The Federal Reserve's Failure to Supervise

Sometimes, the way to solve a problem is to question your assumptions. That's a lesson the Federal Reserve should take from the Financial Crisis Inquiry Commission's Final Report. There's an interesting tidbit on p. 54, which quotes a former senior Fed staff member as writing, "Supervisors understood that forceful and proactive supervision, especially early intervention before management weaknesses were reflected in poor financial performance, might be viewed as i) overly-intrusive, burdensome, and heavy-handed, ii) an undesirable constraint on credit availability, or iii) inconsistent with the Fed's public posture." In other words, when a bank was making profits, especially lots of profits, regulatory staff were supposed to hold back.

This is exactly wrong. Undergraduate level economics teaches that any high degree of profitability should be ironed out by competitive forces in the market. Thus, the existence of high profitability may be a sign that something less than entirely desirable may be happening. The bank might be taking a lot of risk (remember that risk comes with reward), such as by underwriting mortgage loans to people whose documented ability to repay is skimpy or nonexistent. Or the bank may be doing something illegal. Fraud, manipulation and other illegal conduct can be immensely profitable. That's why there are so many financial shenanigans. High profitability is a yellow flag, indicating that increased regulatory scrutiny is warranted.

Requiring staff members to hold back until a bank's financial performance has nosedived, as the Fed apparently did, is tantamount to fiddling until disasters burst forth and wreak a full measure of havoc and collateral damage. No glory is attained when the cavalry charges over the hill after the wagon train has been massacred.

The FCIC final report also notes, on p. xvii, that in 1980, the financial sector earned 15% of total corporate profits in America. This figure grew to 27% by 2006. This sustained rise in profitability is another yellow flag. It could indicate a sustained increase in risk levels (uh, duh). Or it could be a sign of illegal behavior. Either way, a sustained rise in profitability should have been seen as a reason for greater regulatory alertness.

Sustained elevated profitability might also indicate cartelization, with large, powerful banks extracting outsized profits by dominating markets. This is also undesirable, as greater oligopoly power would reduce the benefits of competition. Regulators should be vigilant against a shift toward concentration in market power.

The Fed appears to have viewed bank profitability as desirable. Better financial performers would presumably be more stable and less likely to collapse, which would reduce the Fed's worries. But we now know that the sustained increase in bank profitability resulted from high risk and sometimes illegal conduct that exacerbated the instability of the financial sector, ultimately leading to the crisis of 2007-08.

It may be counter-intuitive for regulators to scrutinize their regulatees more closely when the latter are reporting rosier financial performance. But greater profitability is a yellow flag, and perhaps a red flag, for serious problems. Regulators are not supposed to be cheerleaders for management, nor are they supposed to relax when the regulated industry is prosperous. They must apply unrelenting skepticism, 24/7. The history of financial crises preceding the creation of the Federal Reserve well-document that markets are not invariably self-correcting or self-regulating. That's why the Fed was created. One of the root causes of financial bubbles is too much credulity. The civil servants charged with preventing these disasters should never add to the credulity.

Artistry at the Piano

The Financial Crisis Inquiry Commission issued its solemn report today, excoriating some, castigating others, and ascribing blame from sea to shining sea. Four dissenters expounded on their frustrations with the majority, leaving their fellow commissioners well-scolded. If you've been paying attention to the recent financial crisis, you've pretty read everything the commission has to say. Its report is likely to leave the debates unresolved. Which is typically what commissions in Washington, D.C. accomplish.

Onto more important things. Today's classical pianists tend to be technically precise, overly expressive of their very strongly felt emotions, scared shirtless of even a minor deviation from stylistic norms, theatrical in a conformist way, and just about impossible to distinguish from one another. Conservatories produce performers, and rather predictable ones. However, within living memory, great concert halls were graced with the presence of artists. The well-known artists--think of names like Rubenstein and Horowitz--serve as the templates for today's conservatory graduates. There were others who were distinctive, singular, unique. To fully appreciate the breadth and depth of classical music, one must leave well-marked trails and explore. Here are a few starting points.

Claudio Arrau. One of the most underappreciated pianists of the 20th Century, Chilean-born Claudio Arrau played with a self-possessed, deliberate style, seeming to hesitate before striking a note as if to think through the sound he wanted to produce. Always keeping the tempo under control however passionate the piece, Arrau added elegance to even the most tempestuous passages. Sometimes described as a romantic, Arrau maintained fidelity to the score and was never more romantic than the composer (a fault common among today's performers). Listen to Arrau play a passage from Beethoven's Appassionata piano sonata, a technically difficult piece through which Arrau movingly explores the depths of Beethoven's greatness. http://www.youtube.com/watch?v=w7GftdLYSsI&feature=related.

Glenn Gould. Known for his percussive interpretations of Bach, Canadian-born Glenn Gould was less contrapuntal than faithful to the score. Bach didn't write for the piano, an instrument that didn't exist in his day. Pianists playing Bach today are usually performing his pieces for harpsichord, a contrapuntal instrument incapable of modulating its tone or changing its volume. Although Gould is famed for largely eschewing Romantic music, he played pieces written for the piano sweetly and passionately with an understated touch that gently highlighted the emotion infused by the composer. Allow him to lead you through a passage from Beethoven's Piano Sonata No. 31. http://www.youtube.com/watch?v=rTfNSMcH2TY&feature=related.

Alicia de Larrocha. Spanish-born Alicia de Larrocha was not even five feet tall, yet she managed to wrap her small hands around the masterpieces of the piano repertoire. With verve and a perfect sense of tempo, de Larrocha painted magical musical landscapes, staying within the confines of the score and eliciting the emotions embodied in the composition. Here she is, gliding through Bach's French Suite No. 6. http://www.youtube.com/watch?v=Fiokjl-_gtA&feature=related.

Friedrich Gulda. Austrian Friedrich Gulda was the bad boy of Europe's classical music scene, once faking his own death just for laughs. He was theatrical, in a deviant sort of way that poked convention in the eye. (In the video attached below, Gulda performs wearing a turtle neck shirt and a hat that seems vaguely Turkish.) Although unorthodox and unrestrained, Gulda was a rarity: he had fun on stage. And while doing so brought unvarnished joy to his performances. Here's Gulda playing the first movement of Mozart's Piano Concerto No. 20, while also conducting the orchestra that accompanies him. http://www.youtube.com/watch?v=VtTqpqGIIYU.

None of this is to detract from the greatness of the well-known masters. For the finest performance this writer has ever heard of Chopin's Polonaise N0. 53 (the "Heroic," which for many serves as Poland's de facto national anthem), see this video of Polish-born Artur Rubenstein performing in Moscow. He must have been inspired by the venue to stick it to Poland's oppressors by reaching the heights of lyricism and grandeur. http://www.youtube.com/watch?v=nsl7XDTBaJo.