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The Fed's Canary in the Meltdown

Patricia Sullivan

As I read the investigation into the Federal Reserve on the front page of this morning's Washington Post, I remembered an obit from about two years ago of a Fed governor, Ed Gramlich. Sure enough, not far into the story about how the Fed failed in its duty to enforce the law, Gramlich's name popped up:

"In the prime market, where we need supervision less, we have lots of it. In the subprime market, where we badly need supervision, a majority of loans are made with very little supervision," former Fed Governor Edward M. Gramlich, a critic of the hands-off policy, wrote in 2007. "It is like a city with a murder law, but no cops on the beat."

He wasn't the only one warning of a disaster to come, of course, but he was one of the few in an official position who warned of what was to come. He expressed his concern in public speeches. "A good defense against predatory lending, perhaps the best defense society has devised, is a careful compliance examination for banks," Gramlich told a 2004 meeting of bankers in Chicago. He raised the issue in a private meeting with then-Fed governor Alan Greenspan. He had self-doubts, telling Greenspan later that if he had felt more strongly, he would pursued the issue further. But unlike many others, he raised it.

By Patricia Sullivan |  September 27, 2009; 12:14 PM ET  | Category:  Patricia Sullivan
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Ronald Reagan, the deep thinker of the right-wing, said it all. Government IS the problem. He did not address government's responsibility to monitor large financial entities to ensure they don't get overly optimistic and inadvertently kill the economy. He did not address government's crying need to prop up financial entities after they kill the economy. According to the right-wing, only unions can do bad things to the economy. That's a biased view that does not withstand scrutiny.

Posted by: BlueTwo1 | September 27, 2009 2:46 PM

The Fed's implicit blessing of subprime mortgages was at the level of criminal negligence. That action was just the tip of the iceburg of the Fed's failure. The Fed has basically had a history of a hands off attitude towards a wide range of financial instruments that have been invented by various financial instititutions and come to play a large part in our financial system. Some of the more obvious ones are mortgage backed securities, credit default swaps, and money market mutual funds. The markets for all of these instruments failed or would have failed in the financial crisis without some form of intervention and bailout from the Fed. To date, there is no sign that anyone has stepped up to the task of even understanding how these financial instruments actually function in our finance system. The efforts by the Fed and the Treasury to resolve the financial crisis bogged down because nobody understood the range of financial instruments well enough to figure out what to do with them. Increasingly both organizations retreated into a coverup of the state of our financial system on the grounds that public disclosure would be too damaging to the fragile state of major financial institutions. So there is no real possiblity of a public assessment of the prospects for improving the stability of our financial system. But until we create a financial system that we understand, there is no possibility of rational estimates of risk and a high probability that the system will collapse again the next time any serious stress is encountered.

Posted by: dnjake | September 27, 2009 3:10 PM

@Bluetwo2, presumably you're being ironic rather than ignorant. Fed policy reflected Regeanite "hands off' policies and the rather watered down version praticed by Clinton and allowed to fully flower under Bush II. It's interesting that the Post should publish a post-mortem as its non-covereage of all this (along with other major media outlets) was part of the problem.

Posted by: thebuckguy | September 27, 2009 3:32 PM

Although I am not an expert in banking, I have been a licensed securities dealer since the mid-80's, and I see the problem quite clearly I believe.

It is simply a problem of greed. If the mortgage folks would not have passed out loans like sticks of chewing gum to kids, and if the regulatory folks would not have "just missed" checking out the bad activity then we likely would be in a different shape now. Both of those items (among others like them) are simply a show of greed. To not do your job is greedy-to give something to someone else that has not earned it is the same.
Go think.
But of course today there is no need to teach youngsters to always be honest, and the college kids cheat on many of their tests, so when they are in the workforce they have no compunction to be honest. And the blame goes to all of us "adults" who must stand up and say something when we smell a noxious odor.
So it comes down to you and me to be honest, and hold others to a higher standard also.
But of course it is illegal to post the Ten Commandments.......
Go figure......

There always is a judgement day coming for me and you.

Posted by: wa4moe | September 28, 2009 8:08 AM

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