He blames libertarianism at the Fed. But his history is a bit selective. For example, he writes
the Fed was highly supportive of securitisation.
Actually, the Fed was quite worried about Freddie Mac and Fannie Mae.
In general, I think that Kaufman offers contradictory advice. On the one hand, he thinks that banks should have been closely regulated. On the other hand, he thinks that the growth of non-bank financial institutions should have been thwarted. You cannot have it both ways. Either you hamstring the banks, in which case non-banks will expand at their expense.* Or you allow banks to remain relevant by giving them room to compete against non-banks. In practice, the Fed compromised between those two approaches.
On the whole, I would rather see banks regulated more closely, in order to protect depositors. But one has to recognize that such a policy implies that the non-bank financial sector will be free to take advantage of regulatory restrictions on banks. If this approach is adopted, one has to be willing to let these uninsured competitors fail, rather than treat them as too big to fail. Since we have not demonstrated an ability to allow large financial institutions to fail, I cannot make any claims that my preferred approach is feasible.
*For example, when banks are not allowed to “abuse” credit card customers, the result will be fewer credit cards issued. This will allow alternative non-bank intermediaries, including loan sharks, to step into the vacuum, probably to the detriment of the alleged victims of credit card “abuse.”
READER COMMENTS
Vangel
Apr 28 2009 at 11:07am
Kaufman is a very bright individual but he seems to have trouble with logic. How is the Fed in any way libertarian? It is a monopoly that is given the power to print money, to regulate the banking system and to set short term interest rats at arbitrary levels of its choosing. As such the article needs to be dismissed as muddled thinking by what is usually a great mind.
cynicalone
Apr 28 2009 at 11:17am
I really don’t understand why anyone is giving Henry Kaufman column space to pass on his views.
Henry Kaufman, the former chairman of the Finance and Risk Committee at Lehman Brothers. He is now being sued by the state of New Jersey for that fine work.
He was so good at determining risk that he also invested with Bernie Madoff.
Quite an Oracle.
Troy Camplin
Apr 29 2009 at 8:39am
Libertarianism at the fed? Try blaming direct manipulation of interest rates at the fed, artificially driving down interest rates to cause people to think that high risk was okay when it was in fact not. Bubble, then crash. More like some perverse Keyneseanism in interest rates at the fed.
paul gibson
Apr 30 2009 at 6:54pm
Let’s put it in simple way, because some aspects of this crisis are really simple, that is the paradoxe. Fed let them go. Read the
Fed manuals of supervision, the best books of the world on the safe and sound banking. They seem to have forgot them along the last years, may be for the fear of being too “zelots” or some other reasons. In that sense I’ve interpretated the accuse of being “libertarian”.
Troy Camplin
May 1 2009 at 8:54am
Ignoring one’s own rules is not libertarian. Libertarians fight for rule of law, not for the arbitrary whim of men. If the people at the fed threw out the rules in favor of the rule of men, then they were not libertarian in their actions. They were acting, rather, as do dictators and tyrants.
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