Looking for a Fed apology

By Felix Salmon
January 6, 2010
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.

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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.


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This just highlights the fact that we cannot expect policies, regulations, and institutions alone to properly regulate the financial–or any other–system.

Reflection has led me to believe we had a perfectly adequate–if poorly constructed and seriously compromised–financial regulatory system in place leading up to the crisis. All it would have taken would have been for the regulators in place to have done their proper jobs, the Fed included. They did not.

At the end of the day, it is people who must do the work of regulating. We will always be vulnerable to ideologues, hacks, and lazy morons hijacking the regulatory system for ulterior motives, or even for reasons they do not fully understand. The same is true of the people populating the finance industry, our political system, and indeed society itself.

You cannot legislate character, principle, or moral integrity. Sadly.

Posted by EpicureanDeal | Report as abusive

“A simple first step would be for Mr. Bernanke to discuss the Fed’s recent failures, in detail.”

And do it on Oprah, so our nation could reach out, and forgive him.

Posted by maynardGkeynes | Report as abusive


As far as I can tell you’ve never once discussed Scott Sumner’s views on Fed policy, even though there’s a credible case to be made that he’s saying exactly what Bernanke would be saying if he were free from all PR and political constraints. He’s an interesting and prolific blogger who’s been recommended very highly by Tyler Cowen, and has been engaged in some very important debates with Arnold Kling, Brad DeLong, and Paul Krugman. He blogs at http://www.themoneyillusion.com/ , and you may find http://www.themoneyillusion.com/?p=3554 interesting on the subject of trills.

Posted by jplewicke | Report as abusive

Our country has yet to place into affect any measures whether it be policy, regulation or legislation that would prevent another systemic failure. We are passively burying our heads in the sand and saving incompetent industry leaders who made foolish decisions by PROVIDING them with more funds to speculate with the goal of making them solvent again. These institutions could not withstand the last onslaught of market discipline when they had hoards of cash, the next tidal wave will end their existence.

When an event occurs that was given 0 to infitesimal probability of occurence so as to not be reflected in financial analysts regression models or whatever failed statistical methodology used, there are but a few choices to protect ourselves from future narrowmindedness. I’ve listed two: One: institute fundamental measures that prevent the repeat of the outlier event so your model now reflects a new normal as best as you can foresee or Two: do nothing (as we are doing) but adjust your expected rate of returns by discounting the previously unknown risk that you are NOW aware of and which now has a higher probability of occurence(or as in the last meltdown, known but dismissed).

Our country has failed to do either which is now in evidence by: One) zero legislation and continued government support of incompetent financial managers and more sadly, our elected officials; Two) the level of stocks.

This can only mean that the frequency and severity of meltdowns will increase until we adapt.

Posted by csodak | Report as abusive