Firstly, as you state, many people saw this problem coming. True, they were in the minority, but they weren’t at the lunatic fringes. If the Fed isn’t able to evaluate the arguments of respected economists who are differing from the prevailing wisdom and come up with a balanced picture, then that’s due to incompetence and willful disregard, not ignorance.

Secondly, El-Erian rightly states that the power of central bankers has diminished. But that’s because people like Greenspan expressly wanted to limit the reach of the Fed. The statutory powers given the Fed by Congress are actually quite vast, including regulating member banks and intervening in the open market. Heck, the Fed would be well within its authority to have banned outright some of the loan products offered in the housing market. But the Fed didn’t use those powers. Greenspan basically reduced the Fed to twiddling with the overnight rate and issuing oracular pronouncements.

Thirdly, the central banks continue to confuse the health of Wall St. with the health of Main St. It’s a truism of political science that regulatory agencies tend to become captured by the industry they’re supposed to regulate. It’s telling to review the history of the formation of the Fed. The Fed was designed as an amalgamation of regional banks dispersed throughout the country specifically because the public was wary of Wall St. financiers like JP Morgan. They wanted a central bank that was ostensibly as responsive to the concerns of farmers in the Midwest and manufacturers in the west as they were to financiers in New York. In other words, the Fed was a response to concerns that Wall St. had hijacked the nation’s financial system for its own gain. But this original goal has now been perverted. The Fed has been so thoroughly captured by Wall St. that (if the NY Times Magazine’s recent article on Bernanke is to be believed), the Fed Governors are heavily influenced by the CBOT’s Fed Fund Futures rates to decide how much to cut the overnight rate!

To the extent that Wall street hates any oversight of their activities, I’m not surprised the Fed would willingly surrender their authority and founding purpose.

In summary, the Fed deliberately blinded itself and cut off its own arms, and is now begging for leniency on the grounds that it’s handicapped. Sorry if I’m not too sympathetic.

High risk investment banks have always waxed and waned in size and power. The difference here is that now(again) they have control of joe 6 packs dollars in pension funds and other funds which are supposed to be “safe” dollars.

When you sell people “safe” investments they expect their money back. When people place their money through “banks” they expect principal guarantee. The line between bank and investment bank was clearly drawn in the 30s for very good reason. Then in 1986 the Fed smeared it again. This time the problem is MUCH larger…AND we have serious energy supply issues on top of it.

Things will be getting very nasty….much sooner than most realize. Good luck to all.

It seems there is a yearning for an authority, someone to be in-control, ‘a responsible adult’, a Central Banker, or Central Planner, who will front run the Wisdom of the Market to make a more efficient and just economy.

Can the smartest people in the world, ie Ben Bernanke & Alan Greenspan & governors, outsmart and front-run the market?

It doesn’t look like it.

It looks like the Invisible Hand was intent on punishing excesses of debt and credit ca. 2000. The smartest people in the world postponed the punishment, but it is coming…. with interest due.