Thanks to the Jewish holiday, I had the opportunity to take 5 children, including 3 of my own (yes, Alexander Hamilton Was Wright too) to spend the day in Philly. After the obligatory Duck tour, we checked out the Philly Fed's Money in Motion Exhibit. As a guest museum curator myself (for the Museum of American Finance), I appreciated the exhibits in a new way and the kids had a blast. (I suspect they think, wrongly of course, that they can reassemble the shredded money the Philly Fed hands out upon each visitor's exit. Hey, what else are you going to do with the stuff?)
The exhibit "Supervision Mission" was particularly fascinating and provides unintended insights on the subprime mortgage crisis. The exhibit is a computerized game where the visitor starts off as a trainee. After mastering a basic multiple choice test, the trainee becomes a loan officer who has to make decisions about whether or not to lend to various fictional applicants. It was great fun for the kids and even for me, until I started to get the "wrong" answers, invariably because I turned down loans that my electronic boss thought were "good business for the bank." One applicant wanted a $1 million loan on terms that would have had her repaying some $50,000 per month on expected income of like $20,000 per month. She had other collateral of $2 million but the collateral was not income earning. I turned the sucker down only to be chastised for it!
I managed to get promoted (I think everyone does, eventually) to the final level, investment manager. Here, again, my decisions (60% domestic loans, 15% foreign, 15% Treasuries, 10% cash) were chastised as too conservative. Apparently, they wanted primary reserves of less than 5 and secondary of less than 10.
If this is the sort of supervision the Fed gives its banks I have only two words to say:
No wonder!
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