Don’t expect to hear from fans of Yellen, SEC or Congress at NCPA event
by Cheryl Hall
April 20, 2016
Source Dallas Morning News
George Selgin thinks we’re being hoodwinked into believing that Federal Reserve policy under Janet Yellen is returning to normal.
“Fed policy is now weirder than ever,” says the director of the Center for Monetary and Financial Alternatives at the Cato Institute in Washington, D.C. “We’re far from being safe or out of the woods when it comes to financial stability.”
A growing number of economic thinkers and market watchers see another American financial meltdown building just beneath the bull-headed stock market and a too-loose Fed monetary policy.
Selgin, along with a half-dozen bankers, economists and whistleblowers, will sound that alarm at a National Center for Policy Analysis conference next week. They’ll attempt to answer the burning question: “Can We Prevent the Next Credit Crisis?”
You can expect the speakers to be in line with the libertarian bent of the NCPA. But if you’re not convinced that we’re dancing in the ship’s ballroom while the Titanic heads into the iceberg, they promise to offer insight into why you should be.
Richard Ebeling, professor of ethics and free enterprise at the Citadel in Charleston, S.C., foresees “an inevitable and inescapable” market correction and a subsequent downturn.
The bigger question, Ebeling says, is what we’ve learned “so that we don’t set ourselves on the same roller coaster to repeat it again and again and again.”
He doesn’t expect Yellen to seek his advice. But if she did, he’d tell her to let the market set interest rates rather than try to use them as a policy tool.
The prime rate might jump to 3 percent, maybe even 5 percent, for a brief period, he says.
“You stretch the rubber band, and it snaps back. This will be the snapping back. But then the markets will settle down as things correct and adjust.
“In recent decades, the prime rate has typically ranged between 2.5 to 3 percent. It would settle down to somewhere around that. But at least it would be telling the truth.”
Cato’s Selgin says the idea that the Fed can set rates gives it far too much credit. “It stubbornly tried to keep its interest rate target higher than market rates would permit. The Fed hasn’t been in charge of rates for some time.”
If Selgin could hijack the Federal Reserve Board for one day, he’d limit its powers to bail out failing financial institutions, no matter how big they are.
But we need to reconstruct bankruptcy laws so that the Too Big to Fails can go bankrupt without creating chaos, he says. “That’s how we need to deal with mismanaged firms instead of bailing them out.”
Selgin also worries that regulators are once again giving the green light to lines of lending that went very badly in the crisis.
“It wasn’t the kinds of loans that banks made to longstanding clients that got people in trouble. They got into trouble by lending by the numbers,” Selgin says.
“The cures don’t have much in common with the problems that generated the last crisis.”
Gary Aguirre couldn’t agree more.
The San Diego attorney has been a financial markets watchdog since he was fired by the Securities and Exchange Commission in 2005 in the midst of his investigation into insider trading by a giant hedge fund and its founder.
Five years later, the SEC agreed to pay him $755,000 to settle his wrongful termination suit.
Aguirre began sounding a warning about the last financial crisis in 2006. “I told the U.S. Senate Judiciary Committee that the stars were aligning for another 1929 and that the SEC was totally incapable of dealing with what was going on because they were too tightly connected with Wall Street.”
One month before Bear Stearns collapsed, he sent a letter to the Senate Banking Committee warning that the nation’s financial institutions, and in particular Bear Stearns, were at serious risk because of off-the-balance-sheet exposure in subprime debt.
So you can understand why he wants more people to pay attention to him now.
“Nothing’s been changed. Most of the dynamics that contributed to the last crisis are still there,” Aguirre says. “The reason that the financial markets collapsed in 1929 and the reason we had the crisis of 2008 is essentially the same issue: market transparency.”
By that, he means understanding what’s really on a company’s balance sheet and what’s not.
“If people know what’s really going on, then they can distinguish between Baby Microsoft and a Baby Enron,” he says. “Transparency is a simple solution, and there’s a total lack of it that pervades everything.”
GO & DO: National Center for Policy Analysis
What: Financial Crisis Conference: Can We Prevent the Next Credit Crisis?
When: 11:30 a.m. to 6:30 p.m. April 27
Where: Dallas Marriott Las Colinas, 223 Las Colinas Blvd., Irving, TX 75039
Cost: $195, including lunch