“The Federal Reserve has been hobbled by at least two major shortcomings that were primarily responsible for the current and several previous credit crises. Its failure to spot the importance of changing financial markets and its commitment to laisser faire economics were big mistakes and justify a fundamental overhaul of the Fed.”
– Henry Kaufman in an editorial at the Financial Times
The entire article is fairly devastating stuff, and Kaufman details 6 different ways that economic libertarianism failed the Fed. I won’t reprint those here, but this is the conclusion…
By guiding monetary policy in a libertarian direction, the Fed played a central role in creating a financial environment defined by excessive credit growth and unrestrained profit seeking. Major participants came to fear that if they failed to embrace the new world of securitised debt, proxy debt instruments, and quantitative risk analysis, they stood a very good chance of seeing their market shares shrink, top staff defect, and profits dwindle.
And this is what many of us have been saying for quite some time now. Because we aren’t anti-markets, and nobody I’ve heard is suggesting that market driven capitalism isn’t the way to go. But we’re certainly anti-loosely regulated markets because it creates an environment where something really big and bad can happen. And so it did.
In short, it’s better to grow slower on a stronger foundation than grow faster on a weaker foundation. Why this wasn’t obvious to the libertarian economists is beyond me, but perhaps the liberal economic voices will be listened to more closely this time around.