Bill Moyers Journal: Moral Hazards and the Fed

In their conversation this week with Bill Moyers, economic journalist Robert Kuttner and former SEC chairman William H. Donaldson questioned the wisdom of Federal Reserve heads Alan Greenspan and Ben Bernanke’s interest rate cuts in times of economic crisis - most recently the half-point cut on September 18 in response to the sub-prime mortgage collapse.

Robert Kuttner suggests that the resulting flow of cheap money is a quick-fix that obscures the root causes of economic woes and, perhaps, makes them worse:

The Fed cheapens money and bails the economy out and then invites the next round of speculative excess…The risk is that every time we repeat this cycle, we get bigger and riskier bubbles. And with the dollar being in the tank, it’s not a costless kind of bailout… We’re going to see inflationary pressures as a result of the cheap dollar.

“The sub-prime crisis was the result of the Fed’s failure to enforce lending standards…On the one hand, [Alan Greenspan] did not use a lot of the regulatory power that he had. On the other hand, every time there was a credit crunch he would race to the rescue…It seems to me if you’re going to bail out problems after the fact, you have an obligation to prevent some of them before they start.”

William H. Donaldson argues that rate cuts can lead to a “moral hazard,” in which the presumption of a Federal Reserve bailout might actually encourage some to make irresponsible and/or ill-considered investment decisions:

The Federal Reserve, the central bank, has an ability to reverse a downturn, but at great cost… Insofar as they do, we run into a moral hazard, i.e. we bail out the people who made bad or devious – whatever you want to call them – investment decisions. So you sort of are saying “Go ahead and do whatever you want, and you can count on the good old Fed to bail you out."

Between widespread controversy over Chairman Bernanke’s recent interest rate cut, Alan Greenspan’s recent best-selling book, and criticism of the Federal Reserve on the campaign trail (including some suggestions that it be eliminated altogether), the Fed has become a hot topic.

What do you think?

Should the Federal Reserve act more aggressively to regulate areas of the market suspected of improprieties?

Should the Fed continue to respond to economic crises with interest rate cuts to encourage liquidity?

Will the Fed’s actions ultimately be a boon for the U.S. economy?

Photos: Robin Holland

Comments

I think the interview of these two gentlemen deserves a rebroadcast. This is the biggest I-told-you-so I've seen in my lifetime. I would love to hear what they have to say about the current "bailout" plan.

Posted by: Chauncy Spencer | September 29, 2008 11:30 PM

The fed is a private bank, a corporation run for profit. The only way we can rescue our economy, is to go back to a valued currency, backed by gold and silver. Until then, we are all pawns to be manipulated by the bankers.

Posted by: nancy lynn | October 29, 2007 11:48 AM

Do let us remember that the Fed is a private, profit making institution, which means 'caveat emptor' and BOHICA for everyone else... they have no interest in the well-being of the people of this country as long as they are getting money out of us...

Posted by: dot | October 20, 2007 1:52 AM

Mr. Scahill you have been brilliant in your interview with Bill Moyers, but by oversight or intentional forgetfulness, you avoided the touchy topic of Israels' troops involvement (at least 6800) in the Iraqi war. Please investigate and respond.

Posted by: Dalton Barrett | October 19, 2007 11:06 PM

Bill, c'mon, man. The Fed is not even part of the Federal Government. What we need is goverment regualtion. That includes the Federal Government regulating the Fed. The Federal Reserve and the IRS are examples of ancient forms of Privatization and we all know how well that works...take Medicare - it's not a government program either - it's farmed out to private insurance carriers like Blue Cross and others. If you ask the wrong questions it doesn't matter what the answers are. Anyone that believes (a religious word for a religious nation) that we operate in a Freemarket economy is delusional. You can have regulated Freemarkets - but first you have to have a Freemarket. The US economy according to Ferdinand Lundberg has been an Insiders' Club since 1918. No matter what passifying words the Fed or the SEC vomit on the public NOTHING is going to change until the system is surgically corrected of the cancer.

