The Volokh Conspiracy - The Power of the Federal Reserve:

Apropos of the issue of where the Federal Reserve gets the power to "take over" AIG, here's something I find disturbing. As regular readers know, I've been following the housing/credit bubbles since well before it was widely acknowledged that these bubbles existed (though, of course, I was far from the only one to notice). At the height of the bubbles, in 2004-05, there were plenty of people arguing that the Federal Reserve should crack down on the lax mortgage lending practices that led to the current troubles. The Fed's consistent response was, "most of these mortgages are initiated by non-bank mortgage companies, and we only have authority over federally regulated banks, not over mortgage companies."

I assume that that's true. But, in the wake of the current emergency, the Fed has sought and received authority to do all sorts of things it couldn't do before, and has even done things that it's not at all clear it has the statutory authority to do, as with AIG. If only the Fed had been even a fraction as aggressive when the crisis was building!

Much of the blame, of course, lies with Alan Greenspan, who, having served as Fed Chairman during one obvious bubble involving tech, continued to insist during the second obvious bubble (as measured by a comparison to historic housing prices on a variety of measures, as well as the historic laxity of credit standards) that it's impossible to know if wild, unprecedented, asset inflation is the product of a bubble--even though both bubbles had an obvious "Austrian" cause, the Fed's easy money policy, first after the LTCM/Russian bond fiasco in 1998, and then after 9/11.

Greenspan is an odd sort of free market fundamentalist: he used his awesome (government) power at the Fed to artificially lower the cost of credit, but then insisted that the untoward consequences were likely just the natural consequences of the free market at work. Apparently, government intervention in the economy via Fed manipulation of short term interest rates didn't count as "regulation" so long as Alan Greenspan was doing it!

	[David Bernstein, September 17, 2008 at 9:00pm] Trackbacks The Power of the Federal Reserve: Apropos of the issue of where the Federal Reserve gets the power to "take over" AIG, here's something I find disturbing. As regular readers know, I've been following the housing/credit bubbles since well before it was widely acknowledged that these bubbles existed (though, of course, I was far from the only one to notice). At the height of the bubbles, in 2004-05, there were plenty of people arguing that the Federal Reserve should crack down on the lax mortgage lending practices that led to the current troubles. The Fed's consistent response was, "most of these mortgages are initiated by non-bank mortgage companies, and we only have authority over federally regulated banks, not over mortgage companies." I assume that that's true. But, in the wake of the current emergency, the Fed has sought and received authority to do all sorts of things it couldn't do before, and has even done things that it's not at all clear it has the statutory authority to do, as with AIG. If only the Fed had been even a fraction as aggressive when the crisis was building! Much of the blame, of course, lies with Alan Greenspan, who, having served as Fed Chairman during one obvious bubble involving tech, continued to insist during the second obvious bubble (as measured by a comparison to historic housing prices on a variety of measures, as well as the historic laxity of credit standards) that it's impossible to know if wild, unprecedented, asset inflation is the product of a bubble--even though both bubbles had an obvious "Austrian" cause, the Fed's easy money policy, first after the LTCM/Russian bond fiasco in 1998, and then after 9/11. Greenspan is an odd sort of free market fundamentalist: he used his awesome (government) power at the Fed to artificially lower the cost of credit, but then insisted that the untoward consequences were likely just the natural consequences of the free market at work. Apparently, government intervention in the economy via Fed manipulation of short term interest rates didn't count as "regulation" so long as Alan Greenspan was doing it!