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Paul Kiesel
Paul Kiesel
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Skepticism within the Federal Reserve and The Languidly Observant White House

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Since the rescue of Bear Stearns, there have been dissenting views within the Fed that have suggested the government is inducing more risk taking by lenders. The Richmond Fed President, Jeffery Laker, made some recent comments reflecting the burgeoning dissenting views.”There is a concern among people within the central bank and close to it that the emergency actions taken over a single weekend in March may have fundamentally recast the role of the institution — but without the lengthy, deliberative process that normally would precede such a move,” (The Washington Post, 6/6/08).

Lacker has not specifically criticized Fed Chairman Ben Bernanke’s role in financially backing the acquisition of Bear Stearns and to also extend Fed lending to all investment banks. Lacker understands that part of Bernanke’s decision to pull the trigger on the deal stemmed from a fear of creating a global financial disaster, but Lacker sees that part of the deal’s ramifications has resulted in creating newer risks.

“The danger is that the effect of recent credit extension on the incentives of financial market participants might induce greater lending,” Lacker told the European Economics and Financial Centra in London, “which in turn could give rise to more frequent crises, in which case it might be difficult to resist further expanding the scope of central bank lending.”

Vincent Reinhart, who was a senior staffer at the central bank until last summer, called the Bear Stearns save, “the worst mistake in a generation.” Others with close ties, Fed presidents from Kansas City, Minneapolis, Philadelphia and St. Louis, have attacked the actions of the central bank explicitly as “an undue interference in markets.”

Mainly, it appears that many within the Fed now believe that the bank’s mission has changed from one with much forethought, to one that is more myopic. It is obvious and unfortunate that many of the government’s decisions over the last six months, in regards to the housing crisis, have been some of the more myopic decisions within the second term of the Bush Administration; and most of those decisions have only helped lenders in the short term, not the borrowers.

The Bush Administration knew that the foreclosure/housing crisis could happen (the President was often seen/heard relating home ownership as the”centerpiece” of the American Dream during the subprime boom), but looked at the potential end-result of the housing boom indifferently. This is similar to how the White House viewed the levees in New Orleans before Hurricane Katrina, they had seen simulations of them breaking, knew it was possible, but did nothing to correct the situation or improve the levees before Katrina hit. This might be one of the more languid administrations in the history of the United States when it comes to domestic policy and regulation of industries.

Just as Reagan’s deregulation in the 1980s led to the savings and loans collapse, so did deregulation of the mortgage industry lead to the current housing collapse were witnessing.