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The Fed’s “Fatal Flaw”: Morgenson & Rosner on Why Nothing’s Changed Since the Crisis

Aaron Task
Editor in Chief
Fin - Daily Ticker - US

Revelations the Fed lent financial institutions like Goldman Sachs and Credit Suisse $80 billion via a "secret" lending program in 2008 suggest there's still plenty we don't know about the financial crisis.

In Reckless Endangerment, co-authors Gretchen Morgenson and Josh Rosner painstakingly detail the events, policymakers and decisions which led to the financial crisis of 2008.

"There's a lot in the book about the Fed and the role it played in the years leading up to the crisis," says Morgenson, a Pulitzer-prize winning columnist at The New York Times. "Not only as a lax regulator but also a sort of 'in the dark' regulator."

The Fed and other bank regulators confused profitability with stability, Morgenson notes, and didn't ask questions about how those profits were being generated. This was the "fatal flaw" of the Fed's regulatory philosophy, she says.

This laissez faire approach is often attributed to former Fed Chairman Alan Greenspan, but Rosner says it was more than just about one man, however powerful. There's an "incestuous relationship" between the New York Fed, U.S. Treasury and Wall Street, he says, citing current Treasury Secretary and former New York Fed President Tim Geithner as the most glaring example.

Unfortunately, little or nothing has changed since the crisis, Rosner and Morgenson agree.

"Because of the crisis we grew the 'too big to fail' banks into ever more 'too big to fail," Rosner says. "There's a psychology in Washington 'we really can't go after them…because we could destabilize them. So let's just pretend there's not a problem.' That's the danger of too big to fail: when you can't enforce the rule of law because you're afraid of harming these institutions, you're giving them a free pass and free reign to take on more and more risky behaviors."

As a result, claims by President Obama, Ben Bernanke and Tim Geithner that Dodd-Frank means no more taxpayer-funded bailouts are "not credible in the slightest," Rosner says.

See also:

"The Risks Are Enormous": Why Morgenson and Rosner Are So Worried

Reckless Endangerment: Morgenson, Rosner Name Names — Point Finger at Fannie Mae

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @atask or email him at altask@yahoo.com