Lessons of the Financial Crisis from Bill Dudley
I recommend a recent speech by my old classmate Bill Dudley, now president of the Federal Reserve Bank of New York: More Lessons from the Crisis.
The reading is a little … assumptive of some familiarity with financial markets. (Some casual readers might call the prose dense, but it's not really aimed at the casual reader.) However, it's excellent in its explanation of financial crises, doing for the modern era what Walter Bagehot did for the 18th and 19th century period. (If you have some time this holiday season, read Bagehot's Lombard Street, either online or via Amazon, but avoid the Dodo Press version, which is riddled with typos.)
Dudley explains the risks that arise from the investment banking sectors. When he describes possible regulatory actions to deal with these risks, he does something unusual: he acknowledges the costs of regulation: higher costs of financial intermediation and moral hazard.
Comments
Bill,
I read Mr. Dudley’s article. While I find his analysis knowledgeable and coherent, I feel that he overlooks the role of the Fed itself in creating the conditions for the growth of “the shadow banking system.” In short, low interest rates not only made available massive funds to fuel speculation, but also make good returns difficult to obtain apart from speculative and leveraged investments.
In short, the Fed lit the fire, and then added fuel to it. Let’s not forget the loosening of capital ratios that ramped up speculation by the (former) investment banks. This in my mind is an evidence of both complicity and failure on the part of regulators. While the Fed was promoting speculation, the SEC and rating agencies overlooked evidence of rampant egregious practices. The SEC focused on short-sellers for goodness sake – I guess because they had not drunk enough from the punch bowl (or was it the Kool-Ade bowl?).
I have been a gold investor for the past 6-1/2 years for the above reasons.
I’m interested in your thoughts on this interpretation of events.