The Fed: Ivory Tower Economists or Just Clueless Bagholders?

The Fed as bagholder ... it hadn't occurred to me until I read this piece on naked capitalism called "The Fed, Treasury and AIG" (the title has the disarming ring of a child's nursery rhyme). Author: Richard Alford, former Fed economist. He defends the Fed's behavior related to the AIG rescue -- he sounds a bit querulous at times, but it's a thankless mission he's on -- and then he hooks a sharp left turn toward the end of his essay and launches a flurry of pointed and interesting questions:

Why didn’t Treasury announce a more detailed proposal including a Fed role limited to bridge financing? Why didn’t the Fed require it as a condition for supplying “liquidity” to the capital-impaired AIG? Why didn’t the Fed require a commitment from Treasury to assume AIG assets it acquired subject to legislation being enacted? Why didn’t the Fed leave the responsibility for management of AIG with Treasury? Why did the Fed permit itself to be used as an off-balance sheet slush fund by Treasury? Why did the Fed permit itself to be put in a position wherein it would have to pay out public monies on behalf of a capital impaired-institution? Why did the Fed turn itself in to a political punching bag?

Indeed. Why, why, why? Perhaps Bernanke's a leading academic economist, but he certainly lacks a Phd. in "cover your ass"-ology. He's the Gomer you get to sign all the room service bills during one of those crazy guys-go-wild weekends at some luxury hotel. He's the kid you hand the freshly lit stink bomb to, then say, "Listen, Ben, we have to duck outside for just a minute, but you just hold this thing, don't let it go, and we'll be right back. Promise." And earnest Ben says, "Sure, Hank. Sure, Tim."

Yup, Ben Bernanke's confirmation as Fed chairman is now in danger because it looks like he got played as a patsy. Bernanke let the Fed be drawn outside of its proper sphere of influence. It appears he got pushed and he didn't bother to push back.

If there's a lesson to be abstracted from this I'd say: any agency clueless enough to be duped by a bunch of Treasury bureaucrats, who were in turn duped by the Wall Street pros, shouldn't be christened "super regulator" of our entire financial system.