Is There a Doctor in the House?
Fri, 08/24/2007 - 16:07 — moneysageWe are watching the behavior of the Federal Reserve during this unfolding financial melodrama with mixed feelings of surprise, disbelief, pity, and concern.
The FED continues to cling to the increasingly tenuous position that it is waiting to see the impact of the credit market crisis upon the "broader economy" -- to use Mr. Lacker's words -- before doing anything further. This, it seems to us, is akin to an emergency room physician waiting to see whether the patient before him who is showing all the classic signs of a coronary actually goes into cardiac arrest BEFORE PROVIDING SIGNIFICANT medical treatment. Our fictional emergency room physician has ruled out PREMPTIVE MEASURES. HE WILL NOT REWARD patients who have continued smoking and eating rich foods in the face of earlier medical advice. There will be no decisive intervention until the patient turns blue and his heart has stopped beating.
This behavior, we would submit, constitutes medical malpractice.
The FED, it seems to us, is acting like our fictive emergency room physician. Every economist has a pretty good idea what the credit market crisis portends for the real economy down the road. An early, effective intervention will minimize damage to the economy. Despite this, the FED appears to be excessively concerned with preserving the principle of "moral hazard," despite the potentially immense "collateral damage."
We would respectfully submit that the FED is on MORALLY THIN ICE. Its position compares unfavorably to that of the fictional emergency room doctor, we think. The doctor, after all, did give the patient sound advice about smoking and diet long before his heart attack.
The FED, in contrast, implicitly encouraged the production and dissmenination of the instruments of financial ruin by turning a blind eye as the subprime lending of the mortgage and banking industries reached frenzied levels. Wall Street "financial engineers" were permitted to devise and market their innovative mortgage-backed bond pools, tranches, and "derivatives" without let or hindrance from the FED, which presumably believed it had bigger fish to fry.
Moreover, if memory serves, one exalted FED personage publicly encouraged folks a while back to utilize adjustable rate mortgages rather than those silly, antiquated fixed rate loans.
A very large portion indeed of our economy's forthcoming deterioration will be attributable to our financial "doctor's" benign neglect and lack of remedial or effective supervisory action vis-a-vis the real estate mortgage-cum-securitization frenzy. In view of the FED's burying its head deeply in the sand as the preconditions for the residential real estate bust built over the years, we think that its tenacious upholding of the principle of "moral hazard" is OUT OF ORDER. Where are THEIR consequences, we wonder?
The FED, we think, has forgotten its own Hippocratic Oath. Somewhere along the line it REFEFINED its mission to reflect the values, beliefs, and policy preferences of its policymaking officials. We question whether this behavior conforms to either Congressional mandate or Congressional intent.
If the FED sees its primary obligation as protecting the system, as one policymaker recently asserted, then our question is: where's the beef?
With respect to current efforts to disguise the weakness, indecisiveness, and intellectual confusion of the FED in the garb of a determination to "fulfill" its mission, we would suggest that these efforts are likely to encounter the law of diminishing returns as the unnecessary degree of pain which the FED's inadquate performance inflicts upon the economy becomes increasingly clear.
