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The fallible Federal Reserve

PH2009120702588.jpgBinyamin Appelbaum and David Cho have a readable, devastating look at the analytical mistakes that led to the Federal Reserve's costly failure to prevent, or even foresee, the financial crisis. Felix Salmon counts at least a dozen different conceptual errors that led to the Fed's laxity. But he still thinks empowering an improved Fed to act as super-regulator is our best hope for the future.

I think it's all evidence that regulators can't be trusted and we need more automatic safeguards. The FDIC's insurance of bank deposits, for instance, prevents bank runs whether or not the FDIC thinks there's a problem in the market. Muscular capital requirements could conceivably do the same thing, keeping banks from threatening the whole system even when regulators are sure that the awesome innovation the banks just developed is totally kosher, now and forever, amen. After all, there's not much we can confidently say about the next bubble or financial crisis, but the one thing we can say is that the Federal Reserve will miss it, as that's pretty much the definition of these things. What the Federal Reserve can see, it can generally stop. But the Federal Reserve will miss the boat again, and we need some fail-safes that will work when they do.

photo credit: By Haraz N. Ghanbari/Associated Press

By Ezra Klein  |  December 22, 2009; 7:00 AM ET
Categories:  Federal Reserve  
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Next: Letters to health-care Santa: Nationalize the exchanges!


Sorry for offtopic, but I'm wondering, Ezra, if could you give us a summary of the hurdles left to clear once the Senate passes it. Past that point, what room for change do the rules and politics leave?

Posted by: bwill1 | December 22, 2009 8:04 AM | Report abuse

Good thing then we have a fall back public option in health care so we don't have to rely entirely on regulators with half the prestige of the Fed.

Posted by: endaround | December 22, 2009 8:31 AM | Report abuse

What does that tell you about Obama?

Posted by: obrier2 | December 22, 2009 8:50 AM | Report abuse

The Federal Reserve's mistakes and failures were rooted entirely in its collective faith in laissez faire policies. Its subsequent successes in bold Keynesian intervention. I wish Ezra and others would emphasize this more.

Posted by: pneogy | December 22, 2009 10:00 AM | Report abuse

"I think it's all evidence that regulators can't be trusted and we need more automatic safeguards."

This is a structural problem rather than a regulatory problem. If the banks are "too big to fail", regulators will always be at a disadvantage.

The only good way of regulating these monsters is to break them up and make them easier to follow. Bring back Glass-Steagall!

Posted by: leoklein | December 22, 2009 2:14 PM | Report abuse

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