Andrew Ross Sorkin seems badly confused about the Fed and bank obligations in his NYT column this morning. When it comes to the Fed, he warns against the idea of making the institution more transparent and accountable to Congress based on warnings from Senator Judd Gregg: "Congress has demonstrated time and again its inability to manage the nation’s fiscal policy, illustrated by our staggering national debt in excess of $12 trillion. So how can anyone think that its involvement in monetary policy would be good for the country?" Senator Gregg, along with Andrew Ross Sorkin, apparently missed what happened in the last two years. The Fed either failed to notice an $8 trillion housing bubble or somehow didn't realize that it was dangerous to the economy. As a result, the Fed allowed the bubble to grow unchecked. The collapse of this bubble has given the economy the worst downturn since the Great Depression. The downturn caused by the collapse of the bubble, not Congress, is also directly responsible for the huge deficits the country now faces. It is remarkable that anyone involved in policy debates does not realize this fact. Sorkin also complains that a bill before Congress would require that bondholders in systemically important institutions would be required to take a haircut (less than 100 percent payout) in the event of a taxpayer funded bailout. Sorkin complains that this would make it more expensive for these banks to borrow funds. While Sorkin terms the higher cost of funds an unintended consequence, it is actually an intended consequence. At the moment, large "too big to fail" banks can borrow money at lower interest rates than smaller banks because creditors believe that the government will insure their debt. The point of the proposed change is to make a step toward leveling the playing field. It is supposed to raise the cost of borrowing at large banks. The greater risk associated with loans to large banks will make money available to smaller banks at lower interest rates. Doesn't Sorkin understand this?
--Dean Baker
