Friday, January 4, 2008

The Fed--wolves guarding the wolf den

The following article illustrates the problem of bringing in people from the sectors they regulate. They will always take care of their friends, and the Federal Reserve is a classic case in point. The Fed exists solely to advance the interests of the Wall Street "money men", no matter what.

A Lesson From the Last, and Next, Recession

By Mark Weisbrot, AlterNet. Posted January 3, 2008.

This will be the second recession since 2001 that was caused by the bursting of an obviously speculative asset bubble.

In the baseball-and-sex classic "Bull Durham" Susan Sarandon accidentally calls out the wrong name in the heat of passion and makes a remarkably quick recovery. She asks her partner which he would rather have, her having sex with him and saying the other guy's name, or vice versa? In the movie, it seems to work; for the moment, at least, he doesn't seem to realize that these aren't the only two possibilities.

Former Fed Chair Alan Greenspan appears to have gotten away with a similar trick, as the housing bubble that bloated up on his watch continues to deflate, dragging the economy towards recession. Since the bubble was easily recognizable (and recognized) as early as 2002, he could very likely have prevented it from growing to dangerous proportions. But he has made it look as though his only choice would have been to raise interest rates, and thereby risk taking down the entire economy much earlier. In the numerous interviews he gave promoting his latest book of memoirs, the journalists neglected to ask him about a more logical option: simply explaining the bubble to the public, and thereby curbing the expectations of ever-rising prices that fed the speculative frenzy.

It is also now widely recognized that the Fed abdicated its responsibility to regulate against predatory, deceptive and abusive lending in the sub-prime mortgage market - although the bubble itself was still the main problem.

Greenspan himself recently put the odds of a recession at 50 percent. And that was before the latest data on house price declines (October, year-over-year) of 6.1 percent - the biggest in more than six years. Greenspan's prognosis was also made before this Christmas holiday shopping season came in at what looks like the worst in five years. But he was overly optimistic even with the data at hand.

It is difficult to imagine that a collapse of asset prices of the magnitude expected - probably on the order of $8 trillion - would not cause a recession. Most of the six-year recovery from the last recession, which ended in November 2001, was fueled by trillions of dollars of borrowing that consumers were able to take against their rising home values. That source of credit is now drying up as home prices fall, and the decline has only begun. It would take another 28 percent in real house price reduction just to bring house prices back to long-term trend levels.

Consumer spending is about 70 percent of the economy, and it is mainly debt-fueled consumption that has kept our economy afloat since the housing bubble began to burst last year. Over the last six months, exports have also expanded considerably - due to the fall in the dollar, which makes US products more competitive in world markets. But exports are only about 12 percent of our economy - so even fast-growing exports cannot compensate for a serious decline in consumer spending.

The international credit crunch, brought on by the collapse of subprime-mortgage-backed securities has added another source of drag and uncertainty to the economy. It could worsen as house prices decline, and losses in assets tied to the rest of the mortgage market - including prime mortgages - will add to the mess. A glut of homes on the market, the prospect of millions of foreclosures, declines in residential construction, a weak labor market, and rising food and energy prices also weigh upon the economy.

Since this will be the second recession since 2001 that was caused by the bursting of an obvious speculative asset bubble - the previous recession was induced by a stock bubble collapse - the question of what the Fed should do about such bubbles should be the subject of Congressional hearings. And we need something better than Bull Durham answers.


This mess could have been nipped in the bud, but honesty and forthrightness simply are not hallmarks of unbridled capitalism--Tends to interfere with the profits, don't you know? And the only thing trickling down from these greedy amoral bastards is not economics, but liquid from bladders voiding over fear of their own losses. If you're one of those victimized by their machinations, too bad--you're just "collateral, damaged".

UPDATE: From Think Progress 1/04/08

A delinquent nation.

“Late payments on a cluster of consumer loans, including those for autos, home improvement and certain home equity loans, climbed in the summer to their highest point since the country’s last recession in 2001.” Bush’s response? “This economy of ours is on a solid foundation,” the president said. 10:30 pm


gandalf43 said...

I didn't see the movie "Bull Durham."

The choice for her partner was between her having sex with him and saying the other guy's name, or what? Her having sex with the other guy and him not having sex?

