An undeniable benefit of the current financial and economic crisis is that it has started a fundamental debate about the architecture and ways and means of America's financial and economic system. This debate offers a basis to do things better in the future than they have been done in the past, in many respects.
Here, I want to highlight one aspect which is a great contender for the single most important contributor to the mess: Seeking social justice with the wrong instruments.
This diary is inspired by a recent article around statements of Susan Schmidt Bies, member of the Federal Reserve Board of Governors and Fed's point person for bank oversight between 2001 and 2007.
... In her first two years in power, Bies and her colleagues on the Federal Open Market Committee brought the federal funds target rate as low as 1 percent as they tried to help the economy heal from four shocks: the dot-com bust, the 2001 recession, the 9/11 terrorist attacks and the Iraq war. ...
In hindsight, however, Bies believes the Fed's cheap money policy unwittingly fueled overbuilding in the housing market, whose collapse is a big factor in the current recession. "I realize, and I think some of the other folks realize, that we probably raised rates too slowly," Bies said. "They needed to go as low as they went in the last recession. But we should have raised rates more promptly afterward." ...
Bies said the bigger problem was lenders granting mortgages to people without the means to repay the loans. ... In addition, she said, there was pressure from Congress, which oversees the Fed. "When you tighten (mortgage) standards, it tends to be the people with the lower discretionary income, lower credit scores, who tend to be denied housing. And if you've got people in Congress who really feel everybody ought to get a mortgage, period, then tightening those standards, they really feel you're not allowing people to own a home," she said. ...
Worth a read, too, are Susan Schmidt Bies' remarks at the North Carolina Bankers Association 109th Annual Convention, June 14, 2005.
Social justice is a worthy aim. Pursuing it with the wrong means, like putting political pressure on the Fed to set interest rates lower than reasonable from a purely monetary perspective, or like lowering mortgage standards to make mortgages available to people who will with a high probability not be able to pay them, is in the long run doing harm to all of us, and not least to the people these wrong means are supposed to "help".
Politicians who champion these wrong means are not a friend of the American people.