Tim Duy thinks that the Federal Reserve has backed itself into a corner. He is right that the Fed because it was independent was in a "better position to raise regulatory and supervisory roadblocks during the debt build-up compared to other, more politically susceptible agencies." But at the time the Federal Reserve did not see itself as in a much better position. As one extremely senior member of the FOMC told me in 2005: "We stand up and say: "We don't care that you lenders want to issue this mortgage and you homebuyers want to sign it, we won't let you!' and how long do we last in front of Congress?" And he calls for the Federal Reserve to declare war on all too-big-to-fail financial institutions.
I think Tim is broadly right. This was, in fact, the reason that I was calling for at least partial nationalization and the government's taking of proper equity stakes in the banks last fall. The worst outcome would have been not trying or failing to rescue the banking system. But rescuing the banking system in a way that leaves the public believing that bankers have profited and taxpayers lost--as the public now does--is also a bad place to be.
Tim Duy writes: