An admission of guilt from Timothy Geithner

In an appearance before the House Financial Services Committee and the House Agriculture Committee today Timothy Geithner made a startling admission. The following article gives the overview of this testimony:

http://hosted.ap.org/dynamic/stories/U/US_FINANCIAL_OVERHAUL?SITE=OHWIL&SECTION=HOME&TEMPLATE=DEFAULT

Geithner’s admission:

1. …the ease with which derivatives were bought and sold in an era of easy credit encouraged financial institutions and investors to take on too much risk.
2. The federal regulatory system "failed in its most basic responsibility to produce a stable and resilient system for providing credit and protecting consumers and investors," he said.
   

The Secretary of the Treasury has finally admitted that the Federal Government was responsible for the current financial crisis. Statement 1 above is an admission that easy credit encouraged financial institutions and investors to take on too much risk. Statement 2 above is an admission that the most basic responsibility of the federal regulatory system is to produce a stable and resilient system for providing credit and protecting consumers and investors.

The Federal Reserve was then and is now guilty of a reckless policy of easy credit. In an effort to support maximum employment the Federal Reserve created a financial bubble in the housing market by forcing interest rates to below market levels. The actions of the Federal Reserve were compounded by the expansion of Federal intervention in the US housing mortgage market. The Federal regulators ignored obvious acts of fraud by Fannie Mae and Freddie Mac.

His testimony is designed to convince congress that the Federal financial regulators should be granted more powers. To prevent future financial bubbles the Federal financial reform that should be enacted is a rewriting of the Federal Reserve mandate. The Federal Reserve’s current mandate is as follows:

"conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates"

The new mandate should eliminate the pursuit of maximum employment clause. If the Federal Reserve only concentrated on stable prices and moderate long-term interest rates we would have a smoother business cycle without the huge financial bubbles that we have suffered in recent years.

The following quote from Milton Freidman is listed in the “Quotation section” in the right column of this Blog page:

"Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output. ... A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society."