Posted by: Golden Boy | October 18, 2007 11:16 PM

Once again, there is talk but no action. The Fed lowers interest rates to cheapen money, whacking the dollar and bailing out the morons who bought these CDO's and SIV's. Then you will hear about how Americans don't save enough of those ever-worthless dollars as though it's the public's fault. Large financial institutions know that when they pull scams like this they must be LARGE scams, because that endangers the economy and gives the government and the public a poison pill they must swallow - bail them out or suffer recession or depression. In the end, the well-off elites will not be hurt at all. They may lose some, but the general public will lose more - and the 2 ways of getting richer are acquiring more wealth, or making everyone else poorer so that you are rich in comparison.

Posted by: John Bain | October 18, 2007 8:14 PM

Thanks especially for the Kuttner- Donaldson interview. This is first class television journalism. Please consider this bitterly ironic train of recent events: Cutting the discount rate in August 2007, and later, in September 2007, the Fed Funds rate enabled the Federal Reserve to avoid a global seizing up of certain financial markets. But the same actions were deemed, even by Wall Street insiders, as directly bailing out hedge funds and other speculators. Those Wall Street insiders - some of them, with a sense of "Main Street" business ethics, quite angry at the "moral hazard" implied in the rate cuts - openly characterized those policy moves as incentivizing even more financial ineptitude and recklessness by speculators, including "the usual suspects" the hedge funds. So, it is now October 2007, and how have the 9000 hedge funds and other speculative operators "returned the favor" of the cheaper borrowed money the Federal Reserve has handed them? Why, by rushing like the biblical Gadarine herd to speculate further on oil - helping to run the price up to a record $88 per barrel just before winter sets in here in the Northern Hemisphere - and speculatively running up, as well, the price of other...

Posted by: Louis Massano | October 16, 2007 9:15 PM

The roundable talk with Kuttner and Donaldson was useful but frustrating. Their analysis and suggestions were good as far as they went, but they left one assumption unchallenged - that finance capitalism and "free" markets are really ok and are only in need of some regulation and tinkering. Let's just imagine, for a moment, that every corrective Fed regulation they proposed had been in force for the past three deades. Would we be better off, or would the increased regulation only have made the dilemma of where and how to invest all that exceess money and capital that much worse? In other words, without speculation and the invention of new financial instruments, how would the growth of housing or other industries have been financed - and indeed, would the economy have grown much at all? It's questions like these - which touch on the bigger, structural picture of how capitalism is constantly in need of finding solutions to its own problems - - that was so sorely missing from the Kuttner/Donaldson discussion. So why doesn't Bill invite on thinkers and writers who can address this - like historian Mike Davis, or philosopher/social theorist/film critic Slavoj Zizek? I issue a challenge...

Posted by: Neal Goldberg | October 16, 2007 7:33 PM

Lest anyone forget, the FED is a private bank, not under the jurisdiction or scrutiny of the US Congress. It's unconsitutional because only Congress has the right to "make" money for the American people. And that "making" is the coining of precious metals - check your Constitution. Fiat money printed out of thin air decreases in value the more you print and distribute. To 'print' our way out of financial crises is ridiculous. The battle for/against a national central bank goes way back before the FED and was abandoned before - thank you, President Jackson. It's time to abandon it again. Since we know that income tax goes to pay the interest on the national debt, we know that income tax monies are going into the hands of private bankers, and not for any services to the American people. Isn't it fun to work for all the private bankers? If the US "made" its own money at Congress's control, would there be any interest owed to anyone? If it was coined from precious metals, would there be any inflation? Would things be run on a more sound economic policy? Probably. How about this idea - peg the dollar against the...

