You're addressing some of your questions to the wrong person. You will have to ask Loyek what he means by loss of control of the bond market. I made the assumption that Loyak was referring to Treasury bonds, since normally those are the only bonds the Fed trades. Of course, in recent history they exchanged, with banks, discounted "troubled assets" ,i.e., other types of bonds, for reserve accounts' credits. In that way, they very much gained control of an out of control CDO market.
The Fed, directly, via its regulatory role, and indirectly via influence on the long bond interest rate, does influence mortgage rates. They make rules which banks must follow. Then can, if so inclined, have great influence on the mortgage market, as can, incidentally the GSEs Freddie Mac and Fannie Mae. The Fed can control the mortgage market more or less to the extent they are inclined to.
This will seem like splitting hairs to you -- not without justification --but there is a difference between losing control and choosing not to control. In the former case one can not regain control, in the latter, one can, if so inclined. It is fair to say, in my personal opinion, that under Alan Greenspan, the Fed lost control of mortgage bonds and their derivatives, the CDOs. I would be more accurate, however, to say that they chose not to control the mortgage industry, and hence mortgage bonds. As later demonstrated under Ben Bernanke, the Fed could gain control of mortgage bonds whenever they chose to. (In any case, these are not the bonds I was referring to in my response to Loyek.)
I have posted at length on, and I have been unrelentingly critical of Greenspan's failure to act to shut down illicit practices in the marketing of mortgages. I have attributed this to Greenspan's non-belief in regulation, which he shares in common with many of our libertarian ET friends. I have always found it ironic that these same champions of libertarian practice don't find inconsistency when they maul over Dr. Greenspan and his Fed -- true champions of non-interference with the market place!
Greenspan said his failure to act was in part because of his belief that bankers would never act against their own self interest. I think it goes far deeper than that. Greenspan was a believer in market equilibrium theory, part of which maintains that markets, if left alone, will return to equilibrium spontaneously. He was waiting patiently for the return to equilibrium while failing to recognize the ensuing chaos that was about to strike. Equilibrium theory is nonsense in my opinion. I agree with Soros's view that markets do not tend toward equilibrium spontaneously, they tend away from it. Unlike the markets in Dr. Greenspan's textbooks, real market excesses often do not self correct. Instead, they feed on themselves in a positive feedback loop.
I can not blame the Fed however for the unregulated swaps market, although they could have, and should have been more vocal in encouraging legislation, if needed, and regulatory intervention by the SEC. Then too, since the bulk of swaps were traded by banks, surely the Fed could have found a way to apply the brakes to the swaps market, had they been so inclined. Swaps were intentionally designed to circumvent regulation. That's why they called them "credit default swaps" and not "bond insurance". Swaps, in effect, allowed you and I, and a thousand others, to all buy, and at the same time!, a fire insurance policy on the same property! It was rampant, for profit speculation on market failure! And who better to take advantage of failure then those who could assure it would happen. Swaps stand as a remarkable testament to the ingenuity of Wall Street, and the financial chaos that The Street can wreak when it is allowed to do its thing without interference from regulators. But self regulation is no good. The SIPC has taught us that much.
I am an unapologetic libertarian in spirit. Sadly, what these experiences with failure to regulate or absence of regulations have taught us is that in a large, inhomogeneous, complex society, such as the U.S., regulation is necessary. The libertarian philosophy, somewhat in proportion to the extent it is put into practice, will very likely lead to financial, social and political unrest and chaos. Among U.S. citizens, there is no nuttier nor misguided belief than the belief that the smaller government is, the better it is. What we need, what we must have, is good government no larger than it has to be.
I believe that maximum personal liberty, with the limitation that it must be tempered whenever it interferes with another's rights, should be our societal goal. I also believe that a government responsive to the people, flawed as it is, is the best arbiter of what those limitations should be. Thus, as a libertarian in spirit, but a believer in the unavoidable necessity of sound regulation, I am free, and without irony, to be critical of Greenspan's failure to regulate.
(Many, if not most, libertarians don't believe in social welfare programs, universal access to medical care, or government sponsored and regulated pension plans to prevent impoverishment in old age. These beliefs are simply defects in the libertarian philosophy, because they require either perfect people or that one should turn a blind eye to fate and the suffering of others -- features and behavior that are innately inhuman. There is such a thing as inalienable rights, but perhaps I draw them slightly more broadly then our wealthy, landowner Founders intended. That does not make our country's Founders right and me wrong.)
