When the Federal Reserve Board is in the news, there’s no better source of expertise than political economy professor Allan Meltzer of Carnegie Mellon University. Meltzer has not only served as a consultant on economic policy for Congress, the U.S. Treasury and the World Bank, he has written the definitive history of the Federal Reserve from its founding in 1913 to 1951, when it became the independent financial power it is today.
Meltzer, who is writing Part 2 of the Fed’s history, was working at home in Shadyside when I talked to him Wednesday by phone about the liquidity crisis, the overall economy and how the Federal Reserve Board is dealing with both.
Q: What is this liquidity crisis we’re in -- and is it over?
A: I think it’s too soon to say it’s over. It’s the result of errors on the part of both the regulators but especially the banks and financial institutions. The banks and financial institutions were making loans that they had every reason to know could not possibly survive. There were no down payments. They had no information about many of the borrowers. They knew that the interest rates that they gave were going to rise after a year or two. So they had every reason to believe there would be large defaults -- and that’s a problem…. Of course, the primary responsibility falls upon the people who made those loans.
Q: Upon those who made the loans or took them out?
A: Who made them. That is, who offered them. The people who took them out are, of course, at fault also. Many of these people would like to blame Alan Greenspan and what they say was a surfeit of credit. But no one held a gun to their heads and told them to make those loans. They could have invested in safe assets. They chose not to. That’s their error.
Q: Is this liquidity crisis a sign of more trouble to come or of a larger structural problem with the economy?
A: That will depend a lot on how it’s handled. The Federal Reserve has been doing mainly the correct thing -- not trying to lower interest rates, making sure that the market has enough cash to be able to make the settlements between the various lenders who have good collateral. There will be failures out of this. But failures are not a disaster; failures are a way of disciplining the system.
Q: What is your assessment of the economy’s condition overall?