June 27, 2009
On grilling the Fed Chair
I got a bit angry at accounts of the latest appearance of Federal Reserve Chair Ben Bernanke before the U.S. Congress.
The Wall Street Journal reports:
Bernanke faced open hostility from lawmakers who barraged him during a Congressional hearing over his handling of the financial crisis and the central bank's role in reshaping the banking system.
Setting aside the deferential tone usually reserved for Fed chairmen, members of the House Committee on Oversight and Government Reform repeatedly interrupted Mr. Bernanke at Thursday's hearing to review the Fed's role in engineering a government aid package for Bank of America Corp. The lawmakers pored over internal Fed emails subpoenaed by the committee and projected on a screen in the hearing room.
It is one thing to have different views from those of the Fed Chair on particular decisions that have been made-- I certainly have plenty of areas of disagreement of my own. But it is another matter to question Bernanke's intellect or personal integrity. As someone who's known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he's taken, let's start with an understanding that that's been his overriding goal.
These interrogations reveal more about those doing the grilling than they reveal about Bernanke. I see this as pure political theater, and I don't like it.
If Congress wants to explore more usefully the wisdom and motives behind some of the decisions that have been made, it might want to investigate why some legislators are now pushing for Fannie and Freddie to guarantee a riskier category of mortgage condo loans.
Posted by James Hamilton at June 27, 2009 07:26 AMdigg this | reddit
The question is not if the man is a good man. The question is, did he participate in a crime, the crime of knowingly help screw BOA shareholders out of millions. Is there evidence? yes in emails. Is he obfuscating? It speaks for itself. Was this a big deal? Yes, folks that owned BOA got a terrible deal.
I think he'd look good in orange. He can help the other inmates with their financial planning.
Posted by: Keating Willcox at June 27, 2009 08:04 AM
People knew Bernie Madoff for 30 years, praising his integrity and IQ, and he is going to spend lifetime in prison soon.
Definitly, Ben Bernanke is a member of the Government Sachs money gang, no need for demonstrativeness.
Posted by: Jefferson Airplane at June 27, 2009 08:21 AM
"These interrogations reveal more about those doing the grilling than they reveal about Bernanke. I see this as pure political theater, and I don't like it".
Political theatre is becoming the norm in Congressional hearings. I don't like it either. So, I did not listen to this latest example.
Harry Truman was very respectfull of witnesses who appeared before his committee even though he had evidence that they had defrauded the government during WW II. Respectful questions can also be pointed and probing. Current legislators need to look to Truman for examples of how to conduct successful hearings.
I agreed with the emergency actions taken by Paulson and Bernanke in Sept. 2008. Today, I would like to know why Bernanke does not reverse himself on the issue of too big to fail, now that the panic of Sept. 2008 is over and many banks have replenished their balance sheets. The best way to reduce toxic assets and to reduce the financial system down to proper size is to allow the firms that were most active in selling and buying toxic assets to go bankrupt. The money already transferred from the Federal government to the banking system should be view as "sunk costs", not to be recovered, but as the cost of avoiding a possible finanical meltdown.
Posted by: ReformerRay at June 27, 2009 08:22 AM
Not to defend Congress, but good intentions are besides the point.
The questions is, what powers should the Fed use under "extraordinary" circumstances? If you are the Fed Chair or other regulator, and you think the following steps may help avoid a Great Depression II, where do YOU draw the line:
-advise a private company that its management will be fired if it does not rescue a TBTF bank
-advise the American people that inflation is not a concern when, privately, you believe that it is
-look the other way when failing banks fudge accounting to make themselves look solvent
-look the other way when quant funds manipulate the market up at the end of the month/quarter
I'm not saying any of the above is happening. Nor is it an exhaustive list of the possible options available to regulators and the Fed in an effort to avoid a cataclysm.
The question is, which of the above list would you engage in? Remember, FEWER people will be destitute if you carry the above actions out. The country will be MUCH better off in the short run.
Where do you draw the line? If you were the Fed Chair, would YOU have threatened Ken Lewis in order to secure Merrill's future and save the system from collapse? After all, you undoubtedly have the best intentions.
Posted by: David Pearson at June 27, 2009 09:21 AM
Deja Vue all over again. The Bernanke lovefest, calling him a "rock star" and the like follows the pattern of Greenspan's elevation to the "Maestro" to his current state of being a f&ckup that created bubble economies after bubble economies, then went to work for Pimco to make a fortune from the mess he created. Gentle Ben's brief window of adorement will not allow him to write books extolling his genius.
Posted by: Mark G. at June 27, 2009 09:36 AM
While some of the attacks on Bernanke may be unfair, much of this has been brought on by his own actions. When he was confirmed he promised more transparency in Fed actions, yet his actions has been just the opposite. He refuses to tell investors which banks are getting bailouts. He refuses to tell investors which counter-parties are getting AIG money. He makes back room deals involving hundreds of billions of taxpayer dollars with no oversight.
I don't buy the idea of a benevolent dictator acting in our interests coupled with secrecy because the public can't handle the truth. Bernanke could avoid a lot of the criticism if he were more open with information.
Posted by: Joseph at June 27, 2009 09:46 AM
Posted by: Phil Rothman at June 27, 2009 09:58 AM
"I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ."
With a fair bit of courage as well.
Posted by: JKH at June 27, 2009 10:25 AM
As an unelected politician, Bernanke has an even greater responsibility than an elected politician to make sure that he provides excellent value for every dollar of our money he spends (an he has absolutely no right to coerce Americans as to how they run their businesses). Bernanke has not even come close to justifying the incredible amount of taxpayer dollars that he has spent. This is not a courtroom. For politicians, it is guilty until proven innocent, and Bernanke is not providing evidence of innocence.
The whole bailout was badly done. All the scare mongering about potential disaster if the government did not act. The problem is, none of the people advocating drastic action, even Bernanke, predicted the situation that occurred. So they have no credibility saying that "if we don't act, there will be disaster, but if we do act, disaster will be averted.". With the poor record of prediction exhibited by these people, it is just as likely that by acting, the situation could be made worse.
It would have been much smarter (and honest) to know one's limitations, and to NOT act for a long time. Bernanke and company should have spent months, or even years, launching a thorough study of the situation and evaluating a number of possible rescue plans that could be implemented down the road if the situation seemed dire. When one doesn't know what will happen, the best thing to do is to wait and see, while being as prepared as possible.
Posted by: ErikR at June 27, 2009 10:31 AM
Certainly Honest Ben was treated shabbily but why the surprise? His Congressional interrogators are the same venal trash that have been around for decades. The same ones who are in the process of screwing up long over due reforms of health, etc.
