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"Never Even a Whisper" at Fed's Open Market Committee Meetings
Ben Bernanke, William Dudley and Donald L Kohn are on the Fed's Open Market Committee (FOMC).
They are also on the board of directors of the Bank for International Settlements (BIS) - often called the "central banks' central bank". And Kohn is an alternate director for BIS.
Alan Greenspan, of course, was a BIS director for many years.
Dudley is also chairman of BIS' Committee on Payment and Settlement Systems. (Tim Geithner - previously on the FOMC - previously held that post).
So there is clearly quite a bit of overlap between the two groups.
In addition, BIS' chief economist - William White - and others within BIS - repeatedly warned the Federal Reserve and other central banks
that they were setting the world economy up for a fall by blowing
bubbles and then using "using gimmicks and palliatives" which "will
only make things worse".
As Spiegel wrote last July:
White
and his team of experts observed the real estate bubble developing in
the United States. They criticized the increasingly impenetrable
securitization business, vehemently pointed out the perils of risky
loans and provided evidence of the lack of credibility of the rating
agencies. In their view, the reason for the lack of restraint in the
financial markets was that there was simply too much cheap money
available on the market...As far back as 2003, White implored
central bankers to rethink their strategies, noting that instability in
the financial markets had triggered inflation, the "villain" in the
global economy...In the restrained world of central bankers, it would have been difficult for White to express himself more clearly...
It
was probably the biggest failure of the world's central bankers since
the founding of the BIS in 1930. They knew everything and did nothing.
Their gigantic machinery of analysis kept spitting out new scenarios of
doom, but they might as well have been transmitted directly into
space...
In their report, the BIS experts derisively described the
techniques of rating agencies like Moody's and Standard & Poor's as
"relatively crude" and noted that "some caution is in order in relation
to the reliability of the results."...
In January 2005, the BIS's
Committee on the Global Financial System sounded the alarm once again,
noting that the risks associated with structured financial products
were not being "fully appreciated by market participants." Extreme
market events, the experts argued, could "have unanticipated systemic
consequences."
They also cautioned against putting too much faith
in the rating agencies, which suffered from a fatal flaw. Because the
rating agencies were being paid by the companies they rated, the
committee argued, there was a risk that they might rate some companies
too highly and be reluctant to lower the ratings of others that should
have been downgraded.
These comments show that the
central bankers knew exactly what was going on, a full two-and-a-half
years before the big bang. All the ingredients of the looming disaster
had been neatly laid out on the table in front of them: defective
rating agencies, loans repackaged to the point of being unrecognizable,
dubious practices of American mortgage lenders, the risks of
low-interest policies. But no action was taken. Meanwhile, the Fed
continued to raise interest rates in nothing more than tiny
increments...
The Fed chairman was not even impressed by a
letter the Mortgage Insurance Companies of America (MICA), a trade
association of US mortgage providers, sent to the Fed on Sept. 23,
2005. In the letter, MICA warned that it was "very concerned" about
some of the risky lending practices being applied in the US real estate
market. The experts even speculated that the Fed might be operating on
the basis of incorrect data. Despite a sharp increase in mortgages
being approved for low-income borrowers, most banks were reporting to
the Fed that they had not lowered their lending standards. According to
a study MICA cited entitled "This Powder Keg Is Going to Blow," there
was no secondary market for these "nuclear mortgages."...
William White and his Basel team were dumbstruck. The
central bankers were simply ignoring their warnings. Didn't they
understand what they were being told? Or was it that they simply didn't
want to understand?
Yet, White said in a short, must-see talk last week that former
long-time St. Louis Fed president William Poole told him that there was
never even a whisper of these basic concepts at a single FOMC meeting.
Indeed, White says that - even today - the Federal Reserve is doing the same old thing, reading off of the same playbook
that caused the Latin American crisis, the Asian meltdown, the Long
Term Capital meltdown, and all of the other financial crises of the
last couple of decades. And see this.
White, of course, argues for more
accurate models which take into account real-world factors such as debt
stocks, and include a time-frame longer than 2-year inflation targets
or 4-year election cycles.
But as Simon Johnson has repeatedly
pointed out, economics used to acknowledge that politics had an
important affect on economic policy, but now the economics profession -
as a whole - tries to pretend that it is strictly a mathematical and
technical art form.
And as I documented last October, economists are trained to ignore - and central bankers and regulators rewarded to the extent that they ignore - the real world.
And we cannot improve our models and understandings of how to prevent another crisis unless the truth of what caused this crisis is openly discussed (under subpoena power). If the government's entire strategy remains to cover up the truth, then we won't have the chance.
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Conspiracy of silence.
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Excellent post, GW.
I especially perked up to read that White feels, as I do, that the Fed is tweaking on a playbook doomed to failure. It's title is " Cyclical Recessions for Dummies: what it is and what you do ".
ABSOLUTELY AWESOME ARTICLE, GW!
Another great find.
First lesson and the money line: "And we cannot improve our models and understandings of how to prevent another crisis unless the truth of what caused this crisis is openly discussed (under subpoena power). If the government's entire strategy remains to cover up the truth, then we won't have the chance."
Second, and as always, don't assume a well coordinated conspiracy when the simpler incompetence will explain things nicely; and "there was never even a whisper of these basic concepts at a single FOMC meeting." In effect, hear no evil, speak no evil, see no evil as the basic modus operandi of the Fed. Personnel are filtered, or at least there is a strong predilection, for maximum incompetence.
Finally, I realize that, for example, the 'S&L crisis' of the late 1980s & early 1990s had an extend and pretend component to it, but does anyone know if there has been such a time and place as now when economic and related lies and/or enforced ignorance seemed to be the primary responses to past and future financial and economic armageddon? Are the adults all tied up in back, or is it that none can be hired to fill positions of responsibility?
MIT, Princeton, Harvard, Yale..
Sorry but at some point you have to wonder aloud, "Just how do these exceptionally intelligent individuals keep screwing up over and over and over again?"
There comes a time when you have to consider that maybe these aren't mistakes at all. You may want to dismiss it as incompetence but there is just no way you can reconcile that with repeated outcomes. Statistically, it just doesn't add up. There is no way they can be that wrong so consistently if they were simply making mistakes.
If ever there was a demonstration of the "Peter principle"...
No, the Peter Priciple implies incompetence by its very definition.
People will rise to the level of their incompetence.
In this case, however, the Peter Principle is being used as a facade against the underlying criminal machinations that has torn the global economy on its ear. Through the whorish media, they can put on the other face: that we were a bunch of incompetent boobs. Ooops, my bad. And the face of this debacle? None other than phucknut himself.
Did you ever wonder why all the right people were in the right places at the right time? Depession expert (Benanke), gold and monetary value expert (Greenspan), financial architects (Paulson, Rubin, Summers), apparent fall-guy (phucknut Geithner) and on and on and on...
Just when do we take a step back and realise we've been played?
Then, what do we do about it?
I agree, how they can be wrong so consistently. As you said before maybe they weren't wrong, someone made money on the other side of these bets. They can't come out and say we sunk your country in order for our bank and our leaders in the bank to become wealthy. On the one hand they say they are incompetent but on the other they have been running a multi-billion dollar corporation that handles hundreds of billions of dollars daily. No, they got rich by sinking the country and don't want to admit to it.
Plus to the infinite power.
Or, three, possibly knew exactly what was happening and implemented every possible mechanism to ensure the results they were hoping for.
These guys are pretty bright, huh?