Tuesday, September 4, 2007

Hindsight Really is 20/20...

Having more opportunity to do so, I have been watching, reading and listening to the media is putting forth on the current market turmoil. With six weeks of uncertainty behind us and with most people back at their posts, the time has come to affix blame for how the market got here in the first place. The current target of opportunity is the Fed because a) most of the market players want lower rates for a host of reasons and b) the Fed can't respond directly to anyone's criticism, making them a convenient punching bag. This weekend produced an unusually large number of Fed bashing, primarily due to the Fed's annual meeting out in Jackson Hole. Ottmar Issing, former chief economist for the ECB, blamed the Fed for not popping the housing price bubble earlier. We'll have to assume that most of his criticism was meant for Alan Greenspan as it was under his tenure that the easy money inflated housing prices. I guess that Mr. Issing will be upset if the Fed ease occurs in two weeks. Joining Ottmar was Stanley Fischer, formerly of the IMF and Citi, now the Bank of Israel governor, saying the central banks (really meaning the Fed) should do more to control asset prices. Stanley doesn't want an ease either. The last time they were checked, the Fed was doing what it does in the area of asset price control, walking that fine line between inflation control and economic growth. They do that pretty well and if they overshoot from time to time (remember the pendulum), then that is the price to pay for a general sense of stability. This isn't 1929. Nobody has even mentioned it for three weeks now. I guess criticism of the Fed is a good thing as it keeps them honest and gives people like me something to write about. Mr. Issing should focus his efforts on the ECB and Europe in general. Perhaps he could push for greater ECB oversight of European banks that got involved too deeply in the US mortgage market, an area where they have little experience given the mortgage market in their home countries.

The most interesting criticism came from a gentleman on CNBC today who tried to make the case that the Fed shouldn't exist. While fun to ponder, this man (I forgot his name) didn't make a very good case and didn't have a good grasp on what the Fed does (How does this guy get on TV, and I'm in my backyard?). As students of pre-1913 US economic history and watchers of many Star Trek episodes, we have seen the bad and the good of a Fed-less world. But, we're not ready for that yet.

1 comment:

Anonymous said...

You are doarn right that the ECB should be concerned with what is going on in its own backyard. European banks, especially "im Deutschland" have made many bad bets on subprime. It is conevenient to bash Greenspan for easy money and the so-called "Greenspan Put" (which may not materialize under Bernanke o bail the markets out) for encouraging aggressive behavior amomg investors (banks), but the ECB and the German government are guilty of providing a put by bailing out banks exposed to subprime.

European sentiment should not surprise anyone as it is never Europe's fault.

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