Fed Missed This Bubble. Will It See a New One?

Nope. Greed continues to be good on Wall St. Like 9-11, nothing has learned and nothing is really being done about it. And this administration has so many Wall Streeters that any real financial reform won't come until some other financial disaster happens. And there is no indication that the government has a plan for salvaging the economy other than rewarding the very people whom destroying the economy.

If only we’d had more power, we could have kept the financial crisis from getting so bad.

That has been the position of Ben Bernanke, the Federal Reserve chairman, and other regulators. It explains why Mr. Bernanke and the Obama administration are pushing Congress to give the Fed more authority over financial firms.

So let’s consider what an empowered Fed might have done during the housing bubble, based on the words of the people who were running it.

In 2004, Alan Greenspan, then the chairman, said the rise in home values was “not enough in our judgment to raise major concerns.” In 2005, Mr. Bernanke — then a Bush administration official — said a housing bubble was “a pretty unlikely possibility.” As late as May 2007, he said that Fed officials “do not expect significant spillovers from the subprime market to the rest of the economy.”

The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power. It raises the question: Why should Congress, or anyone else, have faith that future Fed officials will recognize the next bubble?

Just this week, Mr. Bernanke went to the annual meeting of academic economists in Atlanta to offer his own history of Fed policy during the bubble. Most of his speech, though, was a spirited defense of the Fed’s interest rate policy, complete with slides and formulas, like (pt - pt*) > 0. Only in the last few minutes did he discuss lax regulation. The solution, he said, was “better and smarter” regulation. He never acknowledged that the Fed simply missed the bubble.

This lack of self-criticism is feeding Congressional hostility toward the Fed. Mr. Bernanke is still likely to win confirmation for a second term, based on his aggressive and creative policies once the crisis began. But Congress hasn’t decided whether to expand his regulatory authority and is considering reining in the Fed’s other main mission — setting interest rates.

A once-marginal proposal — from Representative Ron Paul, the Texas Republican — that would give Congress the power to review interest rate decisions recently passed the House and will soon be considered by the Senate.

Economists are generally horrified by this idea. If Congress could force Fed officials to answer questions about every interest rate move, the process could easily become politicized. A politicized central bank is a first step toward runaway inflation.

But politicizing monetary policy isn’t the only mistake Congress could make. It also could end up going in the other direction and handing Fed officials more power without asking them to grapple with their failures.

When Mr. Bernanke is challenged about the Fed’s performance, he often points out that recognizing a bubble is hard. “It is extraordinarily difficult,” he said during his Senate confirmation hearing last month, “to know in real time if an asset price is appropriate or not.”

Most of the time, that’s true. Do you know if stocks will keep going up? Is gold now in the midst of a bubble? What will happen to your house’s value? Questions like these are usually an invitation to hubris.