Economic Outlook: Fed gets schooled

Newspapers pounced on U.S. Federal Reserve Chairman Ben Bernanke's statement that the Fed has learned lessons from the financial crisis.

An admission of this kind, served up to members of the Senate Banking Committee, ministers to two purposes. It says, by implication, that the Federal Reserve is run by human beings, which, by extension, is a concept sometimes lost in the flurry of bureaucratic wrangling. It also implies something has changed.

When Bernanke was pressed to explain Thursday what the Fed had learned from the financial mess of the past three years, he said, "The importance of being very aggressive and not willing to allow banks, you know, too much leeway, particularly when they're inadequate in areas like risk management," The Washington Post reported.

It's notable that the Fed chairman did not say the critical lesson learned from the crisis had anything to do with economic theory -- how or when to add liquidity to the market or pump stimulus into the economy. Those lessons -- the mathematics behind policy decisions -- are intact, unchanged. Inflation hawks did not alter their approach, nor did advocates of stimulus to combat a downturn.

Gary Gensler, chairman of the U.S. Commodity Futures Trading Commission, said, "In 2008, the financial system failed the American people but the regulatory system, as well, failed the American public."

In January, the Financial Crisis Inquiry Commission spelled out similar concerns, stating, "The crisis was avoidable and was caused by widespread failures in financial regulation, including the Federal Reserve's failure to stem the tide of toxic mortgages [and] dramatic breakdowns in corporate governance, including too many financial firms acting recklessly and taking on too much risk."

What has changed, most obviously, is passage of the Dodd-Frank regulatory overhaul that created the Bureau of Consumer Financial Protection and set up a multi-regulator council to keep an eye on bank and non-bank firms so large their corporate risks become everyone's concern.

But the interesting phrase in Bernanke's statement is the term "very aggressive."

The Dodd-Frank bill did not put robots in charge. Humans, not computers, will make the ultimate decisions on what constitutes "very aggressive."

The Financial Crisis Inquiry Commission explained there was an inherent flaw in the formula in which critical campaign contributors are regulated by those with jobs that are filled by political appointment. "Very aggressive" is in the eye of the beholder and in the tangible results that gave us rich bankers and 15 million unemployed.

In international markets Friday, the Nikkei 225 index in Japan rose 0.06 percent and the Shanghai composite index in China dropped 0.93 percent. The Hang Seng index in Hong Kong gained 1.26 percent and the Sensex in India shed 1.6 percent.

In Australia, the S&P/ASX 200 index was flat, falling 0.03 percent.

In midday trading in Europe, the FTSE 100 index in Britain lost 0.53 percent while the DAX 30 in Germany rose slightly, up 0.09 percent. The CAC 40 in France dropped 0.07 percent and the Stoxx Europe 600 lost 0.32 percent.