Friday, April 11, 2008

Greenspan and Bernanke's Big Mistakes

Everybody's a critic, and nobody gets criticized more than the Fed chair. One of the recent actions taken by the Federal Reserve Bank, facilitating J.P. Morgan Chase's buying of Bear Steans, has been deeply scrutinized and heavily criticized.

One critic, Donald Luskin, writes for the SmartMoney website. In his column today he has a link to the actual document that JPMC and the Fed signed to consumate the deal.

Former Fed Chairman Paul Volcker remarked skeptically this week that this deal caused the Fed to "extend to the very edge of its lawful and implied powers." He's right. By statute, the Fed can buy plain-vanilla mortgage-backed securities, although in practice it virtually never does. So this deal with J.P. Morgan — which for all the world has every defining characteristic of an outright purchase of the Bear portfolio of very much not plain-vanilla securities — is elaborately structured to masquerade as a loan.

It is unusual for a former Fed official to speak skeptically about the institution or its current officials. Volcker verbalized the critcisms many have about the deal, and his reputation added sting to the words.

Having saved the world, the Fed must feel a little stung by Volcker's rather pointed second-guessing. It's nearly unprecedented for a former Fed official to speak out publicly against the actions of that august and secretive institution. But then again it's an election year, and Volcker is a Democrat who was appointed by Jimmy Carter, while current Fed Chief Ben Bernanke is a Republican appointed by George W. Bush.

Politics in economics? Nah, impossible.

Former Fed Chief Alan Greenspan has been coming in for his share of criticism, too. Many observers are musing publicly that the Bear Stearns collapse wouldn't have happened in the first place — indeed, that the whole housing bubble and subprime lending debacle that led to the Bear Stearns collapse, and to so much other agony in markets — if it weren't for Greenspan's missteps.

For years people in government and on Wall Street fell over each other and their own feet to rush to the altar where Chairman Greenspan sat and kiss his ring and sing his praises. Eighteen years. But now it's open season on the former Chairman. He thinks it unfair. A jilted lover, he can not believe the things people are saying about him. And people are treating him with the disdain of a disappointed lover: Greenspan is ugly, I never really loved him anyway, and he's the reason the Yankees didn't win the Series.

... Greenspan lowered interest rates too low in 2002 and 2003, and left them too low for too long in 2004 and 2005. The critics are also faulting Greenspan for not being a better regulator. It's ironic. When Greenspan left the Fed in 2006, he went out in a blaze of adulation — hailed universally as "the greatest central banker who ever lived." Oh, how the mighty have fallen. Greenspan has even had to come out in his own defense, both writing a lengthy reply to his critics in the Financial Times this week, and answering probing questions in an interview with The Wall Street Journal.

Easy to kick 'em when they're down, or out of office, anyway. As Kermit the Frog once said, it's not easy being green.

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