Henry Kaufman: Fed Failed as Regulator

Henry Kaufman, former chief economist of Salomon Brothers in its heydey and a Wall Street eminence grise, joins the chorus of critics who said that the Fed’s failure to regulate got us into our economic mess.

Note that Kaufman is not new to this theme, just more blunt, as a post from June of last year, “Henry Kaufman Takes the Fed to the Woodshed,” attests.

From the Financial Times:

Henry Kaufman, the distinguished Wall Street economist, has added his voice to the debate about the Federal Reserve’s role in the credit crisis, saying the central bank failed to give enough importance to its role as a regulator.

In a video interview with the Financial Times, Mr Kaufman criticised the Fed’s monetary policy. He said it allowed too much credit expansion over the past 15 years and that this contributed to the market turmoil.

“Certainly the Federal Reserve should shoulder a substantial part of this responsibility. . . it allowed the expansion of credit in huge magnitudes,” Mr Kaufman said.

“Besides its monetary policy approach, [the Fed] really indicated very clearly that it was performing its role as a supervisor . . . in a minute fashion, not in an encompassing fashion. Monetary policy had a high priority, supervision and regulation within the Fed had a smaller priority.”

Mr Kaufman, who is on the board at Lehman Brothers, has long advocated tougher regulation of the biggest financial firms, arguing that they need to be made “too good to fail”, rather than remain “too large to fail”….

Mr Kaufman said a distinctive feature of the financial crisis was “much greater lapses in official supervision and regulation than in earlier periods”.

He said there should be a new federal regulator appointed who would work with the Federal Reserve but who would have responsibility for “intensively” regulating the 30 or 40 biggest financial firms. Failure to do so could lead to a “crisis that’s bigger than the one which we have today”.

“The supervision of major financial institutions requires deep skills in credit, deep skills in risk analysis techniques and it requires within that organisation, very skilled, trained professional people,” Mr Kaufman said. “That is lacking in the supervisory area in the United States.”

He added that recent proposals from Hank Paulson, secretary of the US Treasury, to overhaul US regulation “lack focus”. “There is going to be some reform of financial supervision and regulation; hopefully it will be along my lines rather than the big compendium of suggestions that came out of the US Treasury”, he said.

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  1. Anonymous

    Re: Fed’s “role as a regulator”, that is a joke! They play politics and Greenspan was like a grandfather with soothing verbage like frothy, but never did you see The Fed regulate! You did however, see Greenspan pump the notion of ARMS and subprimes as he backed the housing bubble, with his fellow crooks!

    The Fed Had All It Needed to Avoid Crisis
    April 14, 2008; Page A13


    Re: The failure of the Fed to exercise even a minimal standard of prudent regulatory responsibility has been attributed to the opposition of former Chairman Alan Greenspan to interfering with the market process. Yet the chairman was only one of seven members of the Board of Governors and did not have the power to override the wishes of the other six, had they voted to take a strong stance against some of the most egregious practices. The only Fed governor who appears to have comprehended the magnitude of the issue was Edward Gramlich who, unfortunately, was suffering from a terminal illness.

  2. Jojo

    These guys are all part of the same ‘ol boy network. How can anyone expect independent thought/action that would impact their relationships and potential future livelihood?

    The only thing that might work is some sort of penalty to be assessed if their decisions prove wrong on review. Maybe public stoning?

  3. TallIndian

    Surely, LEH is an innoncent victim (collateral damage, if a pun be allowed), of the evil Dr. Greenspan.

    Wise old men on, such as those on the board of LEH, were speaking up lo these many years about the dangers of leverage and the corruption of the ratings agencies.

    Wise old men, such as thsoe on the board of LEH, strenoulsy criticized the use of FED discount window to prop up over-leveraged investment banks.

    Hypocricy thy name name Henry.

  4. Anonymous

    Well, Henry the director at Lehman, attempts to shift the blame for their own mistakes since Adam and Eve (Adam: the woman made me do it; Eve: it was that snake). Nice try on your part, but I ain’t buying. You took the risks and enjoyed the acclaim while it last. Now it’s time to suffer the consequences of poor choices.

  5. Anonymous

    This so called administration is running around blaming everyone and everything else for their failed policies. It has been an unmitigated disaster of policy rather more than a lack of regulatory tools.

    It was obvious early in 2002, and not just in monetary policy, that the inmates were running the asylum. Bill Donaldson was one of the first beheadings because he was actually trying to regulate.

    There was a conscious policy decision by the Bushco to expand the money supply through credit. Anyone with the timerity to oppose was paid a visit by the administration legbreakers, Dick Cheney and Rumsfeldt, and their idealogue minions.

    The current crisis, and policy agenda that has led up to this crisis, is a rerun of the Reagan real estate mess, right down to the same policy team.

    More or new regulatory institutions will not address the underlying problem: An idealogue, incompetent administration that has been derelict in its duties to faithfully execute the laws of the United States for the good of our citizens. The administration’s actions appear to be criminally negligent in this regard.

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