Posted by: Robbie Robinson | October 15, 2007 8:10 PM

I submitted the comments below to the production team. I repost them here hoping others may agree and add their voice to the task. What is clear from this show and the comments in this thread is there are some deeply fundamental things that are not well known or understood. Either by choice or by design. Either way I have read this book and find it a primer for these conversations that otherwise, while good, and certainly more honest than the general run, are still not going deep enough. Hello, A note of appreciation for the couple of in depth shows concerning the economy you have run lately. The recent show with Robert Kuttner and William H. Donaldson contained an interesting segment about regulation between the New Deal "and the early 70's". And then had an interesting bit about the pressure against regulation. It struck me that this fit perfectly w/ the thesis recently articulated by Naomi Klien in her new book The Shock Doctrine. (Link below). She essentially maps this statement above to the ascendancy of the ideas of Milton Freidman. I would strongly suggest that you get her on your show. And if you could have her in...

Posted by: Michael | October 15, 2007 5:26 PM

Another GREAT session, as usual. Among the expressions that struck me most was the term ''economic orthodoxy'' which, as Bill put it, is ''cut-throat capitalism'' and all its arrogant manifestations by way of mindless military 'adventurism', exploitation of the poor by big corporations through out-sourcing and globilisation etc. The conflict between 'rich and poor' will play out, as it always has, throughout mankind's history at every micro and macro level in this world. It will depend on wise and mature leadership to take precautionary steps through 'equitable sharing' of global resources and wealth of nations. Ha, but then, there will always be this evil emotion called G-R-E-E-D in possession of men's hearts to keep them going for more and more and more - - - if only the 'pendulum' could stop swinging and stay somewhere in the middle; federal regulation is the only way to strike some kind of balance - -

Posted by: Paul Amigo | October 15, 2007 1:40 PM

FINALLY others, fully qualified, are waking up and speaking out about the same patterns I see repeating themselves. Should the Federal Reserve act more aggressively to regulate areas of the market suspected of improprieties? Absolutely, the US needs to restore transparency in the markets and look sensibly at the new global implications. We must take into account the lessons learned from the turn of the 20th Century so as not to needlessly repeat the same mistakes. The first lesson is that unfettered capitalism leads to disaster. But as the speakers pointed out, managed capitalism works for everyone. All segments of the population are important ingredients in the economic pie. Should the Fed continue to respond to economic crises with interest rate cuts to encourage liquidity? I am not qualified to say. But, they do need to stop catering to elitist politicians and market leaders and do what is best for the greater populace. Will the Fed’s actions ultimately be a boon for the U.S. economy? Not if it is on the backs of the middle class. Depending on consumers to prop up the economy with more and more spending is not sustainable All spending and no saving will not work...

Posted by: MLM | October 14, 2007 6:10 PM

my comments would seem to only add to the visual vomit that we've all gotten so used to seeing that we really only look right past/through it now.With that said, all I can leave with is:.."Good Grief"..."Gee Beav, I gotta' go!"... www.villagestreet.com has been pulled down after Ed (Eddie) passed away...He suffered more than Jesus could have survived through...(just trying to stay alive)...He was a human guinea-pig for the medical industry (who got paid well for experiements they performed on him)...It really shoulda' been the other way around, but doctors only pay for cars and houses, boats, & things that can be considered tax write-offs, etc, etc., but I truly hope all the current people suffering with crohn's and other auto-immune diseases who's research (& most likely cures) are being held up by the self-righteous that won't stand for the thought of stem-cell research, will stop for a moment and give 'Eddie' a quiet 'THANKS' for his many contributions in raising their quality of life...even if just a bit...Thanks Ed...www.villagestreet.com will be back online ASAP-WE PROMISE!

Posted by: Sir Vertual | October 14, 2007 2:03 PM

"The Robotic Wageless Economy" You may think this sound like UTOPIA but it soulds like HELL to me. I really don't think Science Fiction is a good or realistic model on which to model a human society. The movie Blade Runner did not portray a world in which I want to live.

