"I think we misinterpreted what the markets wanted," [Federal Reserve Board Gov. Emmett] Rice said. "I thought they wanted us to stay tight. After the ease, I was concerned about how the financial markets would react. When they reacted positively, I was surprised."
Rice was a governor on the Fed when Ronald Reagan was president and the nation was suffering through the longest recession since the Great Depression until now. His words then, quoted by William Greider, in his 1987 book "Secrets of the Temple," sound a familiar ring for today.
Here's more of Greider's quote of Rice, along with a paragraph in Greider's own words about that time in 1981 and 1982:
"Market participants talk tough as individuals and they're hard-liners [Emmett Ricce said], but they wanted to see interest rates come down and they welcomed it. When they saw rates come down, they were very quick to jump on the bandwagon and benefit from it. If you talk to individuals in the market -- dealers, bond salesmen, investment bankers, commericial bankers -- they will say: 'Stay tight.' Yet they welcomed the lower interest rates. It was the same with the Federal Advisory Council, advising us to stay tight. Then we ease and the markets rally and the same advisory council says to us: 'You did the right thing.'"
Greider continues in his book:
"For months, the Federal Reserve had held tight, insisting that this was what the financial markets demanded. The politicians from Congress and the White House, pleading for lower interest rates, were dismissed as mere politicians. Governor Nancy Teeters was ignored, too. The economy was driven deeper and deeper into contraction. In effect, the national government's management of the economy was being guided by the self-interested commentaries from a few hundred thousand financial experts in Wall Street. The Fed was steering -- or was being steered -- by the opinions of bondholders and their representatives and what they alone thought would be good for the nation. Only, in this case, the investors and investment experts from Wall Street were mistaken. Because they were wrong, the Federal Reserve was wrong, too."
Ben Bernanke, current chairman of the Federal Reserve, and Timothy Geithner, secretary of the Treasury, were determined not to get it wrong again in 2008 and 2009, and that's why anyone who wants to understand how the 2009-2010 economic recovery is occurring should consult Greider's book as a blue print.
Their mentor, and one of the chief architects of this slow recovery, is Paul Volcker, who was the Fed chairman during the early Reagan years, and who joined in making the mistakes Rice was quoted as admitting. Volcker, like Bernanke and Geithner, also doesn't want to see the same mistakes made now that were made then.
And to ensure that, the 21st century architects of recovery are following a precept intimated in Rice's comments from "Secrets of the Temple." He admits the Federal Reserve Board was trying to do back in 1981 what it thought Wall Street wanted it to do.
The Fed was not trying to "do the right thing" for the nation.
The Obama administration has made it quite clear to Wall Street this time around that it will being doing the right thing by the nation, rather than cater to the financial industry's traditional beliefs.
And if it steps on some peoples' toes, Obama is a guy with big feet and so far has shown he doesn't mind appearing politically awkward in public. Lets hope the same goes for his health-care reform.
In the meantime, Greider's book remains an outline for financial-industry reform. It's long and I'm still reading it, but I plan to write more about about it here in the future.
You can order it for $16.38 on Amazon here.