Anna Schwartz criticises Fed and Bernanke

As I have said before, it would have been wonderful to get Milton Friedman’s views on Fed and Bernanke in this crisis. After all, what Bernanke is trying to do now is what Friedman said Fed didnt do in 1929 leading to Great Depression.

Anyways, we still have views from Anna Schwartz, the monetary historian who co-authored the famous book with Friedman. She is 93 years old and still wor\ Surprisingly, she has always criticised Fed and Bernanke for not being transparent enough and following ad-hoc measures (See this and this).

In her latest interview she says:

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?

On Bernanke:

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.

This is some sharp words.


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