Today's WSJ has a brief article discussing whether or not the Fed can prevent bubbles in the economy like the recent subprime mortgage one.
Short answer: "No."
The Federal Reserve uses open market operations to set interest rates and implement monetary policy. It’s the central bank’s primary tool, and not a very good one for preventing bubbles that may be developing in the economy, Fed Chairman Ben Bernanke says...The real, underlying question here is, "Can the Fed protect you from yourself?" Of course not. Like almost everything else in life, the dominant feature in your life is you. For example, you can read all the books on parenting you want, but in the end, if you don't dedicate a lot of time to it (you, not your day care provider) you'll end up with problems in your family. If you invest in things like Amazon.com at $105 per share, you're going to be in trouble. If you make $43,750 a year and take out a $715,000 adjustable rate loan to buy a house, things are going to get ugly pretty quick.
Mr. Bernanke said it’s “very, very difficult” to spot a bubble early enough to address it effectively using the primary tool of monetary policy –- interest rates -– and attack only that bubble, but not other asset prices, to bring it “down to ‘the appropriate level,’ whatever that might be.”
However strong, some gigantic, government institution thousands of miles away isn't going to be able to keep you from doing stupid things. Bubbles are nothing more than mass stupidity in action. Asking them to use monetary policies to keep you from lying on your loan application or keep you from loaning $450,000 to the town drunk seems kind of silly.
Of course, the boys on the Fed don't actually come out and say this, but in this day and age, who does?
6 comments:
With your line of reasoning then we don't need the FAA to insure competent pilots fly airliners. Let's put any ole drunk in there and the people will learn after a few burning crashes!
I don't think the average person takes off in their car and believes the gas tank will magically fill itself!
It's the unfortunate greed factor -- allow debt to be created so fees can be generated. Government has the responsibility to insure the monetary system is engineered to protect its integrity.
Goldman Sachs provided mortgages with no equity in the collateral and no documentation as to the borrowers qualifications. After they sold the mortgage security they would short it for an even bigger gain.
To fault the borrower is ridiculous saying they should know better. Goldman Sachs and its ilk in bed with Washington is what's sending us towards collapse.
Your FAA argument doesn't work. The FAA intervenes directly in the actions of the pilots. The Fed does not, unless there are some Fed Monetary Gnomes watching all of my financial transactions and I just don't know it.
I agree with your greed assessment. See my earlier post on this subject.
I most certainly can fault the borrower. It's not like there aren't a zillion tools and books and resources all around to help tell you what you can and cannot afford.
If you don't agree, please complete this sentence:
Americans should not be expected to be able to manage their own finances because __________.
K T,
I think you're on the right track here, and Anon misses the point.
To keep the FAA analogy, yes, the gov't has a role to ensure that pilots are competent. But the gov't can't tell you whether you can afford a ticket or stop you from putting one on your maxed-out credit card.
How is it ridiculous to fault the borrower? Banks were essentially floating junk mortgages, and people snapped them up. Is it the government's fault if I buy unrated junk bonds and lose my investment? Or is the argument that the gov't shouldn't allow banks to offer unsecured home loans?
Everybody wants something for nothing -- lenders and borrowers. Is it the government's job to outlaw greed? Good luck with that.
Americans should not be expected to manage their own finances when deceit and trickery are used to obligate them beyond their means.
You're missing the point with the FAA and any other government agency designed to protect us from the onslaught of the crafty and greedy who have no concern with the damage they cause.
Suppose anybody could practice medicine as a doctor. Even with our rigorous methods via school, exams and medical boards we still suffer from incompetance and in some cases outright fraud when a doctor prescribes a medicine or operation because they need to make a house or car payment.
The problem with the current mortgage crises comes from Wall Streets lack of concern for its deeds and only focuses on the fees it will earn regardless of the larger implications to our monetary system.
It's easy to blame the borrower while you sock away billions in fees and then get Paulson and the rest of Washington to come to your rescue. That's just downright wrong and stupid!
If a person with specific and particular knowledge of mortgage financing is telling a prospective borrower untruths such as housing prices will continue to rise, refinancing will be a cinch, interest adjustment rates will be minimal, etc. and presenting to them all this data to convince the borrower to take the loan all the while knowing it is probably precarious and a good likely-hood it is beyond the borrowers means is tantamount to fraud.
Very simply when finance or any transaction becomes so sophisticated that an ordinary person has difficulty understanding the terms it should require some means of protection for the borrower.
What happened to the simple net income after taxes affordability equation? Wouldn't it be prudent to disclose to the borrower that debt level percentages at their income level is flashing a big red signal? After all, we put the warning on cigarettes. It may not deter some smokers but it gives pause.
The real problem is engineering a monetary system which provides some semblance of reality. Wall Street runs amuck in clever designs for returns that create these bubbles.
What if the pilot of an airplane takes off believing he has 1,000 gallons of fuel and then by some mysterious, arcane fuel accounting
methodology he/she finds out they only have 200 gallons? The physical world wouldn't work!!
As long has you have these clever and designing Wall Street types manipulating the money system all the while yelling "you'll destroy free markets" while lobbying Washington to buy in shows how powerful they've become!!
Just look at a stock price. You have a sliver of a trade. You have billions of shares outstanding for a particular company and some microscopic number of shares suddenly change hands at a price. Now it's believed all shares are of that price when there's no liquidity or substance to support the entirety of the value. Do you think GE can liquidate? It's imaginary and Wall Street just keeps adding on more imaginary stuff to earn those fees.
Let them keep going with Washington in their hip pocket!!
Alan Greenspan -- "We do not have the resources in any credible economic scenario to fulfill what is currently on the books as an entitlement 10, 15, 20 years from now"!
What deceit and trickery? There are very simple rules of thumb for figuring out whether or not you can afford a loan. As for Washington bailouts, the only one getting killed on this is the taxpayer.
People are responsible for their own finances. It just isn't that hard.
Alan Greenspan -- "We do not have the resources in any credible economic scenario to fulfill what is currently on the books as an entitlement 10, 15, 20 years from now"!
Amen, brother!
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