Looking for a Fed apology
The Fed is profoundly flawed, and there’s a good chance it will fail at doing the job we’re tasking it with. But it’s the best chance we’ve got. That’s the consensus I’m beginning to feel on the subject of Ben Bernanke’s status as Fed chairman specifically, and the wisdom of confirming and expanding the powers of the Fed more generally.
David Leonhardt today has a great column along those lines, explaining that even a Fed with much more teeth than it has today would have done nothing to prevent the housing bubble — not under Greenspan, certainly, and probably not under pre-crisis Bernanke either. It’s worth reading John Carney on the subject too: far from being worried about the housing market in the bubble years, regulators were actually being asked to help inflate it.
So it’s clear that the Fed needs to renounce its former worldview and move to a state of permanent worry about the risks that markets pose to the economy as a whole. And as Leonhardt says, even if it’s doing the latter, it’s doing a bad job on the former:
The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power…
Just this week, Mr. Bernanke went to the annual meeting of academic economists in Atlanta to offer his own history of Fed policy during the bubble… He never acknowledged that the Fed simply missed the bubble…
He and his colleagues fell victim to the same weakness that bedeviled the engineers of the Challenger space shuttle, the planners of the Vietnam and Iraq Wars, and the airline pilots who have made tragic cockpit errors. They didn’t adequately question their own assumptions. It’s an entirely human mistake.
Which is why it is likely to happen again…
What’s missing from the debate over financial re-regulation is a serious discussion of how to reduce the odds that the Fed — however much authority it has — will listen to the echo chamber when the next bubble comes along. A simple first step would be for Mr. Bernanke to discuss the Fed’s recent failures, in detail.
Leonhardt talks about setting up a permanent board to go back over past mistakes and try to ensure they don’t happen again. I’m not sure how useful that would be — my guess it would issue carefully-parsed and extremely long reports and would change very little. At the same time, however, Leonhardt is surely right that we need much more transparent self-criticism at the Fed, especially when it comes to its underdeveloped regulatory role. If you don’t know exactly where you went wrong in the past, the chances are you’ll continue to go wrong in the future.