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Anna Schwartz, “The new group at the Fed is not equal to the problem that faces it”

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Wow. When I first began voicing my opinion about the Fed and monetary policy in a public phorum, it didn’t take long for me to be drawn to some papers by Anna Schwartz. On July 3, 2007, when I was asked what I would have done if I was in charge of monetary policy, I said:

If I were in charge from 2000-2007, I probably would have surrounded myself by smart people like Anna Schwartz, who wrote this gem (in 2002)

Asset Price Inflation and Monetary Policy

Abstract:

It is crucial that central banks and regulatory authorities be aware of effects of asset price inflation on the stability of the financial system. Lending activity based on asset collateral during the boom is hazardous to the health of lenders when the boom collapses. One way that authorities can curb the distortion of lenders’ portfolios during asset price booms is to have in place capital requirements that increase with the growth of credit extensions collateralized by assets whose prices have escalated. If financial institutions avoid this pitfall, their soundness will not be impaired when assets backing loans fall in value. Rather than trying to gauge the effects of asset prices on core inflation, central banks may be better advised to be alert to the weakening of financial balance sheets in the aftermath of a fall in value of asset collateral backing loans.

Now, she takes both Greenspan and Bernanke to task in this scorching article at the Telegraph:

Anna Schwartz blames Fed for sub-prime crisis

The high priestess of US monetarism – a revered figure at the Fed – says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. “The new group at the Fed is not equal to the problem that faces it,” she says, daring to utter a thought that fellow critics mostly utter sotto voce.

“They need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence,” she told The Sunday Telegraph. “There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for,” she says.

That is a great article and although I should probably be a little more dignified that proclaiming “Bernanke sucks”, it is good to know that Anna Schwartz is also not a particularly big fan of those at the Fed right now.

Written by Eric

January 16, 2008 at 12:31 pm