. Zero risk weighted assets require no capital support. What passed for AAA rated assets included CDOs (Collaterised Debt Obligations) which are large structured passels of diversified debt. The fact that many AAA rated CDOs included subprime debt would have been known to the OCC. (Give them their due. In my experience, OCC site visits are very thorough.) Naturally enough, the US banks loaded up on these transactions.
I have to go and pack….
RO
Richard Oakes on August 22, 2009, 12:19 AM
James,
You really have to get a life (or at least learn what actually goes on in the world).
All this “Wall Street” conspiracy stuff is fanciful. Wall Street insiders hate one another to much to be able to conspire together. At best, the fact that they behave in a similar manner can be explained by reference to “herd instinct”. Most of them are scared that they will be eaten by a lion, so they hide in the herd.
I think that Bernanke in an unimpressive individual. (Lincoln would have called him “A first class, second class man”.
Tim Geithner is the genuine article: a card carry genius!
RO
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