[OPE-L] Is the Fed the new FEMA?

From: glevy@PRATT.EDU
Date: Fri Dec 14 2007 - 16:07:36 EST

 Link: <http://www.slate.com/id/2179937>


 Heckuva Job, Bernanke!
 Is the Fed
the new FEMA?
 By Daniel Gross
Posted Thursday, Dec. 13,
2007, at 3:38 PM ET

 The Federal Reserve and the
Federal Emergency Management Agency seem to have very little in common.
One is a respected professional organization, led by highly credentialed
economists, that is charged with promoting price stability and full
employment. The Fed enjoyed a justly deserved reputation for responding
well to man-made financial disasters in the 1990s. The other is an agency
that had a reputation for responding well to natural disasters in the
1990s, but which devolved quickly into a Bush-era parking ground for
third-tier political hacks. The former was led by the legendary Alan
Greenspan, who bestrode the financial world of the 1990s like a colossus.
The latter was led by Michael Brown, who would become legendary for
bestriding the crisis-management world the way President George W. Bush
rides a Segway.

And yet, in seeing how the two agencies
have responded to the biggest challenge they have faced in recent
years&mdash;the subprime mortgage debacle for the Fed, and Hurricane
Katrina for FEMA&mdash;there seem to be certain commonalities. The
analogies are admittedly imperfect, but the agencies' subprime response to
the submerging of New Orleans and the subprime crisis encapsulate the way
in which the Bush administration has failed to anticipate and prepare for
significant problems and then to respond with alacrity and

The commonalities:

1) An
obvious failure to prepare for the sort of cyclical event that was
predictable and plausible and would disproportionately harm poor people
and minorities. Thanks to a combination of incompetence and
ideology&mdash;the governing principle of the Bush administration seems to
be that the best way to delegitimize big government is to make sure that
it functions poorly&mdash;FEMA clearly did not prepare adequately for
hurricanes generally and didn't anticipate the possibility that the levees
might break, despite specific warnings from relevant agencies that such an
event could happen. In the Fed's case, a combination of incompetence and
ideology&mdash;Alan Greenspan believed the Fed should carry the lightest
possible stick in regulating mortgage lending by banks under its purview
and believed that his job was primarily to provide cheap money to Wall
Street, regardless of any asset bubbles it might help foment&mdash;had a
similar effect. When Fed governor Edward Gramlich urged Greenspan to crack
down on predatory mortgage lending, Greenspan shrugged. This week,
Gramlich, who died in September, received the Opportunity Finance
Network's Lifetime Achievement for Responsible Finance. (The Lifetime
Achievement Award for Irresponsible Finance will be awarded next year at a
ceremony in a foreclosed McMansion in the suburbs of Phoenix. Thus far,
Greenspan and Countrywide Financial CEO Angelo Mozilo are generating the
early buzz.)

2) When the deluge came, the Bush-appointed
leaders of both entities, like their counterparts in relevant Cabinet
agencies, failed to recognize the severity of the problem, even in the
face of mounting evidence. On the evening of Sept. 1, 2005, after CNN and
other TV outlets had been broadcasting distressing images from the New
Orleans Convention Center, Michael Brown&mdash;the government official in
charge of monitoring post-disaster needs&mdash;told CNN he hadn't been
aware of the situation there. In the case of subprime, casual consumers of
financial news would have been aware that carnage was piling up in the
summer and fall. But Ben Bernanke&mdash;the government official in charge
of monitoring the soundness of the financial system&mdash;seemed somewhat
oblivious. In the spring, he pooh-poohed the bad news coming out of the
housing market and the subprime lending sector. This summer, he estimated
losses on subprime debt "in the order of between $50 billion and $100
billion," but he failed to adjust them upward even as investment
banks took massive write-downs. By the fall, respected market watchers
were tabbing the losses at between $250 billion and $500 billion.
Bernanke's response? In congressional testimony in November, he said
estimates of losses up to $150 billion were "in the ballpark."
(That must be some ballpark.)

3) In both instances, the
failure to respond in a timely manner was aggravated by a post-debacle
misdirection of government resources. Post-Katrina, FEMA rushed out to buy
145,000 mobile homes at a cost of $2.7 billion. But as the Washington Post
reported, thousands were never used, and the government essentially began
to flood the market with cheap trailers. In the wake of the subprime mess,
the Federal Reserve flooded the market with cheap money, repeatedly
slashing interest rates. Yesterday, the Fed unveiled a new plan to make
cash available to banks. Thus far, the moves have been ineffective in
forestalling foreclosures and bucking up the sagging housing
market&mdash;because they aim to treat a symptom rather than an underlying
cause. Financial institutions may be reluctant to lend to home borrowers
and to one another, and investors are reluctant to provide cash on easy
terms to financial firms. But it's not because the interest rates set by
the Fed are too high. It's because those lenders made spectacularly bad
use of the money given to them on such easy terms in recent

4) In both instances, the combination of
incompetence and neglect in the face of disaster drove emotive cable TV
news divas to on-air meltdowns. In September 2005, CNN's Anderson Cooper
lost it while interviewing Sen. Mary Landrieu, D-La., on CNN. And in
August 2007, CNBC's James Cramer raged at Bernanke as a terrified Erin
Burnett looked on.

Send your own Fed-FEMA imperfect
analogies to moneybox@slate.com.

Gross is the Moneybox columnist for Slate and the business columnist for
Newsweek. You can e-mail him at moneybox@slate.com. He is the author of
Pop! Why Bubbles Are Great for the Economy.

by Robert Neubecker. Photograph of Ben Bernanke by Chip Somodevilla/Getty
Copyright 2007 Washingtonpost.Newsweek Interactive Co.

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