Fed may need more resources and/or ability to compel disclosure

Janet Yellen for Fed Chair!

The Fed plays a crucial role in the world economy but it may be handicapped by having to react to information as it becomes available. 

They are expected to take the long view on economics and will be more effective in that if they have complete information. 

The scope of the sub-prime mortgages and related problems didn’t seem to be on people’s radar until it began to be a problem. 

Once you get that information it is obvious what they were doing and that it would be a disaster.  The idea was to puff up the housing market by flooding it with buyers, then foreclose when the buyer couldn’t afford the new rates with more profit built in for a foreclosure than the bank could get for a mortgage. 

Quite aside from the fraudulent nature of the practice, so many were engaging in it and exploiting weak foreclosure and consumer protection regulations that it was too big to succeed.  The scam artists were destroying the value of each other’s collateral.

At the big banks there were other problems such as giving mortgages to people that probably wouldn’t be able to afford them from the outset.   A premium was placed on short term profit to increase everyone’s bonuses and gaining market share at any cost. 

The arrangements were built to fail. 

Fed members aren’t omniscient, they’re just good at what they do.  Even with the best brain if you put garbage in you may get garbage out. 

Somebody sharp may perceive that they aren’t getting all of the information but the lack of information isn’t a sound basis for drawing conclusions. 

The Fed needs to be able to peek over the shoulders of various institutions, including banks and other financial institutions, to see what they are up to, in enough detail that they can analyse and predict if any problems are being created. 

The self reporting of financial institutions can’t be relied on.  They’ll always say they are fine.  The SEC in it’s wisdom (or lack thereof) decided that there should be looser constraints on the valuation of assets so that e.g. banking institutions didn’t have to report their assets at present market value.  As if the financial crisis were caused by the inability of companies to adequately fudge their numbers.  

Thank you SEC, for dispensing with the requirement that any company provide accurate financial statements. 

After fiascos like Enron, Bear Stearns and Lehmann we should be skeptical when companies say that they are fine.

The SEC has the investigation powers that the Fed should have, although probably not all of them.  

The SEC isn’t presently answerable to anybody and tends to be padded with well connected political hacks.  That’s probably why they don’t accomplish anything. They showed no interest in pursuing the many credible questions about Madoff.  The one time they did a half-hearted investigation into Madoff, he bluffed them by suggesting that they call to confirm his orders.  Madoff thought he was busted.  The SEC didn’t make the phone call.  

I get it why there have to be independent boards governing e.g. certain kinds of investigations and prosecutions without political interference.  

But with the SEC it isn’t working.  

I suggest making them report to the Fed and empowering the Fed to give them direction and if necessary fire the lot.

The Fed needs to have an investigative wing, but one with more power than the SEC.  Waiting for complaints isn’t enough.  The Fed needs to be able to get in front of things and nip disreputable practices in the bud, not wait until there is a disaster to manage. 

The Fed makes very important decisions and has some of the best minds in the country.  It is not reasonable that they should have to find out what is going on in the world by first reading it in their morning paper like the rest of us. 


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