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New at Reason: Irony of Trusting Treasury and the Fed with Financial Stability Oversight

Anthony Randazzo
August 3, 2010, 4:34pm

Over in Minyanville, I have a new article on the Financial Stability Oversight Council:

Treasury Secretary Timothy Geithner is upbeat about the economy and sees a bright future ahead. “A review of recent data on the American economy shows that we are on a path back to growth,” he said in a the New York Times op-ed this week. Furthermore, according to Geithner, it has been by the power of government -- from regulators to Congressional leadership -- that the economy is recovering. “By taking aggressive action to fix the financial system, reduce growth in health-care costs, and improve education, we have put the American economy on a firmer foundation for future growth.”

Picking up on that note of optimism about the economy was Federal Reserve Chairman Ben Bernanke, who recently said: "We expect moderate growth going forward, we believe that if the housing sector begins to stabilize, and if some of the inventory corrections that are still going on in manufacturing begin to be completed that there is a reasonable possibility that we’ll see some strengthening in the economy some time in the middle of the year."
Wait, I’m sorry. That was Bernanke talking about the economy back in February 2007, before the economic collapse. He went on to say that, in the Fed’s assessment, “there's not much indication at this point that subprime mortgage issues have spread into the broader mortgage market, which still seems to be healthy. And the lending side of that still seems to be healthy.” Barely four months later, the Libor-OIS spread spiked through the roof and the credit crunch began, setting the stage for a wave of subprime losses, economic tightening, and the financial crisis.

Setting aside, for a moment, the debate about whether or not the economy is in recovery, consider this: Bernanke, Geithner, the Federal Reserve, the Treasury Department, and every other regulatory body missed the financial crisis buildup and explosion. And their response -- misdiagnosing a confidence problem as a liquidity shortage -- exacerbated much of the economic downturn.

In response, the Dodd-Frank Act aims to fix the problem of forecasting. Given the regulatory failure of the above-mentioned organizations, Congress has tasked -- wait for it...

See here to find out and read the rest of the column.


Anthony Randazzo is Director of Economic Research


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