My surprise is why are there no howling demands for term limits? Think of the sheer joy of never again having to look at the piggy, greedy faces of such masters of financial oversight as Sen. Dodd or Rep. Frank. Any half way smart Senator ought to be able to steal enough in two terms.
Posted by: C Thomson at June 27, 2009 10:51 AM
The Fed and Treasury have transferred a tremendous amount of wealth to financial bond and equity holders, including the management of those companies that should have failed because of their mismanagement. As an "ordinary person", I can hope that some of this largess will trickle down to me, but what efforts Dr. Bernanke has made on behalf of ordinary people is not obvious to me.
Granted, Dr. Bernanke's scope of action is limited. But he does have the ability to influence public opinion. To date, he has talked up asset values and not much else. How about throwing his weight behind direct debt relief for underwater homeowners, instead of lowering interest rates for those with equity so these fortunate folks can re-finance? Such a policy would be extremely hard to implement in this country, but Dr. Bernancke's reputation might sway opinion.
The Fed's has presided over a 20-year secular decline in interest rates to ZIRP in an effort to maintain NGDP growth of 6%. At the same time, the economy of the U.S. has become increasingly financialized. Greenspan was the maestro, but what has Bernanke done to reverse this course?
To date I'm no fan of Dr. Bernanke's, but Larry Summers is waiting in the wings. That is truly a frightening thought.
Posted by: OregonGuy at June 27, 2009 11:12 AM
We are very lucky to have Prof. Bernanke, no matter whether you agree with him on each and every point or decision. Both his head and heart seem to be in the right place. If you think you could do a better job, speak out.
Would the naysayers here prefer Greenspan? Volcker? Really?
Posted by: Steve Bannister at June 27, 2009 11:26 AM
Public can't handle the truth because they turn into a herd. That is the only reason why the crisis happened at all after Lehman's collapse. Irrational fear.
Posted by: Ivars at June 27, 2009 11:28 AM
Like you, I would not challenge either Mr. Bernanke's intellect or integrity. I would challenge your judgment (& his) that what he has done was "guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil."
It is not at all clear to me as a taxpayer, investor, and economist that this was either his intent or, more obviously, the current or prospective effect. Clearly the biggest investment banks have been beneficiaries of his policies from Day One. It is less clear (indeed, intuitively, the opposite appears true) that Fed policies in the last two years have helped "ordinary people."
If you can show me that your statement is true, I'll listen.
Posted by: Terry at June 27, 2009 11:47 AM
"His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil."
So...because you, a university professor, think he is a heckuva guy we are not supposed to not question his motives and take it on faith that he represents "ordinary people".
Posted by: end_the_kleptocracy at June 27, 2009 12:44 PM
No one knows what would have happened after Lehman Brothers failed if AIG had been allowed to fail also. We do know that markets froze without the failure of AIG.
We can suspect that some other firms would also have been brought down by the failure of AIG - including some banks in Europe.
Not all banks would have failed all over the world.
The consequence of this cleansing of banks and hedge funds who bet wrong could have been very beneficial rather than harmful.
Bernanke's actions and their consequences are what is important. His knowledge of what happened in the Great Depression served him poorly, in that the impluse to preserve existing banks was appropriate in the 1930's but probably wrong in 2008. The difference is external factors created banking problems in 1932 and internal decisions created banking problems in 2008.
Posted by: ReformerRay at June 27, 2009 12:59 PM
terry, because your comment is, in a sense, representative, i'll respond to you. there was an excellent (meaning, well above 90% chance of probability) likelihood that the entire financial system would have collapsed last fall.
do you honestly believe "ordinary people" would have escaped unharmed?
Posted by: howard at June 27, 2009 01:03 PM
God may have made uranium, but it took man to make the atomic bomb. The global financial system, whose evolution over the past
20 plus years has resulted in a complex system the fragilities of
which NOBODY (including Messrs. Greemspan and Bernanke) have
any understanding, has now imploded. Bernanke is tinkering not with a clockwork mechanism, (as he may suppose) but rather with a living organism which, like a sports team, learns to play defense.
This helpless and hopeless thrashing about will, in the end, have
saved about the same amount of human misery as doing nothing.
To take a liberty with the late mayor of Chicago, "Bernanke isn't
here to create disorder, he's here to preserve those who created the disorder."
Posted by: RHK at June 27, 2009 01:14 PM
"""Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.
U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households."""
For those who like videos:
"""What is the worst-case scenario if we were to see house prices come down substantially across the country?
Bernanke: I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. What I think is more likely is house prices will slow, maybe stabilize, might slow consumption a bit. I don’t think it’s going to drive the economy too far from it’s full employment path though."""
I'd take Dean Baker as Fed chairman. I evaluate Dean Baker IQ, personal dedication to the public and integrity at about 100000000000 times Bernanke level.
Fact, august 2002:
Posted by: Laurent GUERBY at June 27, 2009 02:25 PM
I'm sure Bernanke and Greenspan have very high IQ scores, and I'm sure they have a measure of integrity. Integrity doesn't count for much in this case if Ben's code of ethics makes lying to Congress and the American people acceptable when it's in the best interest of the financial industry. While B&G may be very smart people, they missed one heck of a huge asset bubble and the implications of it's collapse on the stability of the financial sector. I think this failure makes a good case for stripping the Federal Reserve of regulatory functions in favor of someone else.
Posted by: Mike at June 27, 2009 03:21 PM
The courage required to undertake an act is dependent on how much is being risked.
One needs great courage to risk one's life in an endavor. It also takes courage to risk one's money and livelihood. It takes a little courage to risk one's reputation.
How is Bernanke couragous? He isn't risking his own money. He isn't even really risking his reputation. There is no outcome that could severely harm his reputation. If there is a depression, it could simply be that there was nothing that could have been done, by anyone, to stop it.
I think it would have taken courage to admit that he did not have any way of predicting what would happen, that if he acted he might possibly make things worse, and so announced that he was not going to act. That could have harmed his reputation, and so would have taken some courage.
Doctors have the guideline to do no harm. Too bad politicians do not have something similar.
Posted by: ErikR at June 27, 2009 03:37 PM
Personally, I have absolutely no problem with the possibility that the Fed strong armed BoA. I have absolutely no sympathy for the shareholders who may have taken a hit because of it and I don't give a damn about BoA management. They've subsequently received more than their fair share of handouts and forbearance to make up for any losses they suffered. If anything, I'd like to see the Fed and Treasury playing a more hard ball with the bankers.
I think it's clear that Bernanke saved the world in the fall of 2008. As best I can make out, the world economy essentially went into cardiac arrest after the Lehman failure. This led to a complete freeze of the commercial paper market and a run on money market funds. From reading Brad Setser, it seems that it was the run on money markets that sent interbank rates to the moon. The Fed intervention to guarantee money market funds and restore commercial paper markets save us from GD 2.0. We were literally days away from every major company on the planet defaulting on payrolls etc ...
