The Fed still has accepted almost no responsibility for its mistakes during the housing bubble. “Like other regulators, there were some things we could have done, at least with hindsight,” Ben Bernanke, the chairman, recently said. “But we had neither the mandate nor the tools to be the financial system’s supercop.”
Reading that, you might think that the bubble was evident only in retrospect and that, regardless, the Fed was powerless to stop it. That’s simply not the case. A fair number of people did recognize the bubble as it was inflating. The Fed’s leaders, by contrast, went out of their way to claim real estate was not in a bubble.
Imagine if Mr. Bernanke and Alan Greenspan had used their bully pulpit to point out how high house prices were relative to rents or incomes. Or imagine if they had cracked down on delusional mortgages, as their consumer protection powers gave them the authority to do — and as they finally did only after the bubble burst.
Despite the Fed’s failures, Congress is giving it vast new powers, largely because there is no better alternative. Most important, the Fed will decide how much debt banks can take on, a standard that will help determine how well they weather the next crisis. Yet neither the Fed’s leaders nor President Obama, who reappointed Mr. Bernanke, has explained why we should believe the Fed has learned from its errors.
Congress can do better. The Senate bill calls for an audit of the Fed’s actions during the crisis (which were, in fact, pretty heroic). Why not expand the time frame to the run-up to the crisis? The Senate would also create an independent unit inside Treasury, the Office of Financial Research, that could identify problems even if the Fed did not.
The more checks and balances on the Fed, the better the odds of avoiding another crisis. Fool me once, right?