Federal Reserve — VOICES for REASON

In case anyone believed that the reckless lending and borrowing of the housing boom would never happen again, read this story: “The Return of the $1,000 down mortgage.” Once again, borrowers are putting essentially zero money into the house they buy, encouraging them to buy houses they can’t afford and to walk away if the value of their houses decline.

If you are wondering how the government is letting this happen, you’ve got it backwards; as was the case leading up to the financial crisis, the government is making it happen through its many manipulating tentacles:

This offer does not come from a subprime lender, looking to reel in thousands of unqualified and ill-advised homebuyers, only to slap them with add-ons, fees and variable rates. It is not a teaser or a trick. The advertisement references a program initiated by the National Council of State Housing Agencies and Fannie Mae, the taxpayer-backed, government-sponsored enterprise that buys up mortgages from lending banks.

The pilot program is called “Affordable Advantage,” and it has now been adopted by three states — Massachusetts, Wisconsin and Idaho. (Other states, such as Pennsylvania, California and Colorado, have similar state programs.)…Fannie Mae helped to create Affordable Advantage after the state government agencies tasked with expanding homeownership found they were having trouble doing their job.

The idea that it is the government’s job to “promote homeownership” or create “stimulus” is the root cause of the financial crisis. This idea was carried out by the Federal Reserve, Fannie Mae, and Freddie Mac. Until that idea dies and these entities lose their power to manipulate the economy, the financial carnage will just continue.

Image Source: Wikimedia Commons

Another day, another major news story about Ben Bernanke’s economic prognostications. I find these stories bizarre on two levels. One, they never mention Bernanke’s obvious incentive to paint an overly-rosy picture of the economy’s future given that he wields more power over it than any other person. And two, they never give convincing evidence that Bernanke is a credible forecaster.

It’s taken for granted that Bernanke is an economic genius–a claim backed by everything but his actual track record as an economic forecaster. We hear of his distinguished academic career, the admiration in which he is held by the profession, even a near-perfect SAT score in high school. While these would be relevant if Bernanke were applying for more column-inches in Who’s Who, or a job at The Princeton Review, neither Bernanke’s academic popularity nor his IQ tell us whether his predictions hold water.

In this regard, his track record of predictions, by contrast, proves a lot:

• March 2007: “the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”
• February 2008: “I don’t anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system.”
• July 2008: Fannie and Freddie “…will make it through the storm,” are “in no danger of failing,” and “adequately capitalized.”

Why not write news stories about the prognostications of economists who actually predicted the financial crisis?

Image: Wikimedia Commons

Throughout Washington, the most powerful politicians (including Barack Obama) and bureaucrats (including Ben Bernanke) are sparring over the apportionment of new government powers–in particular, how much additional power should the Fed have–to prevent future financial crises. (See stories here, here, and here for more background.)

But notice that this “debate” essentially features only one position on the financial crisis: that it was caused by insufficient government control of the economy, especially by the Fed–and therefore that the solution is more controls. But what about the position that the government, in particular the Fed, was the essential cause of the crisis? Without the Fed lending out money at below the rate of inflation, without government-guaranteed mortgages, without government bailout guarantees, the housing bubble never would have gotten off the ground.

Barack Obama, Ben Bernanke, et al. want to pretend that such a position doesn’t exist. Read the rest of this entry »

Ben Bernanke recently penned an op-ed in the Washington Post sounding the alarm that the powers of the Federal Reserve might be undercut by pending legislation, and thereby undermine its ability to prevent future financial crises.

The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.

In Bernanke’s view of the Fed—the same view that is shared by most narratives of the financial crisis—the Fed was a force for good in minimizing the crisis, which was caused fundamentally by greedy, reckless financiers. The only criticism of the Fed in this narrative, is that it did not use its powers strongly enough. As Bernanke puts it:

The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis.

Thus, the Fed is a financial firefighter that simply needs more resources to put out fires set by financial arsonists in the free market—and Bernanke is Financial Firefighter in Chief.

Hardly.

Read the rest of this entry »