The Federal Reserve and the Federal Emergency Management Agency would seem to have very little in common. One is a respected professional organization, led by highly credentialed economists, that is charged with promoting price stability and full employment. The Fed enjoyed a justly deserved reputation for responding well to man-made financial disasters in the 1990s. The other is an agency that had a reputation for responding well to natural disasters in the 1990s, but which devolved quickly into a Bush-era parking ground for third-tier political hacks. The former was led by the legendary Alan Greenspan, who bestrode the financial world of the 1990s like a colossus. The latter was led by Michael Brown, who would become legendary for bestriding the crisis-management world the way President George W. Bush rides a Segway.
And yet, in seeing how the two agencies have responded to the biggest challenge they have faced in recent years—the subprime mortgage debacle for the Fed, and Hurricane Katrina for FEMA—there seem to be certain commonalities. The analogies are admittedly imperfect, but the agencies' subprime response to the submerging of New Orleans and the subprime crisis encapsulate the way in which the Bush administration has failed to anticipate and prepare for significant problems and then to respond with alacrity and efficiency.
1) An obvious failure to prepare for the sort of cyclical event that was predictable and plausible and would disproportionately harm poor people and minorities. Thanks to a combination of incompetence and ideology—the governing principle of the Bush administration seems to be that the best way to delegitimize big government is to make sure that it functions poorly—FEMA clearly did not prepare adequately for hurricanes generally and didn't anticipate the possibility that the levees might break, despite specific warnings from relevant agencies that such an event could happen. In the Fed's case, a combination of incompetence and ideology—Alan Greenspan believed the Fed should carry the lightest possible stick in regulating mortgage lending by banks under its purview and believed that his job was primarily to provide cheap money to Wall Street, regardless of any asset bubbles it might help foment—had a similar effect. When Fed governor Edward Gramlich urged Greenspan to crack down on predatory mortgage lending, Greenspan shrugged. This week Gramlich, who died in September, received the Opportunity Finance Network's Lifetime Achievement for Responsible Finance. (The Lifetime Achievement Award for Irresponsible Finance will be awarded next year at a ceremony in a foreclosed McMansion in the suburbs of Phoenix. Thus far, Greenspan and Countrywide Financial CEO Angelo Mozilo are generating the early buzz.)
2) When the deluge came, the Bush-appointed leaders of both entities, like their counterparts in relevant cabinet agencies, failed to recognize the severity of the problem, even in the face of mounting evidence. On the evening of Sept. 1, 2005, after CNN and other TV outlets had been broadcasting distressing images from the New Orleans Convention Center, Michael Brown—the government official in charge of monitoring post-disaster needs—told CNN he hadn't been aware of the situation there. In the case of subprime, casual consumers of financial news would have been aware that carnage was piling up in the summer and fall. But Ben Bernanke—the government official in charge of monitoring the soundness of the financial system—seemed somewhat oblivious. In the spring he pooh-poohed the bad news coming out of the housing market and the subprime lending sector. This summer he estimated losses on subprime debt "in the order of between $50 billion and $100 billion," but he failed to adjust them upward even as investment banks took massive write-downs. By the fall respected market watchers were tabbing the losses at between $250 billion and $500 billion. Bernanke's response? In congressional testimony in November he said estimates of losses up to $150 billion were "in the ballpark." (That must be some ballpark.)
3) In both instances the failure to respond in a timely manner was aggravated by a post-debacle misdirection of government resources. Post-Katrina, FEMA rushed out to buy 145,000 mobile homes at a cost of $2.7 billion. But as the Washington Post reported, thousands were never used, and the government essentially began to flood the market with cheap trailers. In the wake of the subprime mess, the Federal Reserve flooded the market with cheap money, repeatedly slashing interest rates. Yesterday the Fed unveiled a new plan to make cash available to banks. Thus far the moves have been ineffective in forestalling foreclosures and bucking up the sagging housing market—because they aim to treat a symptom rather than an underlying cause. Financial institutions may be reluctant to lend to home borrowers and to one another, and investors are reluctant to provide cash on easy terms to financial firms. But it's not because the interest rates set by the Fed are too high. It's because those lenders made spectacularly bad use of the money given to them on such easy terms in recent years.
4) In both instances the combination of incompetence and neglect in the face of disaster drove emotive cable TV news divas to on-air meltdowns. In September 2005, CNN's Anderson Cooper lost it while interviewing Sen. Mary Landrieu on CNN. And in August 2007, CNBC's James Cramer raged at Bernanke as a terrified Erin Burnett looked on.
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