Whether AIG was really necessary is another matter, but I accept that they (the Fed) were sufficiently terrified of another cardiac arrest that they thought it better to open the spigot and poor money into the hole than to risk a repeat of 1931.
Posted by: Patrick at June 27, 2009 03:57 PM
Whom would I prefer? I would prefer Mr. Ruddy of India, who prevented mortgage abuse, derivatives, and speculation. His story was in yesterday's NY Times. He had some stones, and India's banking system is stable and healthy.
Bernanke orchestrated the systematic forced marriage between BOA and ML, and the secrecy of its problems,causing billions of unnecessary losses to BOA shareholders. That is very likely a criminal offense.
The rogue banks could have gone out of business. The fed could have loaned money to the 3,500 other US banks and guess what, they would have been loaning money to us, rather than trying to offload toxic garbage and gaming the system. This entire TARP scheme stinks of insiders protecting other insiders. Sadly, both Republicans and Democrats worship at the altar of GS.
Ben, please make my license plate real nice.
Posted by: Keating Willcox at June 27, 2009 07:17 PM
"The rogue banks could have gone out of business. The fed could have loaned money to the 3,500 other US banks"
That wouldn't helped much at all. Those banks couldn't have even come close to the lending and credit adventures of the big banks.
Bernanke was immoral, but because he could rationally be immoral in the face of a catastrophic economic contraction. We think the recession is big now, that happens and it becomes super big.
That said Bernanke still has not solved any of the crisis other than trying to "trick" the market that everything is ok while the banks repair and try to stop the bleeding. If the market calls the bluff, we are right back to square 1.
Posted by: The Rage at June 27, 2009 10:33 PM
Having known you for over twenty five years, I respect your insight. Thank you for sharing it with us. Now, I have a higher appreciation for Ben Bernanke.
Posted by: TexFinEcon at June 27, 2009 11:27 PM
Nobody is better suited to run the Fed than Ben Bernanke.
So Bernanke should be replaced by nobody and the Fed should be abolished.
Posted by: Gerry at June 28, 2009 01:54 AM
So how do you reconcile this man of integrity with the illegal activities of the Fed under his leadership? By law the Fed is only allowed to invest in securities with the full faith and credit of the US government, and yet the Fed has been buying MASSIVE amounts of Fannie and Freddie paper which most explicitly DO NOT have the full faith and credit of the US government.
Posted by: John Smith at June 28, 2009 03:37 AM
Courage is grace under pressure.
Posted by: JKH at June 28, 2009 06:23 AM
he is not a good man. he created the crisis, the housing bubble with cheap money and zero oversight. Let us remember he was the chief economic advisor to the Bush maladministration before he became the Fed Chief. he claimed he was not aware of the bubble when other other economists were aware of it. when the bubble started to implode in early 2007, he claimed in public said the the problem was "contained", when 2 days before the public became aware of the damage to Wall Street in August 2007, he said the economy was fine.
then, in March 2008, after the Bear Stearns debacle, he claimed that there "would be no more Bear Stearns", 6 months we had the Lehman Debacle, and the AIG loan.
Mr. Bernanrke has always been feathering the nest of his wall street friends, and shows lack of disregard of the workers. i.e. Michagan has a reported 14% unemployment and the state government California is in the process of shutting down.
He is printing money to shore up the balance sheet of the banks but no calls for changes in the economy.
He is the biggest incompenent in the planet for not seeing the Housing bubble or was aware of the bubble and failed to amailorate the consequenses for the collape.
Posted by: mje at June 28, 2009 06:47 AM
What does it mean to say the entire financial system would have collapsed? Would the local credit union have collapsed? How about a large regional bank like US Bank?
I think we're talking about the prospect of failure for Citi and BofA in Oct 2008. Should we be satisfied with the Fed's solution to the crisis? BofA is now larger and arguably more fragile than it was before the crisis began, except that the Fed is using your, my, and our kids current and future earnings to guarantee that Citi and BofA can't fail. The Boards of Directors and executive management of Citi and BofA that brought these banks to the brink are still in place. Moral hazard is writ large - why reduce leverage and lower earnings potential when the Fed and SEC say that resolution of a multi-national bank like Citi is impossible and failure is unthinkable?
It appears to me that Bernanke's policies have reinforced TBTF and we'll pay the price for this when the next banking crisis comes along. Given the Fed's track record over the last 30 years, this will probably come rather sooner than any of us would like.
As for the next Fed Chairman, my preferred candidate would not believe in EMH, define price stability as 0% inflation, and profess the ability to recognize asset bubbles in the inflation stage. But since debt creation is to banks as swimming is to sharks and the Fed Chairman works for the money-center banks, we'll get status quo, not reform from the Fed.
Where is the Ferdinand Pecora of the 21'st century? I agree with Professor Hamilton about one thing: Barney Frank, Chris Dodd, and Darrel Issa definitely don't fit the bill.
Posted by: OregonGuy at June 28, 2009 07:16 AM
Once central banks get involved in lender-of-last resort operations, recapitalisor-of-last-resort operations and other rescue operations of banks and other financial institutions deemed to big, too complex, to international, too interconnected or too poltically well-connected to fail, centrals banks and central bankers become normal political actors, indeed partisan political actors. They should not be surprised to be treated as such.
The legal issue is whether the Fed Chairman and his staff overstepped their authority as bank regulators when they kept the acquisition of Merrill Lynch by Bank of America on the road. Did they (and Hank Paulson and his Treasury officials) force Bank of America to go through with the deal, even thought it was no longer in the interest of the shareholders of Bank of America; did they hide key facts from other regulators, and did they threaten to fire Ken Lewis should he try to cancel the deal? It seems pretty obvious that, factually and morally that is exactly what they did. The question as to whether they violated laws and regulations in doing so is not for me to decide, fortunately.
, the regulators and the Treasury decided to cut an opaque deal of questionable legality to save the skins of the unsecured creditors of Merrill. By doing this they created a merged entity (Bank of America + Merrill) that would fail without government support and, if prevented from failing by a tax payer bail-out, would become a zombie bank: alive but doing very little new lending.
Posted by: Mark G. at June 28, 2009 07:23 AM
I think that it is almost impossible to judge whether Bernanke does what he does because he genuinely believes that it is for the best, or in order to ingratiate himself with the influential and rich. Either way, his famous speech of November 2002 (about avoiding deflation) marked him out as a man who would, for whatever reason, do what was politically expedient, and, from then on, I expected him to be appointed as Fed chairman. Sadly, what in my opinion the US really needed - a chairman who would argue the case to err on the tight side when asset prices were rising, and who would have refused to allow the Fed to be used as a off (government) balance sheet bailout vehicle - would be unlikely to be appointed because those who would lose from such rigour (at least in the short term) have become the majority in the US. It will probably take a crisis of inflation or default before Americans are willing to accept such a figure.
