Thursday, August 7, 2008

Clueless Corrigan

As a former president of the New York Fed, Gerald Corrigan is a firm believer in the key role the central bank should play in oversight of the financial sector, writes WSJ. “Central banks are the only institutions of public policy that literally operate in financial markets every day of the week,” they quote Corrigan as saying. “If that doesn’t give you some kind of advantage, I don’t know what does.”

Corrigan left the Fed to become, surprise, a managing director at Goldman Sachs.

This guy has a very short memory if he thinks the Fed should supervise things because they have an "advantage" since they "literally operate in the financial markets everyday of the week" .

It was at the New York Fed in 2004 that New York Fed economists Jonathan McCarthy and Richard W. Peach wrote a paper Is There A Bubble in The Housing Market Now? Their answer was decidedly, "No". At the time we wrote that when the housing crash did finally hit that we thought their analysis would prove as embarrassing as Irving Fshers 1929 forecast:

They have set themselves up for perhaps making the worst economic prediction since Irving Fisher declared in 1929, just prior to the stock market crash, that "stocks prices have reached what looks to be a permanently high plateau."

Now, we are certain of it. And, Corrigan wants the markets regulated by these type characters?

Alan Greenspan was correct when he recently wrote:

We may not easily confront or accept the price dynamics of home and equity prices, but we can fend off cries of political despair which counsel the containment of competitive markets. It is essential that we do so. The remarkably strong performance of the world economy since the near universal adoption of market capitalism is testament to the benefits of increasing economic flexibility.

It has become hard for democratic societies accustomed to prosperity to see it as anything other than the result of their deft political management. In reality, the past decade has seen mounting global forces (the international version of Adam Smith’s invisible hand) quietly displacing government control of economic affairs. Since early this decade, central banks have had to cede control of long-term interest rates to global market forces. Previously heavily controlled economies – such as China, Russia and India – have embraced competitive markets in lieu of bureaucratic edict. The danger is that some governments, bedevilled by emerging inflationary forces, will endeavour to reassert their grip on economic affairs. If that becomes widespread, globalisation could reverse – at awesome cost

Further, during a recent interview on CNBC, Greenspan was even more specific of the dangers of the Fed becoming regulator of the financial sector. We reported on his comments this way:

He very perceptively warned that the plan Treasury Secretary Paulson is pushing to put the Federal Reserve in the role of regulator of the financial sector is foolhardy and such a role by the Fed would end in failure by the Fed as all factors are never known in advance and thus it is impossible to regulate them in advance. Hear, hear!

There is downright danger in Corrigan thinking he can micro-manage the economy, or a significant sector in it. These guys really don't believe in free markets, and simply are incapable of doing Hayekian deep thinking that will result in their understanding how the economy really works and why it can't be successfully controlled. It was with a pessimistic understanding of Corrigan type thinking that resulted in Friedrich Hayek titling one of his books The Fatal Conceit, in which he described the fatal dangers and conceit of those who think they can control and regulate an economy better than free market interactions can.

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