Putting a big chunk of the blame for this mess where it belongs
This is a great story from Minyanville.com. An excerpt:
"As I have explained several times, the Federal Reserve, through their easy and easier monetary policy, has itself created several asset bubbles, the latest being housing. They have basically made money “free,” thus encouraging speculation…borrowers to take out loans and spend or buy assets. They have purposely encouraged risk taking behavior of the most egregious kind in an attempt to reflate asset prices. Reflate them they have, with massive amounts of debt."
And here's another zinger from Bloomberg. An excerpt:
"The Federal Reserve and the Office of the Comptroller of the Currency took little action in public to police the $2.8 trillion boom in the U.S. mortgage market -- whose bust now risks worsening the housing recession.
"The Fed, which is responsible for the stability of the banking system, didn't publicly rebuke any firm for failing to follow up warnings on home-lending practices between 2004 and 2006. The OCC, which supervises 1,793 national banks, took only three public mortgage-related consumer-protection enforcement actions over the same period.
"Consumer advocates and former government officials say the regulators, by acting behind the scenes rather than openly advertising the shortcomings of some firms, failed to discipline an industry that loaned too much money to borrowers who couldn't repay it."
I couldn't agree more with these sentiments. Over and over and over again, for the past several years, the Fed has opened a floodgate of liquidity and interest rate cuts at the first sign of trouble. Long-Term Capital Management blow up? Here's some free money. Tech bust? Here's some free money.
And if you can believe it ... despite the rolling bubble/bust cycles we keep seeing ... the Fed still believes this policy is sound. In fact, Fed governor Frederic Mishkin defended this "let no asset bust go un-fought" approach back in mid-January in a speech I criticized harshly. My take:
"As I see it, the problem with the Fed's "asset prices are not our problem" argument is the asymmetry of the whole thing. The Fed claims it can't identify an asset bubble as it builds ... and that it shouldn't be in the business of deciding whether the current level of asset prices is appropriate when those prices are rising.
"But when an asset bubble bursts, and prices start falling, the Fed essentially believes it should swoop in and save the day. It should prevent financial institutions who took on too much risk ... and who helped speculators bid asset prices through the roof ... from failing. And it should work to stabilize asset prices -- in other words, it should substitute its judgment for the market's judgment that those asset values should decline even further.
"You can call it the "Greenspan put" ... "Moral Hazard" ... or whatever you want. I just call it flawed monetary policy. It encourages speculators to go nuts and throw a gigantic party in asset market after asset market because A) They know the Fed won't intervene and take the booze away and B) Even if they get behind the wheel, drive drunk, crash into a tree, and go to jail, the Fed will be there to bail them out ... over and over again."
As for the regulators, they defend themselves in the Bloomberg article. They say they examined plenty of lenders and cracked down on home loan abuses behind the scenes, even if there were very few public actions taken. If that's the case, there is scant evidence the lending industry overall noticed. If anything, they pushed the envelope even FURTHER in 2005 and 2006 -- and that's why we're seeing so many loans go bad today.
"As I have explained several times, the Federal Reserve, through their easy and easier monetary policy, has itself created several asset bubbles, the latest being housing. They have basically made money “free,” thus encouraging speculation…borrowers to take out loans and spend or buy assets. They have purposely encouraged risk taking behavior of the most egregious kind in an attempt to reflate asset prices. Reflate them they have, with massive amounts of debt."
And here's another zinger from Bloomberg. An excerpt:
"The Federal Reserve and the Office of the Comptroller of the Currency took little action in public to police the $2.8 trillion boom in the U.S. mortgage market -- whose bust now risks worsening the housing recession.
"The Fed, which is responsible for the stability of the banking system, didn't publicly rebuke any firm for failing to follow up warnings on home-lending practices between 2004 and 2006. The OCC, which supervises 1,793 national banks, took only three public mortgage-related consumer-protection enforcement actions over the same period.
"Consumer advocates and former government officials say the regulators, by acting behind the scenes rather than openly advertising the shortcomings of some firms, failed to discipline an industry that loaned too much money to borrowers who couldn't repay it."
I couldn't agree more with these sentiments. Over and over and over again, for the past several years, the Fed has opened a floodgate of liquidity and interest rate cuts at the first sign of trouble. Long-Term Capital Management blow up? Here's some free money. Tech bust? Here's some free money.
And if you can believe it ... despite the rolling bubble/bust cycles we keep seeing ... the Fed still believes this policy is sound. In fact, Fed governor Frederic Mishkin defended this "let no asset bust go un-fought" approach back in mid-January in a speech I criticized harshly. My take:
"As I see it, the problem with the Fed's "asset prices are not our problem" argument is the asymmetry of the whole thing. The Fed claims it can't identify an asset bubble as it builds ... and that it shouldn't be in the business of deciding whether the current level of asset prices is appropriate when those prices are rising.
"But when an asset bubble bursts, and prices start falling, the Fed essentially believes it should swoop in and save the day. It should prevent financial institutions who took on too much risk ... and who helped speculators bid asset prices through the roof ... from failing. And it should work to stabilize asset prices -- in other words, it should substitute its judgment for the market's judgment that those asset values should decline even further.
"You can call it the "Greenspan put" ... "Moral Hazard" ... or whatever you want. I just call it flawed monetary policy. It encourages speculators to go nuts and throw a gigantic party in asset market after asset market because A) They know the Fed won't intervene and take the booze away and B) Even if they get behind the wheel, drive drunk, crash into a tree, and go to jail, the Fed will be there to bail them out ... over and over again."
As for the regulators, they defend themselves in the Bloomberg article. They say they examined plenty of lenders and cracked down on home loan abuses behind the scenes, even if there were very few public actions taken. If that's the case, there is scant evidence the lending industry overall noticed. If anything, they pushed the envelope even FURTHER in 2005 and 2006 -- and that's why we're seeing so many loans go bad today.
posted by Mike Larson at
2:15 PM
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