Many, if not most, families have an Uncle Roger. Sober, he is a wonderful storyteller, the heart of any party and a caring, energetic, pitch-in-and-do-it friend and helper. If fully fueled, though, he is often the ruination of weddings, holidays and family gatherings of all sorts.
Responsibility for dealing with Roger is typically vested in one particular family member who is, usually, empowered to draft others with special talents or skills such things as intimidating bulk, or owning a car with kiddie locks are especially valued to return Roger to his own digs.
Having a Roger to contend with is simply endured as a nuisance by most families a price that must be paid for having the nonjudgmental love of relatives. If Roger’s behavior moves from annoying to dangerous, though, that is another matter. If, for example, he becomes chronically careless with matches, the safety and well-being of the entire family is put at risk. Something must be done.
Federal Reserve Chairman Ben Bernanke may not have an Uncle Roger in his family, but not to worry: He has Wall Street. When Wall Street’s financial markets are sober, they are the wonder of the modern world. While we could never describe them as caring, they are incredibly efficient at redistributing assets and risk throughout our economy so that we achieve maximum productivity.
Wall Street’s natural enthusiasm, especially for its own concoctions, is an intoxicant, though, and when too much is imbibed, we get Roger-like results.
Like Uncle Roger, Wall Street is also a wonderful storyteller and fun to be with. And when financial markets peel off some investors for some ill-advised scheme much like Roger’s occasional recruiting a few party guests for one of his “field trips” there is little sympathy for what happens to them. They pretty much knew what they were getting into, and can work out their own hangover problems.
Fed Chairman Bernanke is very much like the family member who has responsibility for Uncle Roger. With the overall economy as a sort of family gathering, he is keeping an eye on Wall Street to make sure that it is more or less functional, especially when the party’s gettin’ a glow on.
In addition to this responsibility, though, Bernanke must keep watch on Roger’s more dangerous behavior. Is he lighting his cigar or setting the couch on fire? Is he just being a jerk or is he a menace to the health and safety of others?
Chairman Bernanke did not make any specific references to Uncle Roger during his most recent speech at Jackson Hole, Wyoming. But the economic situation he described was pretty much the same story.
His speech was entitled, “Housing, Housing Finance, and Monetary Policy” and, while not particularly long, provides an excellent historical perspective on how the financial side of the housing sector has changed and how this has affected financial markets and our economy. Essentially, once Wall Street arrived at the housing party, things began to heat up, especially after it began securitizing mortgage debt to transform it into a tradable asset.
At this point, the overall housing market is softening and the sub-prime mortgage market is in trouble. The sub-prime market was a self-created problem, much like one of Uncle Roger’s field trips, of course. And there is a natural limit to how much sympathy we have for those institutions and individuals who are now nursing financial hangovers.
Bernanke, even though he has made clear that he does not wish to bail out sub-prime investors, still has to keep a wary eye on it. There is a recurrent risk that an anxiety attack in this market sector could spread to broader financial markets and to the economy as a whole.
That is the reason that the Fed stepped in and supplied short-term liquidity to the financial sector. And that is the reason why President Bush stepped in to provide assistance to some home owners.
The potential, party-wrecking threat of the sub-prime sector suggests regulatory change, and it is certainly in the air. One key question, though, is “How dumb are we?” Do investments really need more warning labels, of the increasingly ridiculous sort now used to mar consumer products (“Do not eat this stepladder!”)?
The most efficient regulatory solution would be to require securitized loan sellers to provide periodic updates of collateral quality. This would allow rational pricing and promote an orderly market for the security instead of letting investors stew over potential, but unknown, losses.
At bottom, it remains largely an Uncle Roger problem. Have Wall Street’s actions reached the point where something must be done, or is this simply another party punctuated by bad behavior?
James McCusker is a Bothell economist, educator and consultant. He also writes Business 101 monthly for the Snohomish County Business Journal.
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