Posted by: RebelEconomist at June 28, 2009 09:05 AM
"Yes, folks that owned BOA got a terrible deal."
True. But they got that in Sept 2008 with no Fed pressure. There is no way BoA could have legally backed out of the deal. Merrill would have gone bankrupt with Fed support (to avoid disorderly liquidation) and it would have sued BoA and BoA would be facing astronomical liability.
Posted by: HZ at June 28, 2009 09:48 AM
B of A is a sideshow in my opinion.
Center stage ...Bernanke has exposed the US taxpayer to trillions of dollars of losses ...without the consent of congress. Congress is apparently not even collectively intelligent enough to figure this out yet.
Congress is supposed to have the power of the purse ...according to that pesky document ...The Constitution of the United States of American. The bankrupt banks should have been bankrupted and nationalized ...but Bernanke didn't have the stones to do the right thing.
Bernanke is simply the head Bankster. Steal from the poor and give to the rich.
With all due respect I think you need a better class of friends.
Posted by: Jim at June 28, 2009 10:06 AM
Last point first: Frank's strong-arming of FNM & FRE to make mortgages to riskier condo borrowers is deplorable and if he was an interrogator, well, the people of Mass should have their say (oh wait, they did).
On Mr. Bernanke: I agree that he is a stand-up, very intelligent guy who was forced to choose the lesser of evils under extreme pressure and we will never know what was to be if he had done nothing. For me the issue is manifestly emotional--even knowing as I suspect the vast citizenry does not that calamity was just around the corner (for them personally, not just the bad apples). Bailout of bad behaviour seemed necessary; bad behaviour was (and still is) rewarded, thrift was (and still is) punished.
All metaphors/analogies aside (what's going to burn next week), I get why it was done, and perhaps would have done same. But the urge to punish those responsible by letting them go bankrupt--reprecussions on me and mine be damned--is strong.
So too is watching my parents clip 2% coupons on their life savings as banks get paid 0.25% (or so) on reserves (generated by toxic paper!?). So too is watching the value of my work slip in value against others' currencies. I understand economically the value of inflation in a debtor country. But it is also a hidden tax levied by an unelected official to the benefit of the treasury. See, it's just emotion vs. logic. While I do know where emotion got us last time, I'm not so sure where logic is going to get us this time.
Posted by: Rob at June 28, 2009 10:07 AM
I'd like to know what qualifies these guys Bernanke & Geithner for the job of fixing our financial system. Geithner sat in the middle of Wall St. in a big plush office with all the perks & a fat salary provided by us for 5 years(as President of the NY Fed no less). And Bernanke has been on the Board of the Fed since 2002 (9 years!!) and Chairman for 3 years. Again with a plush office, all the perks and a fat salary paid by us. And what have we been paying them to do? To prevent a financial crisis. And what have they accomplished? Zero. Nada. They were either too dumb or too lazy or both to prevent it. So now they’re going to fix it? Lots of luck.
Posted by: chas at June 28, 2009 10:43 AM
howard wrote above, "...there was an excellent (meaning, well above 90% chance of probability) likelihood that the entire financial system would have collapsed last fall."
Since Bernanke took the SATs in nearly the same year I did and outscored me by almost 80 points, I assume he has a higher IQ. So I am intensely puzzled as to why, when it was quite obvious to me as a layman observing from the sidelines that a massive shadow banking system had been allowed to grow up with no practical provisions for dealing with a run on it, Ben Bernanke as a leading authority on the consequences of runs on banking systems apparently made no attempt after ascension to positions of power not only to retard or reverse the growth of that shadow system, but also made no attempt put in place any effective provisions to deal with a run on it.
I also assume that Bernanke is a man of integrity. But that's not necessarily a good thing. I've noticed over the years that people tend to interpret the behavior of others in terms of their own world-view, so I wonder whether Bernanke is really the right man to deal with a financial industry in which the behavioral norms so resemble those of the Duke lacrosse team, an industry in which people are proud to brag "I ripped his face off".
It really looks to me like they've ripped Ben's face off. And ours along with his.
The people, finding their faces ripped off, are more than a bit upset.
Posted by: jm at June 28, 2009 10:59 AM
Almost all commentators are upset, because we are less rich. But that reality does not answer the question of whether Bernanke and Paulson made the right call when they provided money to AIG on Sept. 15, 2008 and subsequently went before the Congress and asked for money to prevent the collapse of the world financial system.
Patrick said: "I think it's clear that Bernanke saved the world in the fall of 2008. As best I can make out, the world economy essentially went into cardiac arrest after the Lehman failure. This led to a complete freeze of the commercial paper market and a run on money market funds. From reading Brad Setser, it seems that it was the run on money markets that sent interbank rates to the moon. The Fed intervention to guarantee money market funds and restore commercial paper markets save us from GD 2.0. We were literally days away from every major company on the planet defaulting on payrolls etc ..."
The important thing about the above paragraph is the bit about Fed intervention to guarantee money market funds - etc. The Fed intervention that prevented the collapse of the world financial system used resources that were available to Bernanke at the time Paulson was claiming to the Congress that the banking system would fall apart if they did not get more money from the Congress.
Turns out Paulson was wrong. Bernanke had the power and resources to prevent the collapse of the world financial system without the money provided by the Congress.
Hindsight says Paulson should have reassured the Congress that the Fed had the resources to meet the current emergency but that more money was needed to deal with likely clean up after the bankruptcy of the other major firms that created the problem.
Posted by: ReformerRay at June 28, 2009 07:43 PM
A comment asked what is meant by collapse of the world financial system. From what I understand, it basically means a complete stop to the short term lending between banks, financial institutions and companies. This short term lending (like commercial paper) is required by firms to meet their day-to-day cash-flow needs. Essentially, it bridges the gap between incoming cash and outgoing expenditures (sorta like a credit card does for individuals). If this short term lending stops, it doesn't take long for businesses to run out of cash (despite being solvent). Once they run out of cash, they default on their obligations. Defaults cause lenders to call the loans (they demand repayment in full). To repay, the company has to have an asset fire sale, and if everyone runs out of cash at the same time because short term lending is frozen, then you find yourself in a situation where everyone is forced to sell assets and nobody is buying, so asset prices plummet. If they fall far enough, fast enough, then everyone actually does go bankrupt. We very nearly ended-up in that situation in Sept/Oct 2008. It was the Fed who short circuited the death spiral by stepping-in to restore credit market. The Fed saved the world (with a little help from other central banks).
