It’s good for Ben Bernanke that his re-confirmation as Federal Reserve chief is all but assured, because the Washington Post has an excellent story reviewing how Bernanke and the Fed have gotten so much wrong in the crisis.
This is good reporting and smart analysis, and it’s well-written and edited, too. Check the lede (emphasis mine):
Foreclosures already pocked Chicago’s poorer neighborhoods but the downtown still was booming as the Federal Reserve Bank of Chicago convened its annual conference in May 2007.
That’s where Bernanke uttered his infamous assurance that subprime was no big deal.
The Post tells the story of the Fed’s poor governance through three bad banks: Citigroup, National City, and Wachovia—each one representing unique shortcomings by the Fed and at different stages before and during the crisis.
What the Post ultimately is reporting here is that the Fed failed at its job, as it says forthrightly in the headline: “Fed’s approach to regulation left banks exposed to crisis.” That we already know, but I’m not sure I’ve seen a better account of what the Fed did that caused such massive failures.
Of course, Alan Greenspan and his doomed philosophy loom large here. Reporters Binyamin Appelbaum and David Cho look all the way back to an incredible 1994 quote from the erstwhile “Maestro” saying “banking was becoming too complicated for regulators to keep up. As he put it bluntly in 1994, self-regulation was increasingly necessary ‘largely because government regulators cannot do that job.’” There was your top bank regulator, folks, and he would basically say the same in 2000.
But the Post is admirably point-blank here about the role of regulators:
Regulatory agencies exist to lean against the wind. But rather than looking for warning signs, the Fed had joined — and at times defined — the mainstream consensus among policymakers that financial innovations had made banking safer.
And it gets into the things Bernanke got very wrong, including the Wachovia purchase of Golden West, but also bigger picture stuff:
In January 2005, National City’s chief economist had delivered a prescient warning to the Fed’s board of governors: An increasingly overvalued housing market posed a threat to the broader economy, not to mention his own bank and others deeply involved in writing mortgages.
The message wasn’t well received. One board member expressed particular skepticism — Ben Bernanke.
This is also interesting:
The dangers of securitization were underscored the very next month by the collapse of energy giant Enron, which had abused the same accounting rules to conceal losses from investors. But in 2003, the board that writes accounting rules backed away from planned reforms after banks protested that Enron was an exception. The Fed sided with the industry, telling the board that securitization was safe and important to the economy, according to people familiar with the deliberations.
Felix Salmon has a good post on the WaPo piece pulling a dozen Fed errors into a list.
But read the whole Post story to get a sense of just how wrong the Fed got it and remember that the guy who was responsible for much of it and there for nearly all of it is going to be safely ensconced for another four years.