Saturday, August 30, 2008

The Fed and Moral Hazard (B.J. Lawson)

B.J. Lawson has some interesting comments on an enlightening interview with a Federal Reserve insider:

I just watched an instructive interview between CNBC’s Steve Liesman and Harvey Rosenblum, a 38-year Federal Reserve veteran who is currently Director of Research at the Dallas Fed. The entire interview is available here, but let’s start with a brief excerpt:

Liesman: One of the concerns out there right now is that actions by the Federal Reserve and the government will increase what we call “moral hazard.” What are your thoughts on that?

Rosenblum: The Federal Reserve is in business to create moral hazard. The mere act of being a central banker means that your job description involves creating moral hazard. A central bank is a “lender of last resort,” what more moral hazard can you have than having a lender of last resort that people know, when push can to shove, can be relied upon? The Federal Reserve’s job is to cushion the blow to 300 million American citizens of all the economic shocks that hit out there. What drives me crazy is when I hear people shouting “Moral hazard, moral hazard”… that’s what my job is to do…

Liesman then asks Rosenblum an interesting question:

Liesman: You’ve been at the Fed thirty eight years. Do you feel as if some of things being discussed and some of the things the Fed has had to do recently have stretched the Federal Reserve too far?

Rosenblum: No. I think it’s stretching the Federal Reserve in the direction that it needs to be stretched, and we just have to get the laws to catch up with where we ultimately have to be if we’re going to be a 21st century Fed deaing with 21st century financial markets. And if you’re going to be a lender of last resort, you have to have the tools to deal with the thing, and you need more regulatory power. Will regulation ever be perfect? Will it solve all the problems? Absolutely not. At best it will be one step behind the market, but even if you’re two steps behind the market, you’re doing pretty darn good.

There you have it. An insider’s description of a system that is perfectly designed to steal from the poor and middle class, to the benefit of those who control the supply of money and credit. Banks who control the supply of money and credit constantly engineer new ways to exploit the system for their benefit. Importantly, they can push the system past its limits knowing that profits will be privatized during the good times, while losses during crises will be socialized.

Read the rest

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