Wednesday, April 02, 2008


I don't know how else to say this so I'll just come out and day it: I don't trust Ben Berneke.

At first I liked him. I think it was the beard. He seemed a genuine guy, and a welcome change from the cadaverous severity of Alan Greenspan. But like a lot of people, I'd love to have Greenspan back.

Bernake testified before Congress today about the bailout of Bear Sterns, the current state of the economy, and the administrations new regulatory package. He said all the right things: that the economy is likely in recession but will expand in the second half of the year; that bailing out Bear Sterns was necessary to maintain confidence in the markets. Blah blah blah. He also said that the Fed needed the new regulatory authority that President Bush's financial regulation package would give it, which would make the Fed the top regulatory agency governing investment firms.

That raised flags. I'm always suspicious when anybody says "I need you to give me more power."

Schumer complained that the Fed seemed willing to bail out Bear Sterns but wasn't willing to help out consumers who are about to loose their homes. It's a fair complaint, no matter how Bernake tried to deflect it. But there are other issues.

By the pure Milton Friedman philosophy, the Fed shouldn't be bailing out anybody, homeowners or investment banks. Friedman would say that when you over extend yourself, when you gamble and loose, you should pay the price and if that means losing your home or your investment bank then so be it. The fire sale that will result --whether its Dolf dr Roos or JP Morgan who comes in to exploit your pain--creates an opportunity that others can take advantage of, creating new economic activity, and eventually turning the entire economy around. Every catastrophe is an opportunity and, while those who seize the opportunity are often called profiteers, they are also the main engine for recovery. Or so the lazies fair economists would have us believe.

Keynes of course would argue something different, and therein lies the rub: I wouldn't mind it as much if a democratic administration was coming out and saying "we need more regulations and more regulatory authority." I expect it of them. They can quote a principal on which their position is based. It's in their genetic makeup. That's ok. But when a republican administration and the Fed chairman that this president appointed comes out in favor of giving more regulatory authority to the Fed it makes me worry. I look at what these guys have done with the power we've already given them and it does not breed confidence. How can a conservative economist and a conservative president call for more regulation and more government authority? This guy, who continually wraps himself in the sacred mantle of Ronald Regan, is trying to make government bigger and increase interference in the area of the economy--the investment sector--that they have always claimed needs *less* regulation and oversight.

I don't agree. I think there should be oversight. There should sure as hell be more than we've had recently. But that oversight authority should belong to the SEC, not the Fed. And the fact that this cabal of financial Illuminati is the one calling for more oversight really really scares me. It's not that I have any good reason to be scared. I'm sure it is just my anti-bush bias showing. But it stinks.

Adam Smith, Milton Friendman, and Ronald Regan are all dancing a dervish right now.


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