ReformerRay: I think I agree with you. Paulson was pretty much dead wrong the whole way through. I suspect BB was overly deferential because of Paulson's overwhelming personality and his private sector credentials.
I think the AIG bailout was motivated entirely by terror. Lehman went bust on Sept 15, and stock markets crashed. AIG was teetering and it was an order of magnitude larger than Lehman. If they waited, they risked AIG shares tanking and the company having nothing to post as collateral if it needed a bailout later. So I think the Fed decided to step in immediately before AIG was totally worthless and beyond saving (like Lehman).
Posted by: Patrick at June 28, 2009 08:27 PM
Because I assume that Paul Krugman knows Bernanke very well and I recall him writing very positively of him when he left Princeton for the NCEA, I've read the biographical piece on him in the NYT, and I know someone who once had sufficient personal contact with him to make some informed comments on his personality, I'm quite willing to believe that he's bailing out Wall Street only because he believes he has to do that to bail out Main Street.
But I can also see how someone with a different knowledge and experience set could interpret his actions quite differently.
Posted by: jm at June 28, 2009 11:31 PM
all the Bernanke friends, please get this in your head:
NOBODY stands above the law, no matter how smart he is or what he´s doing for the country!
please think a second, what it would mean for the FUTURE if the fed would get away with this kind of behaviour without any further investigation.
none of the fed´s members was elected by the people, but they have free hands to deal with taxpayer money.
it´s the politicians DUTY to make sure the members of the fed are of highgest integrity and DO ACT WITHIN THE BOUNDARYS OF LAW.
Posted by: GreenAB at June 28, 2009 11:38 PM
Allow me to respectfully disagree Professor Hamilton.
I have no axe to grind against Bernanke. I have not taken into consideration populist views about the role of the Federal Reserve or anything published in the last two years about Bernanke's relationship with failed bankers.
Yet there is abundant evidence to suggest that Bernanke is not just partly responsible for the current crisis, but also partly responsible in acting too late:
1. As a member of the Federal Reserve Board when Alan Greenspan was governor, Ben Bernanke - along with the rest of the board - approved the lowering of the Federal Funds rate below the rate of inflation between 2002 and 2005. Negative real interest rates punished people for simply having money in the bank, and so investors, fresh from losing money in the tech bubble, invested in another bubble - the property bubble. Greenspan and, by extension as a member of the board at the time, Bernanke caused this bubble to form.
2. Whilst acting as the governor of the Federal Reserve, Bernanke had more than enough information proving that a property bubble had formed and would eventually burst. In 2005 Bernanke argued that no bubble existed and then, once he finally admitted its existence, argued that the damage would be contained.
To put it simply, Bernanke has been dead wrong on some very important economic points, the worst of which was the lowering of interest rates between 2002 and 2005. He is not only guilty of creating the current crisis but also slow in responding to it. He should go - as soon as possible.
Posted by: One Salient Oversight at June 29, 2009 02:00 AM
Bernanke Gets Grilled in House as he Should
How dare Congress challenge the Fed Chairman over his role in forcing Ken Lewis to close the BAC takeover of Merrill Lynch in December 2008, at a price set in September 2008 before $14bln in losses at Merrill surfaced? What do members of Congress know about the risks to the banking system?
I heard this everywhere on Thursday while watching the hearing and heard it again Friday on yap TV from a cross section of market participants and even Obama’s senior adviser Valarie Jarrett.
Time out. Don’t get me wrong, I think Bernanke is a national hero too for keeping the banking system and ultimately the global economy from careening into the abyss on at least three different occasions.
However, this is a democracy and the Fed reports to Congress, its only regulator, and Congress has every right, and an obligation, to look into Fed actions through the crisis. Should Congress invite Bernanke in amidst conflicting reports and testimony (most under oath) over what happened and simply be asked softball questions? Like a financial TV interview of Warren Buffet answering questions from one of his favorite, usually attractive, female TV journalisettes?
Sorry but Congress gets paid to ask the hard question and if part of that process is some TV grandstanding than so be it if it keeps the system of checks and balances working. It is very clear that like markets, the Fed left to its own is vulnerable. The Fed needs oversight. It does not need Congress or the White House setting policy. But let’s not confuse accountability with a power grab.
I find it nauseating when market participants especially dump all over elected officials in Congress like they are the worst society has to offer. Surely some are but since when was banking filled with squeaky clean altruists? Congress is no more influenced by its constituents (lobbyists mainly) than the Fed is by its constituents (bankers). I am not suggesting we applaud self serving politicians who take an instance of Fed pressure on BAC’s Lewis (who is not looking very clever after the recently published subpoenaed documents from the Fed) and paint a very heroic and self-less effort by Bernanke to keep the world from a major financial collapse and economic chaos (I got money out of the bank last fall too) with one brush stroke.
But any one of Bernanke’s intellect and experience knows that an at times unfair and unruly Congress goes with territory of a top, unelected, public servant job description. And by all evidence, Bernanke held up just fine under fire even if he had to say he could not remember the details of a phone conversation with Richmond Fed President Lacker…usually a way around possible perjury problems.
And the records obtained by the Congress from the Fed are eye opening – a real look inside the crisis and policy response. The emails are riveting. I may not like the motivations of Rep Towns (my former Rep from Brooklyn, NY) and Rep Issa (he and his brother were accused but never convicted of running a car theft ring in California as young men – developed Viper car alarm and made a fortune), but I am happy that they did what they did and for the most part asked the right questions.
My takeaways…Bernanke deserves a second term as Chairman and the sooner Obama announces this the better, ML was a shell game, BAC was allegedly referred to as the turd in the punchbowl by then Treasury Secretary Paulson, compensation on Wall Street is not necessarily correlated with competence at the executive and board levels and how smart comparatively low paid public servants have a far better idea about risk, banking system and markets than bank executives. Oh and yes Congress in all its ugliness and grandstanding (though find it hard to believe that Ed Towns has elections and garnering more votes in mind when he forced Bernanke to testify on BAC-ML – his margins of victory are enormous as best I can recall), is doing the peoples’ work.
Posted by: David Gilmore at June 29, 2009 05:58 AM
IN either January or February 2009 I was told that President elect wanted to replace Bernanke with his own man. I laughed at the idea because I knew that Bernanke had a 6 year term, but my friend said that the Obama administration would attempt to destroy Bernanke's credibility and force him to resign. Again I did not believe this.
Looking back this grilling of Bernanke is just one in a series of actions taken by congress that seems designed to discredit Bernanke. Is there some grand conspiracy? Was my friend right? I still don't know, but what I do know is that it was not Bernanke but Geithner who gave BoA management the ultimatum. Has Geithner faced the same level of grilling by congress? Will he?
Professor, your outrage is warranted, but you might dig deeper because it may be directed against the wrong people - or person.
