Comments on: Lacker: The Fed Risks Moral Hazard

By: John

John — Fri, 06 Jun 2008 14:18:49 +0000

The Guru
“Personally, I think it may get as ugly as the thirties even with the bailouts. Throwing capital at this problem reminds me of throwing money at the Newark school systems. Will it actually change anything?”

Umm no. It’s not going to get as bad as the thirties for a hundred reasons which it would take me all day to describe. Even if BS had gone down it wouldn’t have taken us to thirties territory although it would probably have provoked the largest financial crisis since the war. Can I prove it, of course not, but the mere fact that the risk existed meant that Ben would have been grossly negligent in exercising his powers in pursuit of maintaining one of the Fed’s two major policy aims. As for Ben’s relative culpability, I’m not exonerating him although within the Fed system the chairman really calls the shots which you don’t seem to understand. He inherited a mess which he may or may not have had a hand in creating and is now muddling through trying to fix it and actually I think he’s making quite a good job of it on the whole although I don’t think he should have been as aggressive on rate cutting. At the end of the day I don’t want a major meltdown of the US financial system just to prove something, as you apparently do, because the people who would mainly suffer would not be the panjandrums of Wall Street but the residents of main street.

By: wunsacon

wunsacon — Fri, 06 Jun 2008 04:50:03 +0000

>> In my view, there is value in communicating policy intentions clearly. Deliberate imprecision – the so-called “constructive ambiguity” approach – leaves it to market participants to draw inferences for future policy from our past actions.

Like TheGuru and Steve Barry, I wonder if this speech is intended to create a perception that the Fed will not bail out the next BS or cut rates further.

I do find the following mildly amusing: Lasker’s speech seems more consistent with a policy of “deliberate imprecision” than with his personal “view” that “there is value in communicating policy intentions clearly”. (I imagine he’s aware of this!)

By: wunsacon

wunsacon — Fri, 06 Jun 2008 04:24:25 +0000

What “system” would collapse? The system of rewarding people for being overly clever moving money around?

- Intel would still make chips.
- Apple would still make toys.
- Musicians would still write new songs.
- Farmers would farm.
- Conoco would still deliver fuel.
- Tata will sell you a Nano.
- The NPV of the younger/future generations’ future labor — paid for on a cash basis — would increase significantly compared against the collapsing value of up-until-now overvalued credit.

What the interventionists fear isn’t so bad. I suspect it’s actually good. Just not for people with large sums of accumulated IOU’s.

By: TheGuru

TheGuru — Thu, 05 Jun 2008 23:44:05 +0000

John — why are you and many others willing to give Bernanke a pass on the current mess? He was part of Greenspan’s posse and could have voiced dissent but chose to go along with Mr. Magoo’s insane monetary policy. Are you saying we need to bail out every damn institution that overreached during these last 5-6 years? Because that is not feasibly possible. Why would the system collapse if Bear/JPM were not bailed out? Tell me — cascading defaults? How many fingers can we have in the dike at once? Personally, I think it may get as ugly as the thirties even with the bailouts. Throwing capital at this problem reminds me of throwing money at the Newark school systems. Will it actually change anything?

By: John

John — Thu, 05 Jun 2008 22:59:10 +0000

Guru: take a comprehension class. I said that the decision to bail out BS was the lesser of two evils as against NOT bailing out BS. They can model it? Oh yep, like all those models they had at BS and a host of other financial institutions that ultimately proved massively flawed. You’re mixing up issues here. The housing bubble and the credit crisis which were essentially by products of the previous Fed chairman’s easy money policies were water over the dam by the time Ben was making decisions about what he was going to save BS. I wonder if you work in the financial industry. I can’t even begin to quantify how serious it would have been if BS had gone but it would have been ugly like no one has seen since the thirties. October 1987 would have a tea party by comparison and inviting a potential meltdown in order to justify a theoretical law strikes me as the ultimate in idiocy. But then pragmatism has always been a failing of mine.

By: TheGuru

TheGuru — Thu, 05 Jun 2008 22:05:40 +0000

Lesser of two evils? The Fed created both of these evils — housing bubble and the ensuing credit crisis. Can’t stop them both nand that is exactly what they are trying to do. I am tired of hearing what “could” happen if Bear (or more to the point, JPM) was not bailed out. The public needs to start hearing what “would” happen if the bailouts do not occur. These guys are smart and can model it, I’m sure.

By: zell

zell — Thu, 05 Jun 2008 21:36:17 +0000

The Fed. is the moral hazard.

By: John

John — Thu, 05 Jun 2008 20:52:57 +0000

DonKei, there isn’t going to be hyper inflation, that’s Germany in 1923 and Zimbabwe in 2008. There’s going to be inflation partially due to the weak dollar which has little or nothing to do with the Fed bail out of BS and the consequential bailout of other major financial institutions like Citi that they might have been taken down too. And no in my opinion dynamiting the house is not the safest way of fixing the plumbing. The problem with all the creative destruction, let the chips fall where they may folks like yourself is that you have no idea of what the unintended consequences might be. Yes Ben’s bumbling through it and making it up as he goes along, and yes there’s going to be some pain (this is news, this wasn’t going to happen anyway?) but it’s all a matter of degree and your dollar weakness argument and the moral hazard involved in bailing BS is essentially a bit of a non sequitur. If you want to talk about prime rate policy that’s a different matter. Yep he shouldn’t have cut as quickly and deeply as he has but they are really different issues.

By: bonghiteric

bonghiteric — Thu, 05 Jun 2008 20:43:08 +0000

Jim Haygood wrote,

“Legally, Bernanke and Paulson lacked the statutory authority to bail out Bear Stearns”,

Could you please provide your statutory citation that supports this claim?

Get real. Serious counter-party risk was at stake. Hell, one thing they did right was not involve Congress!

By: DonKei

DonKei — Thu, 05 Jun 2008 20:36:20 +0000

There’s way too many barn animals getting loose.

But John, really, which do you prefer–the pain of dollar devaluation causing hyperinflationary prices for food or energy, or the pain of collapsing housing prices, mortgage giants (FNMA/Freddie), and a few (but not Goldman!) investment banks?

Either way, you’re gonna get some pain. If the Fed quits bailing, the pain will be shorter and more severe, but it, and the dollar, will survive (if it’s not too late already) with its credibility intact. And Lacker’s right–the only way for the fed to regain its credibility is to allow a major bank to fail.

Lehman, anyone?