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September 26, 2009

Economist's View - 3 new articles

"Auditing the Fed"

Bruce Bartlett and Barry Ritholtz on Ron Paul's call for the Fed to be audited:

Auditing the Fed, by Bruce Bartlett: Ron Paul finally got his wish yesterday and the House Financial Services Committee held a hearing on his legislation to audit the Federal Reserve. There were only two witnesses: the Fed's general counsel and Tom Woods, a historian from the Ludwig von Mises Institute. The testimony is available here.
I urge those curious about this issue to read both statements. I think it is abundantly clear that this is a crackpot idea. The Fed is already thoroughly audited in every area except two: monetary policy and dealings with foreign central banks. The only purpose of having additional audits of the Fed is to undermine its independence precisely with regard to these two areas. If Woods presents the best argument for doing so, the argument is very shallow indeed.
Whatever one thinks of the Fed's policies in recent years--and there certainly are grounds for criticism--there is no reason whatsoever to believe that undermining its independence and putting the Congress in control of monetary policy--Ron Paul's goal--would improve matters at all. Indeed, there is every reason to believe that full congressional control of monetary policy would be a disaster. Instead of getting Switzerland-like stability, as Paul foolishly imagines, the more likely result would be Zimbabwe-like hyperinflation.
In the end, I agree with Barry Ritholz that whatever the Fed's failings, those of Congress are vastly worse. As he put it in explaining why he didn't testify yesterday:
I was invited to testify this week to the House Financial Services Committee about reform and regulation.
I politely demurred.
While I have been critical of the Federal Reserve (especially the Greenspan years), my beef with them has been their judgment and decision-making process. Congress, on the other hand, is a whole different matter. Its not their judgment, but rather, the fact they are owned not by the American people, but by lobbyists, and corporate interests. They have become structurally deformed.
How weird is it for me, who spent so many pages blaming the Fed for a lot of the recent crisis, to find myself in a position of defending them from outside political pressure? The choice we face is the recent Fed regime of secrecy, nonfeasance, irresponsibility, and easy money — versus something possibly likely to be a whole lot worse. ...
If the Fed has been a major source of problems, Congress is much worse. They were the great enablers of the crisis, readily corruptible, bought and paid for by the banking industry. I find Congress to be the worse of two evils — lacking in objectivity, incapable of producing legitimate regulatory review. ...

As I've made clear in the past, I also think that auditing the Fed, or reducing its independence in other ways, is a bad idea. The strange marriage of the populists and libertarians on this issue has given it more momentum that I expected, but hopefully not enough to carry the day.


"Barney Frank Talks Back"

Ezra Klein interviews Barney Frank about financial reform:

Barney Frank Talks Back, Washington Post: ...What's the most important part of financial regulation?
Limiting securitization. I believe the single biggest issue here is that people invented ways to lend money without worrying if they got paid back or not by securitizing the loan. ...
Do you worry that the banks that are "too big to fail" have gotten even bigger?
Banks do fail. Wachovia failed. The problem is not banks but non-banks. The answer is: We will be restricting their activities. They will not be as big, as they will need much more capital. And if they do get big, they will not be so leveraged. It's not the size of the institution that's the issue, it's the amount of leverage.
Sen. Dick Durbin recently said that the big banks "frankly own the place" after they killed "cramdown" bankruptcy legislation in the Senate. Won't banks brush off financial regulation reform?
No. The big banks have been somewhat discredited. That's why the credit card bill went in pretty easily over their objections. I believe reining in derivatives and reducing leverage at high levels will be somewhat easy to do.
What killed the primary-residence bankruptcy bill [cramdown] was not the big banks but the community banks and credit unions. They do have a lot of clout. And they have a legitimate grievance: They have not been behind the abuses. If we only had community banks and credit unions, we wouldn't be in this problem. And it's important to note that they're not just powerful because they have money, but because they're in everybody's district, and they're responsible and thoughtful citizens.
So you think the big banks really have lost their power on the Hill?
Look at the credit card bill. Small banks don't do credit cards. ...
Should the administration have started on financial regulation sooner?
No! They were busy. I understand the media always wants to have bad things to say. But they were working on undoing where we were. They were working to put liquidity back. The problem was that 2008 took longer to end than we thought it would. It didn't really end till April of 2009. The early months of the Obama administration were spent trying to dig out of the hole. Let me ask you a question. What harm came from waiting?
The argument is that you won't get as much regulation because the banks are stronger now.
That's nonsense. ...
Is executive compensation a big part of the problem?
Absolutely. The problem is not just the amount. Shareholders will deal with that. It's the incentive. People had incentives to take risks because they got paid off if the risk paid off and paid no penalty if the risk blew up. They were taking risks free of the consequences of failure. Heads they won, tails they broke even. ...
You became a YouTube celebrity a few weeks ago for snapping at a town hall protester who held up a picture of Barack Obama with a Hitler moustache. You said that arguing with her would be like debating a dining room table. Why don't more of your colleagues yell back?
So the question is, you're asking me, who yelled back, why other people don't yell back? ... I don't know. Ask them.
I hope he's right, but I expect the fight will be tougher than implied above. Just about everybody has a credit card, and lowering fees on the cards, etc., is an easy sell to legislators looking to gain or maintain votes. Other proposals may not enjoy the same broad based support and appeal, especially after lobbyists and others spin the legislation as opposed to the best interests of the very people the legislation is trying to protect.


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