Posted by: DickF at June 29, 2009 05:59 AM
Having just read Alexander Hamilton by Chernow, it occurs to me that this is nothing new. Politics demands a scapegoat to take pressure of off of the real criminals. Hamilton did what was necessary to make the first bank strong and to bailout the States from their debt. He was accused of profiting, when in fact he bought and sold scrip to balance the market against the boom/bust cycle. He was completely vindicated by two separate investigations, while the real criminals, including the politicians that benefited from knowledge of the new system were never even brought to charge.
Posted by: Steve at June 29, 2009 06:54 AM
Patrick says: "I think the AIG bailout was motivated entirely by terror".
I agree. Maybe panic and terror was appropriate given the circumstance.
However, the notion that any bank (or insurance firm) is too big to fail should have been rejected after the panic subsided.
Instead of correcting this mistake, after careful review, the new Obama proposed regulation apparently plans to perpetuate the notion that some banks are, indeed, too big to fail.
If the market system is not to be allowed to work to weed out wrong guesses (mistakes made by participants) we no longer have a market system.
The Obama regulatory system is wrong-headed. Not everything the private sector wants to do can or should be regulated. Let them alone to fail, if they want to take large risks.
A proper regulatory system would shelter some part of the financial system from competition from the unregualted system. Maintain close supervion over those banks who want to shelter under governmental regulation and control. Insure that the regulated system is profitable and a safe repository of wealth. And then ignore the gamblers. Let them fail if they gamble wrong.
The first step in the proper direction is to establish a Obama policy to restrict government funds, provided to any financial system in the next two years, to be use to pay for bets made on derivatives or other products that were removed from governmental regulation by the Commodities Futures Modernization Act fo 2000.
Since the government was excluded from this game, the players should be forced to go bankrupt if they cannot settle their debts among themselves.
Let the chips fall where they may.
The government has a responsibility, not to protect all players in the shadown banking system, but to insure that funds deposited in good faith in the regulated banking system are available on demand.
Posted by: ReformerRay at June 29, 2009 07:49 AM
If you enjoyed Chernow's book on Hamilton let me recommend Alexander Hamilton, American by Richard Brookhiser. It is a shorter book that Chernow's, it is an easier read, but it is filled with material that Chernow left out. Brookhiser's style is much better and where Chernow at times contradicts himself Brookhiser is totally consistent.
Posted by: DickF at June 29, 2009 08:23 AM
I am sure that Ben Bernake is a well meaning, above average IQ kind of guy. This does not preclude others from observing that he also happens to be part of the greatest fraud ever perpetrated on the American people, the Federal Reserve System of the United States.
Posted by: anarkst at June 29, 2009 11:21 AM
"I am sure that Ben Bernake is a well meaning, above average IQ kind of guy. This does not preclude others from observing that he also happens to be part of the greatest fraud ever perpetrated on the American people, the Federal Reserve System of the United States"
Hardly. The "Federal Reserve System" has always been hear. Like, I mean ALWAYS. Making it official in 1913 and ongoing operating body rather than during crisis was a brillant move long term.
FWIW, people against the Federal Reserve are as much guilty as perpetrating fraud as the banking plutocracy. You both are funded by the same financiers, get along and be quiet.
Posted by: The Rage at June 29, 2009 12:23 PM
Replying to HOWARD above (& sorry for the delay):
I have heard the "collapse" explanation/excuse used a hundred or more times in the last year or so, but no one has shown what comprises that "collapse."
Would some big banks & AIG gone under? Certainly--and so what.
Would the dollar have collapsed? Maybe, maybe not. Maybe for a short period, maybe for a long/indefinite period. Now we are virtually assured of a long term erosion of the dollar and its collapse is still a risk.
Lost jobs--Hardpressed to see how we could lose more than we are losing, but possible.
No doubt there is much more. But the point is no one has seriously examined the possible outcomes--direct and indirect--nor compared them with the costs of the track we are now pursuing, including its various (not ideal) outcomes.
No one has shown that any course of action is better or worse for the "ordinary person" so far as I know. ...and that's why I am willing to listen to some serious analysis, but not just hands in the air fear mongering (a la the Bush Administration) about the threat of economic collapse if we didn't do what we did.
Posted by: Terry at June 29, 2009 12:30 PM
The common view on the Street is that BoA was indeed coerced into a marriage with ML. Generally, Paulson, not Bernanke, is credited with the strong arm tactics, but there is little question that Bernanke abetted the initiative. Of course, the pressure was immense, and any reasonable person might have acted similarly.
The question does arise, however, whether a cost of preventing a systemic failure can be privatized, for that is what we're speaking of here. Further, I suspect the record will show de facto extortion, one or more threats to the solvency of BoA or the standing of its management.
Such tactics may seem appropriate in a time of crisis, but once the waters have calmed and memories grown stale, the public may view such actions in hindsight as ultimately distasteful and excessive. The events linking 9/11, to waterboarding, and on to Nancy Pelosi's denials are but a recent example of such a progression.
The more interesting case remains, I think, Lehman. As the story goes, a Lehman analyst told Paulson, Geithner and Bernanke on the weekend before the bankruptcy, that, were Lehman to be sent into bankruptcy, markets in which Lehman was a market leader--money markets, commercial paper, and currencies, if I recall correctly--would collapse at T+3 (settlement day), with economic armageddon ensuring. This warning proved accurate, and Bernanke is well-enough versed to have known it. His crime was in not standing up to Paulson, who was promoting the Administration's line that 'someone had to pay'.
At the time, I thought this the most egregious display of economic malpractice imaginable, but over time, I have come to quesion that view. If implicit government guarantees cause moral hazard at financial institutions, then one possible remedy is caprice. That is, the guarantee is not global, and the institutions that have most prickled the government (or lack good political cover) are singled out for differentiated treatment: bankruptcy.
The rest of system, however, is protected. And this pretty much sums up the government's actions the way I see it.
Caprice also has the virtue of popping bubbles quickly. The failure of Lehman put the economy into free fall, and this may have led to more rapid price adjustments--and therefore a quicker recovery--than might have occured otherwise.
Finally, Lehman stands as a stark example of the risks of systemic financial failure. Take any economic chart from the period, and the failure of Lehman can be seen across the room. Had three or four other big banks failed, we would have seen 20% unemployment and a true depression. For scholars of recession, Lehman will stand as a beacon for generations to come.
Posted by: Steve Kopits at June 29, 2009 12:37 PM
So, assume Bernanke did tell Ken Lewis that he would lose his job if he backed out of the Merrill deal, is there anything wrong with that? Isn't BofA a Federally chartered bank regulated by the Fed, and can't the Fed step in and force these things?
