How Much Shall We Blame the Fed?

I have been having an ongoing debate with a friend who is part of the contingency of people who blame the Fed for many of the evils in the America.The Federal Reserve has been a subject of 717 posts on this site — both pre and post Great Financial Crisis (GFC).

While we disagree about many of the policy approaches, we don’t have many factual disagreements.

The biggest policy disagreement: I rank the Fed high on the “Who is to blame” scale – we agree that low rates were a major cause. I believe there were many sources of the GFC, he lays nearly all of the blame at the feet of the Fed.

But I suspect where he and I disagree is in response to the crisis. I give them a B- (A- if I am feeling generous) he gives them an F.

My views on the Fed are much more nuanced than the average Fed critic:

• Ultra low rates to be one of the causes of the GFC, but not the only cause.

Alan Greenspan was a reckless Federal Reserve Chairman from both a monetary AND a regulatory perspective.

• We should have used the bankruptcy courts in 2007-10 to allow insolvent, dysfunctional financial institutions (BAML, Citi, etc.) to enter Chapter 11, recapitalize, discharge debt, and become much stronger, debt-free institutions;

• We should have precluded banks from lobbying congress, in the same manner we precluded GSEs. (I don’t care about the distinctions, it should have been the terms of any rescue).

• People still get the underlying causes of the GFC wrong;

• Congress deserves blame for the lack of FISCAL response to the GFC, but the Fed enabled them. The Fed Chair should have told Congressional leaders “Its up to you to follow the Keynes playbook $2 trillion stimulus? but if you want to do more we won’t object. And if you do less, best of luck next election.

• The Fed does deserve credit for the rescue, but the unintended consequences — politically, economically, and socially — are still being unraveled.

• The Fed should have normalized interest rates long ago.

We have debated Repos (I say its plumbing, they say its a key support for the markets); He credits the Fed with propping up equity markets; I believe its advantageous to buy into markets that get cut in half, especially broad US markets.
I will have more on this in the future . . .


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