Posted by: MLM | October 13, 2007 11:28 PM

I have come to accept that Capitalism is a sacred cow. To suggest that Capitalism needs improvement, that it may not make the world a better place, that it is not self regulating in and of itself or that it does not compliment democracy... is to then suffer the slings and arrows of most everyone I know. We fail our own wisdom when we refuse to see things around ourselves with as objective an eye as we are capable of using at any given moment. In failing our wisdom we also fail our imaginations that could then create a needed change and eventually we fail our neighbors and ourselves. I was listening to Richard Rohr the other day. He said that most destructive forces in the world started out as good and helpful things. He said the Devil was, in the beginning a Good Angel who was close to God. Fr. Rohr said that Capitalism is just as that once good angel but it too has fallen and is now doing destructive and even evil things around the world through us and our attempts to better ourselves, in a very selfish way. We can only see the good we are...

Posted by: lee jankowski | October 13, 2007 7:24 PM

“You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.” How soon we forget! The Cross of Gold speech was delivered by William Jennings Bryan at the 1896 Democratic National Convention in Chicago. The speech advocated bimetallism. At the time, the Democratic Party wanted to standardize the value of the dollar to silver and opposed pegging the value of the United States dollar to a gold standard. The inflation that would result from the silver standard would make it easier for farmers and other debtors to pay off their debts by increasing their revenue dollars. It would also reverse the deflation which the U.S. experienced from 1873-1896. Bimetallism was a lost cause; the rich financiers of Wall Street argued against “cheapening the dollar” and declared it a moral issue. When we look back to the period from 1896 to October 1929, we see an increasing concentration of wealth in the hands of the Rockefellers, JP Morgans, etc. At the time of the crash of 1929, the monetarists (tight credit crowd) maintained tight reins on credit and gold. Bryan’s quest for bimetallism (cheap money) was squelched by...

Posted by: Dr. Jerry Pipes | October 13, 2007 5:39 PM

Hey Bill, Last night (Oct 12) show (all the guests) was one of the best ever!! I am so impressed with Anouar Majid and please have him on again!! What an inspiration he is! I can't wait to read his book!

Posted by: Denise Johnke | October 13, 2007 5:07 PM

We are constantly told that hedge fund managers deserve their high incomes because they are taking risks (even as they are usually playing with other people's money). What Kuttner and Donaldson pointed out is that the entire economy takes the risk along with hedge fund managers when they make high risk investment decisions -- heads they win, tails the economy loses. It's funny how moral hazard questions are glossed over in discussions of the stock market or other financial markets, but always trip up discussions of universal health care, etc. By the way, Donaldson seemed reluctant to look at the more serious implications of his analysis than Kuttner.

Posted by: Mike | October 13, 2007 2:41 PM

Taken from: United States Government Accountability Office Washington, DC 20548 December 14, 2005 GOVERNMENT ACCOUNTABILITY OFFICE STATEMENT p. 28 "The current financial reporting model does not clearly and transparently show the wide range of responsibilities, programs, and activities that may either obligate the federal government to future spending or create an expectation for such spending. Thus, it provides a potentially unrealistic and misleading picture of the federal government’s overall performance, financial condition, and future fiscal outlook. The federal government’s gross debt3 in the consolidated financial statements was about $8 trillion as of September 30, 2005. This number excludes such items as the gap between the present value of future promised and funded Social Security and Medicare benefits, veterans’ health care, and a range of other liabilities (e.g., federal employee and veteran benefits payable), commitments, and contingencies that the federal government has pledged to support. Including these items, the federal government’s fiscal exposures now total more than $46 trillion, up from about $20 trillion in 2000. This translates into a burden of about $156,000 per American or approximately $375,000 per full-time worker, up from $72,000 and $165,000 respectively, in 2000. These amounts do not include future costs resulting from Hurricane Katrina...

