Gone Fishing

Well that's one possibility to explain m*'s whereabouts this week. Meanwhile, on Tuesday the WSJ offered a brief interview, "The Market Whisperer," with a senior former voice of reason, Peter Fisher, ex head of the Markets Group in the Greenspan Fed, and undersecretary for domestic finance in the Treasury Department under Larry Summers. In his description of some of the current turmoil, he supports an argument m* has made that this market has simply not appreciated the hardness of the new Bernanke Fed and acknowledges what is now widely appreciated as a principle cause, that Fed policy was too loose during 2003-4:

WSJ: What do you think explains the timing of this seizing up in the credit market?

Mr. Fisher: In June the markets finally woke up to the idea that the Fed wouldn't be easing any time soon -- which is what Chairman Ben Bernanke had been saying for some time. Back in January the expected path of monetary policy was thought to be extremely benign. Market participants were convinced that a Fed easing was right around the corner. By the time we got to June, background monetary conditions in Europe were much firmer and, at the same time, the market finally had to confront the fact that Bernanke meant what he said. This started the process.

WSJ: And because there was so much easy money, there was so much borrowing. In retrospect, were interest rates too low for too long?

Mr. Fisher: It is hard to escape that conclusion. Did we create too much leverage? Was our credit capacity based on false assumptions about how low monetary conditions could be? I think so. We have the benefit of hindsight now but rates were too low for too long and now we are going to squeeze out the excessive levels of leverage that built up.

WSJ: For so long, we have been hearing that the banks don't matter much and the capital markets are all that matters. Yet suddenly we are discovering how much the banks do matter.

Mr. Fisher: A great deal of activity has shifted to the capital markets but banks still matter. Banks -- both commercial and investment banks -- play a pivotal role as asset originators for the capital markets, underwriting both consumer and business credit before it gets distributed to investors in the capital markets. With the rapid changes in prices and rise in volatility, the capital markets are less willing to buy these assets and they are piling up on the banks' balance sheets. To restart the process we need the banks to provide the grease. The Fed move Friday was to signal that it is still about the banks and their willingness to finance.

A natural follow up question went unasked unfortunately :

m*: "If banks still matter, presumably what happens at the intersection of banks and capital markets with respect to credit provision in the economy should be of concern to those charged with protecting the safe functioning of the banking system. To what extent did the Fed have a role in examining and potentially regulating the explosive and unregulated growth in credit extension outside the banking system? "

Some possible and wholly inadequate answers come to mind. "We relied on the rating agencies like everyone else." "We did not see a role interfering with the capital markets." "Non bank credit originators are regulated by the states." And m*'s personal favorite, "We did not fully grasp the nature of the problem." Astute and creative readers that you are, you no doubt will have ideas for your own.

In the event, none of this is likely to matter one whit to Mr. Fisher now as he is safely ensconced at Blackrock, while his first former boss is writing his memoirs in the bathtub, and his second got kicked out of school. Incidentally, his successor, Dino Kos, is now drumming up business from Asian SWF's for Morgan Stanley.