PhillyDeals: Fed needs a wider approach

The revelations of

Carmen Segarra

, the former Federal Reserve bank examiner who made secret tapes of her bosses timidly urging her not to be too harsh with big risky deals by big risky banks, confirms things Fed-watchers and the central bank's own leaders have been saying for years, says Swarthmore College economist

Steve Golub

.

In a study of Fed policymaker meetings covering the crisis years, Golub and Swarthmore colleagues Aysa Kaya and Mike Reay found top policymakers tended to talk a lot to each other about the threat from subprime mortgages and financial derivatives only after the damage was done - a backward-looking approach that seems to ignore the many warnings the Fed's armies of policymakers, economists and bank examiners had separately collected.

Indeed, Fed critiques and self-critiques read like the 9/11 Commission's report on how the FBI, CIA and local public safety, by not coordinating or putting pieces together, missed chances to stop the attacks.

In posting Segarra's transcripts at ProPublica.org, reporter Jake Bernstein cited a detailed 2009 report by Columbia University professor David Beim - paid for by the New York Fed and mostly ignored - that recommended ways to put the Fed's many sources of information and its policy powers together more effectively.

Golub cites other examples of lessons recognized and then forgotten.

In an article published in the July Review of International Political Economy (and at http://www.voxeu.org/article/federal-reserve-run-global-crisis), Golub reviews familiar criticisms that the Fed has been "captured" by the banks it is supposed to regulate, or stunted by anti-regulatory ideology, or a too-narrow focus on fighting inflation. Golub says the trouble goes deeper, to the way the Fed is set up: smart people, studying deep but narrow slices of very large problems, in isolation.

Fed bank examiners - Segarra's former colleagues - "tend to look at individual banks and see how risky they are," says Golub. "But you need also to see the larger picture: How many banks is this a problem for?"

Bank deregulation at the end of the 1990s confirmed the Alan Greenspan Fed (1987 to 2006) in charge of "systemic" financial oversight. But the Federal Reserve never seems to have developed management practices for sharing information, or drawing broad conclusions and acting on them before there is a crisis, Golub says.

The Fed employs hundreds of economists, but they don't much work with the bank examiners. Economists in and outside the Fed need to return to basic "down and dirty" Excel spreadsheet analyses, merging and comparing the copious financial data the government and banks generate, and asking basic questions, Golub says.

Instead, "at the New York Fed you got promoted based on academic articles" that may have little connection to the Fed's policy and regulatory needs.

"Economists have to be a little more like anthropologists," Golub concluded. "Take the policymakers, the economists and the regulators - and connect the dots."