Tuesday, May 18, 2010
Monetary Policy Is No Match For Criminal Activity
I have just finished reading another article about the Chairman of the Fed, Ben S. Bernanke, in the Sunday New York Times. The article discusses Mr. Bernanke's role as the head of our central bank and talks about the fact that even the smartest men in the room did not see the crisis coming. I agree with that to a point.
The problem, as I see it, was not purely economic, but rather criminal. Yes, criminal. No amount of regulations can prevent a financial crisis that is born of criminal activity. Whether counterfeit money overwhelms the system or phony Triple-A mortgage-backed bonds overwhelm the system, makes little difference. I would go so far as to suggest that the counterfeit money problem would have at least had the Department of the Treasury and the FBI working on the matter. Unlike the phony Triple-A mortgage-backed bonds that had no one any the wiser until the mortgages started going belly up.
A few bright people realized that all these mortgage-backed bonds could not be Triple-A in quality, and created the credit default swaps that permitted the doubters to bet against these bonds from eventually paying off. Those that realized the huge problem that was going to take over the whole housing market - the bubble that was unsustainable, became very wealthy from betting against these phony Triple-A bonds.
While there are other facets of the financial system that needs attention, the credit rating agencies that bestowed their elegant Triple-A rating on billions of dollars of mortgage-backed bonds, is in my opinion, the biggest and most critical pothole in the road to financial stability. But what do I know, I am just an old man writing a blog.