JohnDWoodSr said...

Thanks for reading my blog. From the question you asked, which dis-regarded the larger points of the piece, I must say I'm saddened to discover the great wizard's line has greatly diminished in 43 generations. Alas,the magic is truly gone.

gandalf43 said...

I agree with the thrust of the article. I also wish to note:

1. Bubbles are clearer after they burst. With due respect to the 2002paper that you cite, there were other contemporaneous papers that argued that economic fundamentals justified the increasing prices. The cited paper was not generally recognized to be to greater validity than other articles.

2. You conclude by saying "This mess could have been nipped in the bud, but honesty and forthrightness simply are not hallmarks of unbridled capitalism..."

Up until this point you were criticizing the FRB in general and Greenspan in particular. Here you switch the target to "unbridled capitalism." So your facts cited (i.e., failure of FRB) and conclusion (fault of unbridled capitalism) are inconsistent.

I think the creation of FRB is not part of unbridled capitalism but an unfortunate historical event.

JohnDWoodSr said...

Gandalf 43-much better, and thank you for not returning my fire.Your points are well made, but if the Fed is not the purest example of unbridled, unregulated capitalism we have, I've not discovered it.They are totally outside the control of any branch of government (since 1913 when the U.S. gave it full control of our money supply).They answer to no one. The members of the Board come straight out of big Business and finance, and can't be expected to act in a manner beneficial to the citizens at the expense of their tycoon buddies. Not an eyebrow is raised when they shovel $40 billion or so into the money supply to cover the thievery and bad decisions of the big players.And the taxpayers have to pay the butchers bill for every decision they make. Pretty good gig, huh? Add to that the fact that they and the big corporations, aided by Congress and the present administration, benefit from ever lower tax rates, special tax cuts, offshoring, ad nauseum, our capitalists are as unbridled as they have been in over 70 years. The Fed, and Wall Street, and the big corporate interests are all part of the system, and so I don't really feel that my conclusions are inconsistent. My biggest problem, aside from the possibility of being wrong, is that I tend to leap ahead without clearly marking my trail. I connect my dots in a hurry, which leads to fuzziness in my essays.
Seriously, thanks for commenting.

gandalf43 said...

1. As relates to being totally outside the control of any branch of government, I believe the Congress has the power to amend or repeal the Federal Reserve Act of 1913 at any time.

2. As relates to the members of the Board come straight out of big Business and finance, Ben S. Bernanke, Donald L. Kohn, Randall S. Kroszner, Frederic S. Mishkin were academicians.

Anonymous said...

Gandalf43 I believe your correct that the Federal Gov't has the right to amend or repeal the Act. Why would they? The Congress created the private corporation during the christmas break when most legislators were at home with their families. It was snuck in w/o the true majority voting on it. So why wasn't it dealt with then? I don't know, my guess it would be that the power of the bankers/business who are in cahoots with congress got it suppressed and have kept it that way.
Congress has the power to print money, they haven't done that in decades. The question I want answered why not? Why let a private corporation handle our money supply and make decisions that affect the Federal Gov't and it's policies. The officers you mentioned are all academics, the chairman is appointed by the President from a list supplied to him by whom? Bankers!
Essentially, the Federal Reserve is accountable to no-one. They set the rates they want, Wall Street lives and dies by them, and we pay for those mistakes. Just recently, how many billions were pumped out/ loaned/ used to try and bail out the large banks who made and approved loans without consideration of the ability to get paid back? (I can go looking for figures if you disagree with this)
The members of the board do come out of finance, JW is correct on that. Full of theories, Sitting on think tanks and writing some stellar ariticles that get published in very prestigous journals. It stands to reason that the group who advises the president would be familiar with the academics and choose someone who fully agrees with status quo. There will never be any change because the good folks in Washington know who keeps them in power. (both parties are guilty of this) To break it down to its barest components, it was unbridled captilism that led to creation of the Fed, creating the unfortunate historical and current events that plague us today.

gandalf43 said...

You say Greenspan could have explained the bubble to the public, and thereby curbing the expectations of ever-rising prices that fed the speculative frenzy.

But Greenspan did speak of "irrational exuberance" as early as 1996.

Regretably, he could have done more.