The Federal Reserve has changed its role from villain to hero, says Henry Kaufman, president of Henry Kaufman Company, but the Fed's bad monetary policies are much of what caused the trouble.
“We tend to forget the villain part, and now the Fed is considered a hero,” Kaufman told Bloomberg
“Unfortunately, we have not had a symposium or a commission that is really going to review what went right or what went wrong with monetary policy leading up to this crisis.”
Kaufman says the Fed’s policy of gradualism, of not moving too quickly in order not to upset markets, allowed financial institutions to leverage massive amounts, which boosted both household and corporate debt and ultimately weakened the financial sector.
“The Federal Reserve has been regarded as the guardian of our financial system,” Kaufman says.
Yet, he says, the Fed abdicated this role.
Kaufman wants a federal supervisor to set guidelines for leverage, the amount of trading activity financial institutions’ proprietary accounts in financial institutions, and oversee securitized debt.
“At present we have none of these,” Kaufman notes.
Yet the appearance of recovery has somewhat quelled enthusiasm for financial reform, he warns. “The current environment encourages things we’ve seen in the past,” Kaufman says.
President Obama has announced he is reappointing Ben Bernanke for a second four-year term as chairman of the Federal Reserve, saying Bernanke's background, temperament, courage and creativity helped to prevent another Great Depression.
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