Monday, October 20, 2008

Anna Schwartz Is not Happy about What the Fed's Doing

Another I-don't-buy-it story from Anna Schwartz, coauthor with Milton Friedman on "A Monetary History of the United States" (1963).  Being 92 years old and having lived through the period from 1929 to 1933, she may know more monetary history and banking than anyone alive. :

Fed Chairman Ben Bernanke, of all people, should understand this, Ms. Schwartz says. In 2002, Mr. Bernanke, then a Federal Reserve Board governor, said in a speech in honor of Mr. Friedman's 90th birthday, "I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

"This was [his] claim to be worthy of running the Fed," she says. He was "familiar with history. He knew what had been done." But perhaps this is actually Mr. Bernanke's biggest problem. Today's crisis isn't a replay of the problem in the 1930s, but our central bankers have responded by using the tools they should have used then. They are fighting the last war. The result, she argues, has been failure. "I don't see that they've achieved what they should have been trying to achieve. So my verdict on this present Fed leadership is that they have not really done their job."

Full text here (source: WSJ). Some of her major points:

The Fed should aim to help banks get rid of bad assets. In the process, it should allow some banks to fail.  Capital injections only prolong the current credit crisis, because if bad assets remain on banks' balance sheets, banks still won't trust and lend to each other.

Much like 1920s, today's housing and credit bubbles were fueled by the Fed's easy monetary policy.  Greenspan can't absolve himself from failing to prevent the bubble from forming. The old thinking needs to be revised that there was no way you could really terminate the boom because you'd be doing collateral damage to areas of the economy that you don't want to damage.