Taking Stock
Taking Stock: Lessons from history
Revered economist and monetary policy expert Dr. Anna Schwartz talks with Kai Ryssdal about how the Federal Reserve and government have performed while in the economic hot seat. She isn't too pleased.
Economist Anna Schwartz (silverbearcafe.com)
More on America's Financial Crisis
TEXT OF INTERVIEW
Kai Ryssdal: Today we're going to pick up with our series Taking Stock, occasional conversations with people who can give us the long view of our current economic situation.
There aren't many people around today who can give us that perspective better than Anna Schwartz. She's 93 years old, an economist for more than 60 of them. Still working, every day, at the National Bureau of Economic Research in New York City. Her area of expertise is monetary policy, how much money is in the economy, usually controlled by the interest rates that the Federal Reserve sets. Specifically, she's an expert in how the Fed blew it during the Great Depression, when customer after customer pulled their money out of the banks.
ANNA SCHWARTZ: The Federal Reserve could easily have provided additional money supply. That would have helped the banks that were losing deposits and that would have helped the economy in general.
Forty-six years ago Schwartz, and a guy named Milton Friedman, who'd later go on to win the Nobel Prize for economics, wrote a book on the topic. It was called "A Monetary History of the United States." It's on just about every list of the most important books on economic history... ever. When I sat down with her in her office in Manhattan last month, she made it clear she's none too happy about all of Washington's bailouts, or how the Fed and the Treasury chose who got one and who didn't.
Schwartz: I think both Bush and the Obama administration have not been as hard headed with banks, it has been too lax. And instead if they had said if you cannot raise capital in the market, there is no reason for the government, the people of this country, to provide capital.
Ryssdal: OK, but wait a minute. Didn't we try that with Lehman Brothers last September? And there are people who will say that only made everything worse. Should we now say to Bank of America, and Citigroup and some of these other banks, "Hey, you can't make your loans..."
SCHWARTZ: No, the trouble with the way the Fed operated when it rescued Bear Stearns, the market then believed this was a signal of the way the Federal Reserve would perform. If the Fed and the Treasury made a candid statement to the market: We will help a bank, which basically is solvent. We will not do that for a bank, which is on the verge of bankruptcy. And then the market understands there are principles. That's why when Lehman Brothers was permitted to fail, the market was simply bewildered. Because here you had treated Bear Stearns in this kindly fashion, and what reason was there not to do the same when Lehman Brothers arose?
Ryssdal: Now do you think the market has figured out what the policy of the federal government is toward these rescues by now? It's been six, seven months since Lehman Brothers.
SCHWARTZ: The market is just bewildered. Bernanke came into office insisting that the Fed would be much more transparent than it had been in the past. But I don't believe that it's lived up to that. If the market understood what the Fed was planning in each case, and could see a design, then I think the market would have reacted much more positively.
Ryssdal: It sounds like you're frustrated with Chairman Bernanke and the White House, that they maybe haven't learned the lessons of history that you and Milton Friedman wrote about.
SCHWARTZ: Well, I think that that's a fair statement. Considering Bernanke's background, you would have expected a much more, should I say a tidy kind of performance by the Federal Reserve. Seemed to be something that was ad hoc and introduced without considering all the implications.
Ryssdal: You know, Alan Greenspan was lionized in this country for many years. And then a year ago went up to Capitol Hill and said, "You know what, I blew it." Does he get the appropriate amount of credit and/or blame for this whole thing?
SCHWARTZ: Well, I think the verdict of history will be different with regard to his stature than it has been so far.
Ryssdal: In your mind, these toxic assets, the bad assets that these banks still have on their books, are they still a big problem or have they worked their way through the system now?
SCHWARTZ: No, and I think the big shortcoming of the Obama administration, and Bush before that, was that it didn't make a concerted effort to get rid of these assets. I mean in a sense it's a condemnation of the Federal Reserve. They did not respond to securitization, which is the basic condition for the creation of these toxic assets. Neither Alan Greenspan or anybody else at the Fed seemed to be concerned.
Ryssdal: Securitization, that is the buying and selling of these packages of mortgages. There are those who will say it contributed a lot to the economic growth in this country. Do you buy that?
SCHWARTZ: Well, I suppose the people who made money on it will say, Sure. But you have to be able to divine what you're letting yourself in for, if you're going to permit securitization to go on. And nobody took action to say, "Wait a minute. What are we doing when we are permitting these mortgage companies to issue these securities backed by a pool of mortgages of varying quality, and you don't know how to price the security?" Nobody raised that question.
Ryssdal: When an economic historian comes along in 25 or 30 years and tries to do for this episode what you and Professor Friedman did for the Great Depression, what's their verdict going to be on the monetary policy that the Fed has been following?
SCHWARTZ: Well, there has not been a straight line in the programs that the Fed has introduced over this period. So, I don't know whether the verdict will be charitable. It's always possible to find reasons why other alternatives were not really available. But I think on the whole the performance has been disappointing. Because now two years and more after Bernanke came into office we don't see visible signs of change for the better.
Ryssdal: Dr. Anna Schwartz. She's an economist with the National Bureau of Economic Research, has been since 1941. She's also the co-author, with Milton Friedman, of "A Monetary History of the United States."
Comments
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From Tucker, GA, 06/10/2009
@David Stenbakken: Certainly "The Wealth of Nations" by Adam Smith is on the list.
With regards to securitization, I agree with Schwartz completely. Banks were drastically increasing the complexity of mortgage investments without really understanding (or caring) the risk involved. An important rule of investing is to understand the investment before you buy. The mortgage-backed securities were deliberately obfuscated in order to hide the risk. Any investment whose risk is deliberately obfuscated should be closely watched. Unfortunately, this was not the attitude of our financial regulators or our financial institutions, and this, among other things, got us in a lot of trouble.
From Longbranch, WA, 06/10/2009
Thank you for the interview with Dr. Anna Schwartz. It was lovely to have someone tell it like it is...
She's wonderful! Great interview Kai!
From Rio, WV, 06/10/2009
Many thanks for this insightful interview.
From milwaukee, WI, 06/10/2009
google "congressional oversight panel". They held a hearing in Milw which I attended. Interesting. Law re: Fed is pretty loose, and that is by design. Intent is to reduce political interference. When Fed, during the Depression, was paralyzed with fear of inflation, despite the reality of 25% deflation, FDR and dems pushed the Fed aside. It took 20 years, until 1951, for the Fed to earn its respect and independence.
From MCLEAN, VA, 06/09/2009
My question to Ryssdal and host, can we know what Fed's official book of law says as to what they did, and also can you give us some info on Federal agency oversite committe report as what they did with all the money?
From MD, 06/09/2009
What other books are on the list of the most important books on economic history....ever?
From Roswell, NM, 06/09/2009
Obama left to pick up the pieces? He seems to be taking the pieces and tearing them up into trillions of more pieces.
From Milwaukee, WI, 06/09/2009
Having just read Meltzer's 1st vol of history of the Fed, I agree with Schwartz that the Fed blew it in the Depression. The laxity of oversight that greatly contributed to the current crisis largely began under Reagan with 'freeing' the money changers to engage in creative bond creation. This trouble formed and grew during past past 4 administrations. Greenspan did not see trouble looming. Bernanke and Obama are left to pick up after the disaster. My real hero is Paulson, who made decisions that went against all he used to believe in.
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