Posted by: roderick w stillwell | October 13, 2007 11:13 AM

A very good and appreciated segment, but like Bogle two weeks ago I do not think they really want to come to grips with the essential monetary problem. A little history. When banks and joint stock cos started they were not really very different, both attempted to acquire a capital, engage in improvement projects and lend above the capital, much of which was promises in the first place. Sometimes these were just speculative "footballs" but in either case they involved pyramiding debt. We had neither banks nor joint stock cos in the US until the 1820s and 30s and their development was associated mercantilist theory and practice. At first this was tightly controlled by government, but democratic commercial efforts to liberalize incorporation and turn from substantive to contract law, led to a proliferation. Opposed to them were the largely agrarian South and West which wanted as Adam Smith and the Physiocrats, free trade and the use of gold. Bray Hammond in one of the classics of American history cites an agrarian critic of 1829 in terms that are still true today: "In Philadelphia back in 1829 a group of so-called 'working men and others opposed to the chartering of any...

Posted by: RE Mant | October 12, 2007 11:16 PM

Robert Kuttner, you made some excellent points and seem to really understand what is going on. Have you heard of the economic trend that is developing gargantuan momentum that almost know even knows about ? It is essentially also the solution to every problem you can think of, and it is being called : The Robotic Wageless Economy http://TeamInfinity.com/RoboWagelessEconomyBM stop by and help make it happen sooner. please let us know what you think Robert. thanks!

Posted by: sysop | October 12, 2007 11:00 PM

I'd prefer to see the Federal Reserve completely abolished. It's unconstitutional, dangerous and has powers it shouldn't have. As long as bankers control our money, the rich will get richer, the poor will get poorer and America will continue down the path to financial ruin.

Posted by: Morgaine Swann | October 12, 2007 5:29 AM

A $320 billion policy to resolve the “credit crunch” - Injecting additional liquidity into the economy” is nothing less than confiscation of funds deposited by all investors in banks and other institutions – formula use to “devalue the principal invested” by the use of the printing press! The man correctly stated, “go ahead do whatever you want, and you can count on the good old FED to bail out”! It is clear why there is no “Gold System standard” or other commodity to preserve the value of the currency. Tissue paper by a printing press is no substitute for real value. Corruption by printing press is no justification “to do whatever you want”!

Posted by: Chris | October 12, 2007 12:50 AM

I have to admit that the Fed is one of those institutions that I have always taken for granite. An integral part of the economic system that’s been there for 95 years, how could I possibly question something that has lasted that long. I’ll be interested in hearing what chairman Donaldson has to say about the Fed on Friday night’s chapter of the Journal. FDR took over as president in 1933 and worked to fix an economy that was in terrible shape. There was no mention in the history books of any efforts to utilize the Fed to lift the economy out of the doldrums during that period. FDR did temporarily shut down the banks to avoid runs and that move had to involve the Fed at some point. However, it’s my understanding that the role of the Fed changed dramatically in 1971 when we abandoned the Gold system for an arbitrary floating value system. Without a known commodity to tie the value of our money to, the value of the dollar became a bit nebulous and subject to the whims of the economic snake oil salesmen. Except for a brief period during the Civil War, we never had inflation...

Posted by: Richard | October 11, 2007 10:48 PM

i don't know that much about the housing bubble.. but i do know about Social Security, and when the Chairman of the Fed tells us it represents a looming crisis, he is lying. There is no other word for it. There is some excuse for the press not understanding the issue. But the Fed chairman knows that the cost of "fixing" Social Security...according to the Trutees own numbers...if you do a little arithmetic... amounts to a one dollar per week rise in the payroll tax each year while the average income is going up by ten dollars per year. this actually covers the time from 2016 to 2036 and represents the cost to the general taxpayer to repay the Trust Fund, but it would be smarter to delay it until 2030 or so and apply it to the payroll tax, used in conjuction with the Trust Fund to extend the "solvency" of the Trust Fund while gradually raising the tax to a level that will support the longer life expectancies of people retiring after 2050 or so. The ultimate increase will amount to about 20 dollars per week on an income that has increased by 300 dollars per week over...

Posted by: dale coberly | October 11, 2007 6:39 PM

Moral Hazards and the Fed

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