Schwartz on the Fed

She may be 92 but Anna Schwartz is still going strong and taking a swing at the US Federal Reserve. The Telegraph in the UK has an article in which they state

According to Schwartz the original sin of the Bernanke-Greenspan Fed was to hold rates at 1 per cent from 2003 to June 2004, long after the dotcom bubble was over. "It is clear that monetary policy was too accommodative. Rates of 1 per cent were bound to encourage all kinds of risky behaviour," says Schwartz.

The article also explains that Schwartz

... says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.

In addition Schwatz is quoted as saying

"There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for,"

This is a point on which Stephen Kirchner at Institutional Economics disagrees (respectfully, in this case).

It is hard to pin the under-pricing of risk in credit markets on monetary policy, as opposed to the innovative nature of the products involved. One can make a case that the amplitude of the most recent Fed funds rate cycle has been a factor in triggering widespread mortgage defaults, but that in turn reflected the preponderance of fixed rate mortgages in the US, which delayed the pass through of changes in the Fed funds rate to actual lending rates. The Fed was simply not getting much of an effect from changes in the Fed funds rate back in 2002 and 2003, which was also a factor in the very gradual re-tightening from mid-2004. If anything, this suggests that the US economy is not all that responsive to changes in official interest rates. The Fed stopped tightening and held rates steady for more than a year before the problems in credit markets emerged. It is hard to believe that the Fed triggered a credit shock by doing nothing for more than 12 months.

The Telegraph makes the point that

As rebukes go in the close-knit world of central banking, few hurt as much as the scathing indictment of US Federal Reserve policy by Professor Anna Schwartz.

At Marginal Revolution Tyler Cowen is taking

... nominations for the following: given perfect hindsight, what should the Fed have done and when? Keep two things in mind: a) looser money sooner probably would not have helped the credit problems (and might have tied the Fed's hands later on), and b) your recommendations cannot refer to actions which predate the Bernanke regime.