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March 19, 2015 10:56 AM Age: 5 yrs

The Fed Needs to Read the Signs Better This Time

Category: AC RSS, A/F Commentary & Opinion, CM Commentary & Opinion, ERM Commentary & Opinion, GPG Commentary & Opinion, AM Highlighted Commentary, ESG Highlighted Commentary, Larry Checco
Source:  Larry Checco, featured writer

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At a recent Brookings Institution event, former Federal Reserve Bank of Philadelphia president, Charles Plosser, echoed the mantra we’ve heard again and again, “We missed the signs”—the signs, that is, that led to the worst economic collapse in America since the Great Depression.

The one phrase I was surprised he didn’t utter—but many others have—is “there is plenty of blame (for this crisis) to go around.”

There sure is—from real estate agents and appraisers who inflated the value of homes; brokers who offered awful and often unethical mortgage products; the sometimes greedy, but more often unsuspecting homeowners who were coaxed into purchasing these products that required no down payment nor job or income verification, sometimes referred to as “liar loans”.

Oh, and let’s not leave out the credit agencies that gave these crappy mortgages AAA ratings; the banks and GSEs (Fannie and Freddie) that packaged them and sold them to investors; the SEC and other government watchdog agencies that were asleep in the wheelhouse. 

Did I miss anyone?

Oh, yes.  Then there’s the Federal Reserve with its hundreds of economists who professionally—or in their personal musings—somehow missed all of this. 

Heck, I can’t even reconcile my own checkbook, but even I became suspicious when people I knew, who were earning $50,000 a year, somehow were able to move into  $400,000 homes.   There was a disconnect somewhere.

Let’s not delude ourselves, folks.  It’s not that everyone missed the signs.  In fact, many in the affordable housing industry were crying wolf—when the wolves were actually at the doors in their communities hawking subprime mortgages.

No, the more rational explanation is that too many people were making too much money for anyone in authority to blow the whistle and yell “FOUL.”

To the Fed’s credit, under Ben Bernanke, we avoided total economic collapse.  Problem is Wall Street literally made out like a bandit while millions on Main Street may never recover from this calamity.

Many believe the reason Wall Street came out so well is because the Fed has been “captured” by the banking industry.

“Reserve Bank presidents have close ties to the banks they regulate, they are less likely to police bad behavior,” Peter Conti-Brown, Academic Fellow at Stanford University Law School, contended at the Brookings event.

Conti-Brown and others believe the Fed is too powerful, opaque and independent, and would like to see it harnessed with more transparency and public accountability, meaning more Congressional oversight.

Ouch! 

So our only alternatives are to either leave the Fed to the influence of bankers, who time and again have proven egregiously greedy and untrustworthy, or to a Congress that couldn’t pass a PTA budget if its life depended on it and which has largely been “captured” by big money interests itself.

A rock and a hard place doesn’t begin to describe this dilemma. 

Yet, the Fed is entering another important junction. 

Job creation is steaming along nicely—albeit wages are not—adding 295,000 jobs in February, and an impressive 3.2 million jobs over the last year.  The unemployment rate currently stands at 5.5 percent, near to what the Fed considers full employment.  The inflation rate remains low, the dollar strong. 

A six-year-old zero-rate interest policy is awaiting Fed action.

Can the Fed keep us from another financial crisis?  Only time will tell.

In full disclosure, I’m no Federal Reserve or economic scholar.  But sometimes commonsense has its place.

And what I commonsensically perceive is that should we experience another recession like the one we just narrowly survived, we can kiss what’s left of the American working middle class good-bye!

The signs are out there again—especially when it comes to rapidly growing income and wealth inequality.

Ya better get it right this time, guys!

Larry Checco © 2015

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