[NYTr] Bush's Colossal Failures: Crashing Economy - Is the Fed the New FEMA?

[All the News That Doesn't Fit]

Mewsweek - Dec 13, 2007
http://www.newsweek.com/id/77827

Is the Fed the New FEMA?

How Bush administration is mismanaging the subprime crisis.

By Daniel Gross
Newsweek Web Exclusive

The Federal Reserve and the Federal Emergency Management Agency would
seem to have very little in common. One is a respected professional
organization, led by highly credentialed economists, that is charged
with promoting price stability and full employment. The Fed enjoyed a
justly deserved reputation for responding well to man-made financial
disasters in the 1990s. The other is an agency that had a reputation
for responding well to natural disasters in the 1990s, but which
devolved quickly into a Bush-era parking ground for third-tier
political hacks. The former was led by the legendary Alan Greenspan,
who bestrode the financial world of the 1990s like a colossus. The
latter was led by Michael Brown, who would become legendary for
bestriding the crisis-management world the way President George W. Bush
rides a Segway.

And yet, in seeing how the two agencies have responded to the biggest
challenge they have faced in recent years—the subprime mortgage debacle
for the Fed, and Hurricane Katrina for FEMA—there seem to be certain
commonalities. The analogies are admittedly imperfect, but the
agencies' subprime response to the submerging of New Orleans and the
subprime crisis encapsulate the way in which the Bush administration
has failed to anticipate and prepare for significant problems and then
to respond with alacrity and efficiency.

The commonalities:

1) An obvious failure to prepare for the sort of cyclical event that
was predictable and plausible and would disproportionately harm poor
people and minorities. Thanks to a combination of incompetence and
ideology—the governing principle of the Bush administration seems to be
that the best way to delegitimize big government is to make sure that
it functions poorly—FEMA clearly did not prepare adequately for
hurricanes generally and didn't anticipate the possibility that the
levees might break, despite specific warnings from relevant agencies
that such an event could happen. In the Fed's case, a combination of
incompetence and ideology—Alan Greenspan believed the Fed should carry
the lightest possible stick in regulating mortgage lending by banks
under its purview and believed that his job was primarily to provide
cheap money to Wall Street, regardless of any asset bubbles it might
help foment—had a similar effect. When Fed governor Edward Gramlich
urged Greenspan to crack down on predatory mortgage lending, Greenspan
shrugged. This week Gramlich, who died in September, received the
Opportunity Finance Network's Lifetime Achievement for Responsible
Finance. (The Lifetime Achievement Award for Irresponsible Finance will
be awarded next year at a ceremony in a foreclosed McMansion in the
suburbs of Phoenix. Thus far, Greenspan and Countrywide Financial CEO
Angelo Mozilo are generating the early buzz.)

2) When the deluge came, the Bush-appointed leaders of both entities,
like their counterparts in relevant cabinet agencies, failed to
recognize the severity of the problem, even in the face of mounting
evidence. On the evening of Sept. 1, 2005, after CNN and other TV
outlets had been broadcasting distressing images from the New Orleans
Convention Center, Michael Brown—the government official in charge of
monitoring post-disaster needs—told CNN he hadn't been aware of the
situation there. In the case of subprime, casual consumers of financial
news would have been aware that carnage was piling up in the summer and
fall. But Ben Bernanke—the government official in charge of monitoring
the soundness of the financial system—seemed somewhat oblivious. In the
spring he pooh-poohed the bad news coming out of the housing market and
the subprime lending sector. This summer he estimated losses on
subprime debt "in the order of between $50 billion and $100 billion,"
but he failed to adjust them upward even as investment banks took
massive write-downs. By the fall respected market watchers were tabbing
the losses at between $250 billion and $500 billion. Bernanke's
response? In congressional testimony in November he said estimates of
losses up to $150 billion were "in the ballpark." (That must be some
ballpark.)

3) In both instances the failure to respond in a timely manner was
aggravated by a post-debacle misdirection of government resources.
Post-Katrina, FEMA rushed out to buy 145,000 mobile homes at a cost of
$2.7 billion. But as the Washington Post reported, thousands were never
used, and the government essentially began to flood the market with
cheap trailers. In the wake of the subprime mess, the Federal Reserve
flooded the market with cheap money, repeatedly slashing interest
rates. Yesterday the Fed unveiled a new plan to make cash available to
banks. Thus far the moves have been ineffective in forestalling
foreclosures and bucking up the sagging housing market—because they aim
to treat a symptom rather than an underlying cause. Financial
institutions may be reluctant to lend to home borrowers and to one
another, and investors are reluctant to provide cash on easy terms to
financial firms. But it's not because the interest rates set by the Fed
are too high. It's because those lenders made spectacularly bad use of
the money given to them on such easy terms in recent years.

4) In both instances the combination of incompetence and neglect in the
face of disaster drove emotive cable TV news divas to on-air meltdowns.
In September 2005, CNN's Anderson Cooper lost it while interviewing
Sen. Mary Landrieu on CNN. And in August 2007, CNBC's James Cramer
raged at Bernanke as a terrified Erin Burnett looked on.

Send your own Fed-FEMA imperfect analogies to moneybox at slate.com.