I fault Lewis for his poor due diligence of both Countrywide and Merrill. If he wanted to back out, he should have acted in the best interest of his shareholders and done so and dealt with the demands of the Fed seperately.
Posted by: MikeR at June 29, 2009 01:02 PM
I agree with Jim Hamilton that Bernanke is very intelligent, knowledgeable, means well, and is not corrupt. I also think that he saved the world in September 2008 with his extraordinary actions, although we may yet be in deep doo doo if he cannot get all that weird stuff off the Fed balance sheet in time.
Nevertheless, that does not mean that he is above being grilled by people in Congress, even if most of them are pathetic hypocrites and grand standers. That is the way it is. He is on the hot seat, and if he cannot take the heat, well, Harry Truman said something about heat and kitchens, if I remember correctly.
As it is, some of the things the Fed did can certainly be questioned, and the details of the BoA deal appears to be among them, although I personally do not think they are a big deal, certainly not worthy of all the gasping and moaning and self-righteousness that was on display in this particular grilling.
For those of you who think that all Bernanke has been doing has been designed to help "the bankers," well, did he help Lehman Bros? And, just who are "the bankers?" We hear that the shareholders at BoA were hurt by his actions, but what about the managers, the depositers, and the bondholders? Frankly, it is not all that obvious who "the bankers" are.
BTW, yes, Bernanke can be criticized for not being more forthcoming and aggressive in combating the housing bubble way back when. But, heck, very few were making noises about it back then. Summers was not, and I am not certain the estimable Janet Yellin was either, although if BB is to go, I would take her over Larry S. any day of the week.
As it is, lots of high quality economists were questioning the bubble, even when there were lunatics like me and Dean Baker and Shiller who were running around like chickens with our heads cut off yelling about it (if headless chickens can yell). I hesitate to point it out, but one of those expressing skepticism about the existence of the housing bubble up to a pretty late date included the author of the post here, although he has a well-established record of publishing papers pointing out how hard it is to econometrically prove the existence of a speculative bubble, given the problem of misspecified fundamentals, so he was perfectly justified in playing such a role, :-).
Posted by: Barkley Rosser at June 29, 2009 02:34 PM
The road to hell is paved with good intentions.
Posted by: own_to_rob at June 29, 2009 03:08 PM
He might be a real sweetheart of a guy when he talks to you, but the fact of the matter is that he's a professional thief, and utterly devoid of personal integrity.
The man runs a counterfeiting syndicate. He and his cronies systematically loot the wealth created by everyone who holds US dollars.
Posted by: John C. Randolph at June 29, 2009 10:36 PM
I've been trying to explain what Ben did and finally came up with (I think) a good analogy:
- Weekend at Benny's -
Your aunt and uncle go on vacation and leave you to take care of their house. Your friends drop by for a party and before you know it the party is out of control ...instead of calming things down you buy another keg. Quite late in the evening something catches fire in the kitchen. Most of the house is ok, but the kitchen burns to the ground.
You call some contractor friends and they inform you that it is going to cost $50,000 to rebuild the kitchen. You do not have that kind of money, but you find one of your uncle's credit cards upstairs in a drawer. You call and discover it has a limit of $10,000. You and your friends head off to Vegas in an effort to win the additional $40,000 (using the $10,000 on the card as collateral). Stay tuned to see if they win the extra $40k or if they loose it all...
Is this making sense to anyone? Who cares about BofA!
Bernanke put the US taxpayer on the hook for a mess he helped create. He "doubled down" with taxpayer money by making loans to zombie banks and buying toxic debt..and he has no idea if he can get these trillions of dollars back! It seems very unlikely to me.
He may have had good and honorable intentions ...but what he did was initially negligent and ultimately reckless. He let the party continue way too long, said it was contained when it wasn't ...and has now gambled our collective future in a pathetic attempt to fix the mess.
Posted by: Jim at June 29, 2009 11:40 PM
You know what's missing from this piece?
A definitive statement that you don't think Bernanke actually undertook the Merrill intervention he's accused of undertaking.
What we have instead is empty hagiography about his intellect and "integrity".
Do you, or do you not, think that Bernanke and Paulson forced BofA to complete the Merrill merger? Do you, or do you not, think that doing so would violate the letter of our securities laws? Those are the important questions. Not whether you think Bernanke thought he had a good reason to do what he did. Or whether you think he's a swell guy with a big heart.
If Bernanke and Paulson get to break the law whenever they think they have a good reason, then our entire system of law is meaningless and no one is under any moral obligation to obey any of it. We should empty the prisons of anyone who thinks they had a good reason to commit their own crime.
There is a two-tier system of law in this country - one for the citizenry, and one for the magistracy. And a two-tier system of law is inherently evil. I'd rather have the recession be marginally more severe than have the principle established that the Fed chairman and Treasury secretary can commit extortion and fraud if they think they "need" to in an "emergency".
Posted by: Brian S at June 30, 2009 06:15 AM
JIM--Great (& accurate) analogy!
Posted by: Terry at June 30, 2009 06:31 AM
@John C. Randolph: you have got it.
@yBarkley Rosser: you dont have got it.
Guess you read http://www.scribd.com/doc/16763183/TaibbiGoldmanSachs
Posted by: Jefferson airplane at June 30, 2009 07:41 AM
Sure, he's smart, as demonstrated by his 1590 SAT.
But, when nine months ago or so, he testified in passing to Congress that the banking mess could be ameliorated by the U.S. government guaranteeing private mortgages in exchange for a small payment from the lenders and mortgage holders, the shades dropped from my eyes, and I saw him for what he is: a lackey of a corrupt system, The Federal Reserve.
Oh, and he's a lousy forecaster, too.
Ben, get ready to be tarred and feathered by the angry masses this fall/winter.
Posted by: jg at June 30, 2009 07:45 AM
I just tried to access the site you provided without any success. So, maybe you should tell us what the great insight is that one finds there that shows that John C. Randolph "gets it" while I do not. As near as I can tell, the main difference between what we each has to say is that he calls Bernanke a "thief." I do not believe there is a shred of evidence to support that. Is he a big stockholder in Goldman Sachs? Has he held a high position in GS? I do not think so.
Frankly, it looks like you do not "get it," even if one thinks his policies have been too favorable to Goldman Sachs.
Posted by: Barkley Rosser at June 30, 2009 09:39 AM
Rule no. 1 in successful populist politics
Always blame the other guy. DO NOT assume any personal responsibility for past policy mistakes and bad decisions.
US Middle East policy is a classic example. Most liberals blame the Republicans for the current mess where if anything so-called liberal democrats are largely responsible for the Middle East mess and the now inevitable deterioration of America's hegemonic status. But why take responsbility for failed policies that are blowing back hard against US power?
