0 votes

CNN: The hypocrisy of the Fed

http://money.cnn.com/2009/09/18/markets/thebuzz/

The hypocrisy of the Fed

The Fed is reportedly looking to monitor banker pay in order to discourage excessive risk-taking. But aren't the Fed's easy money policies encouraging risk?
By Paul R. La Monica, CNNMoney.com editor at large
September 18, 2009: 12:42 PM ET

NEW YORK (CNNMoney.com) -- Are there any mirrors in the headquarters of the Federal Reserve? If so, I think it's time for Ben Bernanke and his colleagues to look into one.

The Fed, according to a Wall Street Journal report Friday, is said to be considering a plan that would allow regulators to closely monitor and even change the pay practices at financial firms in order to make sure that these companies aren't encouraging excessive risk-taking.

Considering that the mess that we find ourselves in is partly due to big banks and insurance firms failing to recognize the many subprime warning signs in order to satisfy Wall Street's myopic focus on quarterly profits, reining in bonuses and other compensation tied to stock performance may not sound like a bad idea.

But riddle me this Bat-readers: Isn't it more than a tad hypocritical for the Fed to be trying to tell banks that too much risk is a bad thing?

After all, the Fed has kept its key overnight bank lending rate near 0% since December and has shown no indication that it will raise this rate anytime soon.

And the Fed has pumped trillions of dollars into the financial system through a variety of programs in order to try and get banks to loan more again. The business of lending is inherently risky. So what kind of message is the Fed trying to send here?

"It makes absolutely no sense at all. It is completely counterintuitive," said Haag Sherman, managing director with Salient Partners, an investment firm in Houston. "The government wants to impose more regulations and put shackles on compensation but in the next breath everybody is screaming about banks not lending."

It's hypocritical plain and simple. Isn't all this cheap money designed to push banks to take on more risks? The Fed wants to slap banks on the wrist for paying its employees too much because that might encourage them to get reckless. But at the same time, the Fed is tempting banks to lapse into bad habits with what may be an overly accommodative monetary policy.