The financial world may lack liquidity, but there is no shortage of irony. One might even say we are swimming in it.
Consider the case of the Federal Reserve Board. Not a few commentators blame its loose monetary policy for having encouraged the rampant speculation and excessive risk-taking of the past few years. In this view, rather than taking the punch bowl away from the party, as former chairman William McChesney Martin Jr. famously described the central bank’s role, the Fed decided to spike the drink. Others fault the Fed for having been lax in its other key role — primary regulator of the nation’s bank holding companies — as many maneuvered fatefully into complex new markets and instruments.
So how should we reform and revitalize a wrecked financial system? The answer, if you’re the Treasury Department, is to give the Fed even more power.
Maybe it’s a good idea — or maybe it’s the only option in a dark time. Ben Bernanke’s Fed, after all, more or less arrogated additional power to itself through the bailout it sponsored of the collapsing Bear Stearns Cos. and its subsequent extension of credit to Wall Street’s investment banking houses. One is reminded too that, not so long ago, the Bush administration decided against tight regulation of hedge funds — they had to register with the Securities and Exchange Commission until a court overturned that de minimus requirement — on the theory that the bank and brokerage intermediaries that dealt with them were closely supervised. As a fourth-grade lunchroom ironist might say: Not!
Meantime, in rare fashion, former Fed chairmen Paul Volcker and Alan Greenspan have been stirring the pot. Volcker, who slew inflation in the 1980s, early this month raised questions about the decision by Bernanke’s Fed to lead the rescue of Bear Stearns, as well as the permissive risk culture that led to the “mother of all crises.” Greenspan, who spoke in riddles as chairman and then more clearly for tens of thousands of dollars in speech fees after he left office, has been on the hustings of late defending his legacy.
The intellectual jousting is instructive. These are three unquestionably brilliant men, each of whom might approach today’s crisis in a different fashion. Only one, though, has the power to act. Which raises a fundamental question: Considering how Wall Street and the broader economy depend on the Fed’s words and deeds, and regardless of whether the Treasury proposals are adopted, do we really think it wise to place so much power in the hands of one man or — assuming he works closely with his board of governors — one institution?
Are we, as a nation, taking on too much risk in doing so?
