The fallible Federal Reserve

Binyamin 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