In a recent speech Federal Reserve Chairman Ben Bernanke took time out from his busy schedule of collecting accolades for averting a disaster that we’re still in the middle of, for which he and his colleagues were materially responsible, and for which none of the fundamentals have changed to provide a spirited defense for the Federal Reserve:
What policy implications should we draw? I noted earlier that the most important source of lower initial monthly payments, which allowed more people to enter the housing market and bid for properties, was not the general level of short-term interest rates, but the increasing use of more exotic types of mortgages and the associated decline of underwriting standards. That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary. Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates. Moreover, regulators, supervisors, and the private sector could have more effectively addressed building risk concentrations and inadequate risk-management practices without necessarily having had to make a judgment about the sustainability of house price increases.
The Federal Reserve and other agencies did make efforts to address poor mortgage underwriting practices. In 2005, we worked with other banking regulators to develop guidance for banks on nontraditional mortgages, notably interest-only and option-ARM products. In March 2007, we issued interagency guidance on subprime lending, which was finalized in June. After a series of hearings that began in June 2006, we used authority granted us under the Truth in Lending Act to issue rules that apply to all high-cost mortgage lenders, not just banks. However, these efforts came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble.
His prescription?
The lesson I take from this experience is not that financial regulation and supervision are ineffective for controlling emerging risks, but that their execution must be better and smarter.
I find that puzzling from a practical standpoint. Telling someone that he or she should be smarter is like telling them to be taller. Either the actions that were taken and the judgments that were made were the appropriate given the information at hand and the knowledge and training of those making the decisions or they were not. If they were we should expect the same people to make materially the same decisions. If there weren’t they should be replaced by people with more appropriate experience, knowledge, and training. Smarter people, presumably.
There’s an underlying problem here. I believe we’re seeing the implications of credentialization. A doctorate in economics doesn’t prepare you for being the nation’s top banker any more than an accounting degree prepares you to be the CEO of General Electric. If you examine the careers of the most successful and admired people in business you will find that acumen and experience lead them to acquire education rather than a degree conferring acumen and experience upon them.
Your last paragraph is something I’ve been thinking about a lot lately. My family is a fan of products from The Teaching Company. They have a wide variety of courses on many subjects. Combined with a library, one could get a very good liberal arts education from their courses. Of course the professional benefit of that is minimized because credentials are so important these days compared to actual knowledge, education and skill. The only place you see “self made” people these days is in business and the arts – everywhere else it’s all about credentials and work experience.
The irony is that anyone can get a good education today. Information is more accessible than it’s ever been yet such non-accredited learning counts for very little in the working world.