Ex-BOE Official Slams Fed, Sparking Hottest Jackson Hole Debate (August 24 – Bloomberg)
Aug. 24 (Bloomberg) — Former Bank of England
policy maker Willem Buiter sparked the biggest debate at the Federal
Reserve’s annual mountainside symposium, saying the central bank pays
too much heed to the concerns of financial institutions.
"The
Fed listens to Wall Street and believes what it hears,” Buiter said
yesterday in a paper presented to the Fed’s conference in Jackson Hole,
Wyoming. "This distortion into a partial and often highly distorted
perception of reality is unhealthy and dangerous.” Fed Governor
Frederic Mishkin said Buiter’s paper fired "a lot of unguided
missiles,” and former Vice Chairman Alan Blinder "respectfully
disagreed” with his analysis of the central bank’s crisis management.
Of course,
Mr. Buiter is right, and any casual observer could tell you so. The
Federal Reserve has crossed many lines in their attempts to fine-tune
the outcome of that largest financial train-wreck in history. But Wall
Street has enormous power and clout, and the Fed is responding to them
partly because that’s the only story they hear.
For my part,
it galls me that the very people who engineered this mess are the same
ones whispering into Bernanke’s ear and guiding his actions. You can be
pretty certain that their advice is enormously self-serving, and will
ultimately end up making things worse and costing you a lot of money,
creating inflation, or both. Here’s one of Mr. Buiter’s criticisms:
Buiter said the Fed’s emergency lending programs
are too generous. The U.S. central bank is making up to $200 billion of
its Treasuries holdings available to primary securities dealers, and
$150 billion of funds through auctions to commercial banks. In
addition, banks are able to borrow directly from the Fed.
"You don’t let your borrower determine the value of the collateral offered to you,” Buiter said. "That’s just crazy.”
That is
unassailably true, and is something I have commented on numerous times
in the past. It is no different than if you had lost your last chip at
the roulette wheel, and the casino lent you more, based on your own
assessment of the value of your used Yugo in the parking lot.
