In October we wrote ‘So Should We Hang All The Mortgage People?’. It was a general comment on the nature of knee jerk regulations to a crisis. We now can revise the title to say ’Should We Hang All Of The High Flying Federal Reserve People?’ Federal Reserve Bank of New York President Timothy Geithner got a little mouthy today in a speech. He called for greater central bank authority over markets and financial institutions. We agree that some serious work needs to be done….but….this sounds a whole lot like asking forgiveness after the fact rather than permission before hand. When he helped the Fed engineer a $30 billion dollar loan last month to Bear Stearns in 36 hours – he pretty much raised the bar of Fed authority to the highest it has ever been. He, along with others, claimed that they simply did not think they would have been able to clean up the crisis if Bear Stearns failed. The end justifies the means. The age of the Wildcat Fed (or Cowboy Fed – whichever you prefer).
So now we have Mortgage Originators acting like Used Car Salesman and Cowboys, we have Wall Street Investment Bankers acting like Wildcat Bankers and Cowboys, and we have the Regulators acting like Cowboys. This is shaping up to be quite a shootin’ match.
Knee jerk regulation dumped fuel on the fire in setting up the complicated debt instruments in the first place. Knee jerk regulation caused financial firms to value assets daily, and thereby trigger a downgrade, write-off, downgrade, write-off cycle in the first place. What demon will this new cry for blood unleash?
There is room for all kinds of change in this environment – but prudence and patience need to win this time. Over reacting to satisfy the din of public discontent is a movie we have seen over and over – it always ends badly.
