At a recent Occupy Alt Bank (Occupy’s Alternative Banking think tank) there was this exchange.
‘Banks find ways to skirt any regulation whatsoever,” said one member.
“Jailing the CEOs will curtail their risk behavior,” replied another.
I wondered: “They can’t be jailed for skirting the law unless they break it. But there is a way to curtail risk outside regulation and law entirely — the Fed.”
Both Barry Eichengreen and George Cooper, independently and from different political perspectives, came to the same conclusion, and even Greenspan in effect admited this: the Fed encourages risk through stabilizing the economy, broadcasting its intentions to keep the money flowing. If the Fed (I know, I know, it’s counterintuitive and sounds just awful) were less transparent, played its cards closer to its chest, and threatened to tighten money suddenly and by surprise, letting a few excessively risky institutions fall off the cliff, the banks would learn a piece of Old Testament Fear of the Fed. (more…)