Bernanke Believes Monodisciplinary Means Multidisciplinary

This column arose from research about President Obama’s proposed reappointment of Dr. Bernanke as Fed Chair. Bernanke was faced recently with the choice of who to make the head of Fed supervision. The context of that choice is extremely important and will be the subject of a longer essay. He made the choice, on October 20, 2009. He is lobbying for the passage of bills that would make the Fed the uberregulator in charge of safety & soundness and systemic risk regulation, so the importance of the top supervisor was extraordinary. As a future column will explain, the person he choose was exceptionally poor and demonstrates that Bernanke was not only one of the major architects of the current crisis – he is the primary architect of the next crisis. Bernanke made a theoclassical economist, Patrick M. Parkinson, the head of Fed supervision. The future essay will show that this long-time Fed economist has a track record of failure because of his fundamentalist beliefs in the gospel of anti-regulation and resultant naïve beliefs that “sophisticated” market participants are impervious to fraud.

This essay focuses on Bernanke’s explanation of why he chose Parkinson to be the Fed’s lead uberregulator. Bernanke is faced with an impossible task. Parkinson has never been a regulator, knows nothing about how to be an effective regulator, thinks that fraud (which causes the greatest banking losses) virtually does not exist, and has consistently proposed anti-regulatory policies that have proved disastrous. Bernanke has to explain why he has chosen, for the most important professional supervisory position in the world, an individual who he should have quietly asked to resign. Here is how he pitched (October 20, 2009) the appointment of one of the vast array of failed Fed economists as uberregulator:

“As an economist with deep expertise in financial markets, Pat Parkinson will be an important asset at a time when we are focusing on a multidisciplinary approach to banking supervision and regulation,” Federal Reserve Chairman Ben S. Bernanke said. “We’re working to supervise the banking sector in a way that focuses not just on individual institutions, but on how those institutions are interconnected and are integrated into the financial system and the economy. Pat is the right person to lead the division as we develop these new methods.”

If you know the Fed then you already get the hilarity of this comment and the arrogance and inanity it reveals. Parkinson is monodisciplinary, not multidisciplinary. He opines that fraud cannot exist among “sophisticated” parties even though the criminology literature has documented such fraud for over half a century as has all human experience including, recently, Drexel/Milken and Enron, et al. Because he is monodisciplinary and because he has no experience as a regulator (and because he is a theoclassical zealot) he has no idea that other fields have falsified his creed. He is not even aware that his own agency’s examiners, ever since the Fed was created, have repeatedly falsified his navie beliefs about fraud.

The joke, of course, is that the Fed has long failed as a regulator not because of its examiners but because of its senior leadership’s four crippling weaknesses.

  • The regional Federal Reserve Banks, which provide most examination and supervision, have conflicts of interest that we already decided, in the context of the Federal Home Loan Banks, was unacceptable. The fact that this conflict continues demonstrates the vastly greater political power of the banks compared to S&Ls.
  • The Board of the Governors of the Federal Reserve has, traditionally, made supervision at best a tertiary concern. Monetary policy and international dealings with sister central banks is what mattered. (Now) Treasury Secretary Geithner’s response to a question by Representative Ron Paul about his regulatory experience as President of the Federal Reserve Bank of New York epitomizes the senior Fed mindset: “I’ve never been a regulator….” True, but you’re not supposed to admit it.
  • The Federal Reserve, at all levels, is far too close to the industry it is supposed to regulate. It has been taught for years to view the industry as “the customer.”
  • Theoclassical economists dominate both the Board of Governors and the senior staff. The fact that this is considered normal and appropriate demonstrates how damaging that domination is. Theoclassical economists are very bad economists that cause recurrent, intensifying crises – but they are even worse anti-regulators.

Bernanke’s claim that putting a theoclassical economist in charge of supervision would fix the Fed’s pathetic anti-regulatory non-actions that were critical to causing the bubble and the Great Recession is an insult to the Fed’s examiners and professional supervisors. The claim that Parkinson needs to run supervision is implicitly a claim that none of the examiners or supervisors understands “how these institutions are interconnected and are integrated into the financial system and the economy.” Only someone with a doctorate in economics can understand those complex matters. Bernanke’s answer to the Fed’s anti-regulatory failures that arise because theoclassical economists dominate the agency is greater domination by those same anti-regulatory economists.

The arrogance and the bias of a monodisciplinary and theoclassical economist’s assurance that his field exclusively holds the answers is staggering. Let us be clear: Greenspan, Bernanke, Geithner, and Parkinson share many characteristics. They are all theoclassical zealots that ignored other fields, and other perspectives within their own discipline. They share an intense anti-regulatory bias. They are all naïve about fraud. None of them understood “how these institutions are interconnected and integrated into the financial system and the economy.” They were all abject failures at regulatory policy. The Fed’s anti-regulatory creed was so destructive precisely because it never understood banks, banking, criminology, and finance.

But Bernanke’s claim that an economist brings unique strengths to supervision is false on another substantive dimension. Greenspan, Bernanke, Geithner, and Parkinson did not simply miss systemic risk. They all missed garden-variety fraud and other forms of credit risk at individual banks. If they had identified and prevented those frauds and undue credit risks there would have been no systemic risk. Without the fraudulent underlying mortgage loans there would not have been a severe housing bubble, mass delinquencies, and the “underlying” that supposedly “backed” the toxic collateralized debt obligations (CDOs). This was an easy crisis to prevent. If the old rules on underwriting had been kept in force and enforced there would have been no crisis. It was the theoclassical economists that claimed that the toxic product was really manna and that the toxic derivatives spread the manna optimally.

What the Fed desperately needs is true multidisciplinary strength. Fraud causes the bulk of bank losses. White-collar criminologists are the experts in this field and have important insights into where “epidemics” of fraud will occur, why such epidemics hyper-inflate financial bubbles, and how to fight such frauds. It turns out that theoclassical economists’ anti-regulatory policy prescriptions optimize a “criminogenic environment” that produces these epidemics and hyper-inflated bubbles. Why don’t the Fed and its sister agencies have a “chief criminologist?”

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About William K. Black 25 Articles

Affiliation: University of Missouri, Kansas City

William K. Black, J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City.

Professor Black was the Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board, General Counsel of the Federal Home Loan Bank of San Francisco, and Senior Deputy Chief Counsel of the Office of Thrift Supervision.

His expertise is in: banking law, fraud detection and prevention, and the regulation and supervision of financial institutions.

Professor Black earned a PhD at University of California at Irvine and a J.D. at University of Michigan Law School.

Visit: UMKC

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