Federal Reserve Chairman Ben Bernanke joined us this morning for an on-the-record conversation at the Council on Foreign Relations. He called for "consolidated government supervision" of financial institutions, underscoring the need to deter efforts by companies in the future to shift excessive risks from more to less regulated markets. If human nature is any guide, we will be be reading stories in the not-too-distant future of corner-cutting financial buccaneers trying to shield themselves from appropriate risk regulation and ultimate accountability.
The Chairman also contended that the current financial crisis should, once and for all, end the unthinking, cliched view that markets somehow fix themselves. Wrong! Markets can profoundly screw themselves up, especially with government complicity. However, markets in the current condition can and will not correct themselves naturally, at least not in time to prevent outright economic disaster. There is simply no such thing as pure laissez-faire capitalism, though some cling to the view for ideological reasons. As stated elsewhere on this blog, we are all most definitely Keynesians now.
Bernanke also spoke of the lamentable procyclical effects of poor government regulation. He is pointing here to our all-too-human bandwagon tendencies to stimulate even greater access to credit in boom times, when excessive credit is unneeded and unhelpful, while slamming credit availability shut during credit crunches when it is otherwise so desperately needed. It's easy to lend in good times and to bolt the doors shut in tough times, although the effects of doing so can be catastrophic. I have sat in many credit committees over the years. Real leadership emerges when, for example, bankers understand an innovative vision in tough times and finance it as part of economic recovery. Lemmings need not apply!
Finally, the MIT-trained economist and scholar of the Great Depression cited two lessons from the 1930s. First, he reiterated that monetary policy needs to be supportive and not restrictive in a crisis. The Federal Reserve Bank of the Great Depression spurned easing credit and was far too conservative in its approach. By contrast, today's Fed has been aggressive with interest rates and other countries are now following suit. Then, he added that the Fed of the 1930s also chose not to intervene in bank failures, a hands-off attitude that exacerbated the contagion of fear and added to our illiquidity.
The Chairman also contended that the current financial crisis should, once and for all, end the unthinking, cliched view that markets somehow fix themselves. Wrong! Markets can profoundly screw themselves up, especially with government complicity. However, markets in the current condition can and will not correct themselves naturally, at least not in time to prevent outright economic disaster. There is simply no such thing as pure laissez-faire capitalism, though some cling to the view for ideological reasons. As stated elsewhere on this blog, we are all most definitely Keynesians now.
Bernanke also spoke of the lamentable procyclical effects of poor government regulation. He is pointing here to our all-too-human bandwagon tendencies to stimulate even greater access to credit in boom times, when excessive credit is unneeded and unhelpful, while slamming credit availability shut during credit crunches when it is otherwise so desperately needed. It's easy to lend in good times and to bolt the doors shut in tough times, although the effects of doing so can be catastrophic. I have sat in many credit committees over the years. Real leadership emerges when, for example, bankers understand an innovative vision in tough times and finance it as part of economic recovery. Lemmings need not apply!
Finally, the MIT-trained economist and scholar of the Great Depression cited two lessons from the 1930s. First, he reiterated that monetary policy needs to be supportive and not restrictive in a crisis. The Federal Reserve Bank of the Great Depression spurned easing credit and was far too conservative in its approach. By contrast, today's Fed has been aggressive with interest rates and other countries are now following suit. Then, he added that the Fed of the 1930s also chose not to intervene in bank failures, a hands-off attitude that exacerbated the contagion of fear and added to our illiquidity.