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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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April 14, 2008 12:01 AM ET
While former federal reserve chairman Alan Greenspan struggled last week to remove the subprime-mortgage tarnish that has accumulated on his halo over the past year, his predecessor questioned whether Mr. Greenspan ever deserved the halo in the first place. Mr. Greenspan argued in several venues that he is not to blame for the credit crunch, and indeed expressed no regrets about any decision the Fed made under his direction. In contrast, Paul Volcker strongly suggested in a speech last week that the Fed has fallen down on the job since he passed the torch to Mr. Greenspan in 1987. Not only did Mr. Volcker trace the need for the recent Fed-engineered buyout of Bear Stearns back to Mr. Greenspan's lax approach to financial regulation and monetary policy, he also noted that the Fed's unprecedented activities in connection with the rescue (as well as its loans to other investment banks in return for questionable collateral) fell into a gray legal area at best. Indeed, Mr. Volcker went so far as to suggest that the Fed, under current chairman Ben Bernanke, has come close to acting outside its authority. Mr. Volcker's point wasn't that the Bear Stearns deal should be undone, but that had there been better oversight, the need for the Fed's rescue of investment banks would never have arisen. It goes almost without saying that large banks cannot be allowed to fail needlessly, jeopardizing the safety and soundness of the financial system. The problem with bailing them out is that it creates moral hazard, perversely encouraging more of the risk-taking that makes banks fail in the first place. Consider the rescue of Long-Term Capital Management in 1998. While the New York Fed successfully rounded up support on Wall Street for the failing hedge fund so that its deals could be safely unwound, there was nothing done to head off more such failures apart from some token efforts by the President's Working Group on Financial Markets, which was averse to stronger regulation under both Presidents Clinton and Bush. The result a decade later has been the need for another, even more dramatic, bailout. Nonetheless, Mr. Greenspan argued in two newspaper columns and an interview last week that such bailouts are essentially inevitable, because the Fed cannot prevent market bubbles. But even if the Fed could prevent such bubbles from materializing, Mr. Greenspan insisted it probably would not be wise to do so, since in the end bubbles produce much-needed innovation in industries and markets. One is thus left to wonder whether Mr. Greenspan thinks the Fed's job is simply to help stock and bond prices rise no matter what's happening in the rest of the economy. In contrast, Mr. Volcker suggested that the bubble-birthed innovation Mr. Greenspan applauds is overrated, and that the Fed should take away the punch bowl when markets or economies are in danger of overheating. Some would argue that both men place too much faith in the Fed, that the central bank should be abolished and private banks should issue currency backed by gold or some combination of gold and other precious metals (and be left to fail if they don't have sufficient reserves), leaving the market to set interest rates entirely on its own. At this point, however, it's hard to imagine doing without a central bank that sets overnight lending rates and serves as a lender of last resort. That isn't to say we should accept bank bailouts as routine events—certainly not without congressionally supervised efforts to ensure that taxpayers' interests are put ahead of those of creditors and shareholders. We simply find Mr. Volcker's arguments in favor of more stringent regulation to head off the need for bailouts more sensible than Mr. Greenspan's suggestion that taxpayers should be prepared to clean up after banks once every economic cycle. If, for the purpose of heading off such messes, the Fed or the Securities and Exchange Commission needs more authority, expertise or both to regulate banks, Congress should see to it that they get it. If, on the other hand, regulators already have sufficient clout and capacity, they need to do a much better job of exercising it. In other words, current Fed chairman Ben Bernanke and his colleagues should take their cues these days from Mr. Volcker, not from his successor.
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