Posted by: GNP at June 30, 2009 10:21 AM
Barkley Rosser wrote:
I agree with Jim Hamilton that Bernanke is very intelligent, knowledgeable, means well, and is not corrupt. I also think that he saved the world in September 2008 with his extraordinary actions, although we may yet be in deep doo doo if he cannot get all that weird stuff off the Fed balance sheet in time.
If I can this is where you don't get it. Bernanke was part of the problem even before he was chairman of the FED. How can you say he saved the world in September 2008? That is like saying Hitler saved the world by killing himself at the end of WWII. Bernanke destabilized the dollar and he provided the liquidity to follow Krugman's advice ("To fight this recession the Fed needs…soaring household spending to offset moribund business investment. Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." Paul Krugman NYTimes 2002) of creating a real estate and credit crisis.
And as you almost admit Bernanke has the FED's balance sheet so screwed up who knows when it will ever unwind? He has already attempted to pull back a little and had small success only to follow it with more expansion. My fear is that now that he has the balance sheet so hosed will it ever be possible to correct it would out an economic disaster.
And Bernanke even admitted he was doing things that had never been done and he has no idea what the results will be.
Would you hire a financial advisor who said he did not know what he was doing? We do that all the time at the FED and Treasury.
Posted by: DickF at June 30, 2009 10:22 AM
Steve Kopit says: "Finally, Lehman stands as a stark example of the risks of systemic financial failure. Take any economic chart from the period, and the failure of Lehman can be seen across the room. Had three or four other big banks failed, we would have seen 20% unemployment and a true depression. For scholars of recession, Lehman will stand as a beacon for generations to come".
I differ. Lehman's collapse had global significance because it revealed a truth that had been not previously disclosed - that large U.S. private financial institutions could not pay their debts. That reality needed to be recognized rather than hidden. Bernanke and Paulson acted correctly in this instance.
Second, anyone who predicts precisely what would have happened (20% unemployment)had four other big banks failed is talking though his hat. What realy would have happened is pretty much what did happen - the world credit system dried up and the Federal Reserve and Central banks in Europe came to the rescue. The only difference is that the four banks collapsing would have added additional stress on the U.S. officials. However, they would have done what they did - concentrate on getting credit moving again.
The recognition that any large U.S. financial firm could not meet its obligations should cause just as much withdrawl of credit as the additional faluire of four large major U.S. banks. Everybody refused to extend credit after the Lehman collapse. I don't see how they could have gone beyond what they did.
Posted by: Anonymous at June 30, 2009 12:01 PM
I blame Greenspan more than BB for the excessively expansionary monetary policy in 2003-04, which was when it was really bad (and seems to have been aimed at avoiding having Big Al get blamed by yet another Bush for causing him to not get reelected). What BB was doing after he became Chairman does not look all that outrageous, indeed, there is good evidence that he and his team (although I have heard that it was mostly Dudley at the NYFed) were preparing for bad things to happen.
There was a full-blown Minsky moment in September 2008. Perhaps you do not "get it" that this was the case. We were in serious danger of full-blown, global financial meltdown along 1931 lines. Now that it did not happen, thanks to Bernanke's innovative and brilliant behavior, it is easy to say, "well, maybe it was not necessary." Sorry, you do not "get it."
Posted by: Barkley Rosser at June 30, 2009 12:07 PM
I'm a bit angry about "people" (mostly economists) defending the fed and the people there.
"As someone who's known him for 25 years"
Right there is the problem. Just about every economist thinks they are doing good when it is the opposite. Look at what has happened instead of "stated intentions" and "knowing someone".
Lastly, should the fed use debt to prevent price deflation from cheap labor and productivity growth? Do you believe there can be too much debt?
Posted by: Get Rid of the Fed at June 30, 2009 12:56 PM
I wrote the above comment signed annonymous. I got too eager to send it.
I agree with Barkley Rosser that the world did face the possiblity of a global financial meltdown after Sept. 15, 2008. But I think the refusal to grant credit was universal and it would not have been any worse had 4 other major U.S. banks and AIG gone under. Credit froze - period. How could it have been any worse? How would the failure of additional banks changed the world reaction to the liquidity supplied by Bernanke? Credit flowed only because Mastro Ben Bernanke provided the cash.
The actions of Bernanke proved that he had the resources to prevent a world financial disaster. The world economic system would be in much better shape today if AIG and some other big players in the betting game had gone broke.
Bernanke's infusion of cash was necessary. Keeping to-big-to-fail banks alive was not necessary. Perhaps AIG needed to be rescued on September 15, 2008 but when the panic susided, after the cash infusion, no more money should have gone to AIG or any other banking firm.
Posted by: ReformerRay at June 30, 2009 01:05 PM
Bernanke is a holdover from the Greenspan era - the greatest bubble enabler in modern times. I have no reason to question Bernanke's intrgrity, or that he is a very good technician - like a good mechanic.
I lament that his vision for Fed policy is a continuation of the Greenspan era -each bubble is met by policies that eventually lead to greater economy-wide financial distress and risk. Perhaps, new leadership is needed at the Fed - leadership that will vigorously "lean-against" irresponsible risktaking in the economy. By all means let capitalists "swing for the fences", but on their own dime.
Posted by: fwm at June 30, 2009 01:15 PM
If he had not propped things up bet let them get worse, we would have a wave of bank failures around the world, not just in the US. A lot of the weirdest stuff on the Fed balance sheet is European junk. The Fed was and still is propping up the European Central Bank.
People here need to remember (or realize if they never knew), what happened between May and August of 1931. The Creditanstalt failed in Vienna. This led shortly to the failure of banks in Hungary and other parts of Eastern Europe. Then banks in Germany began to collapse. Then it spread to France, then to Britain, and by August to the US, and on to Japan and South America. That was the year that turned what had been an unpleaant recession (between 9 and 10% unemployment rate in 1930) into the Great Depression, an average unemployment rate over 15% in the US, unseen since the end of that unfortunate episode, with similar outcomes elsewhere.
I hope I do not need to remind everybody that the still higher unemployment rate in Germany in January, 1933 led to the coming to power of one, A. Hitler. No, this was as serious as it gets, and yes, Ben Bernanke saved the world from somethign potentially awful, although now that he has done so we have all this second guessers and backbiters going on about how he is thief or he should have done this or not done that.
Pretty nauseating, frankly.
Posted by: Barkley Rosser at June 30, 2009 03:10 PM
The idea that without the Fed bailout we would have had a 1931-style worldwide run on banks followed by a revival of bent populist dictatorship is pure sick fantasy. We do have the FDIC these days.
But last September we were looking at the protracted bankruptcies of at least half of the largest US financial institutions. And there was a strong argument that it would take too much time and cause too much damage to the economy. And legislation to expedite their bankruptcies likely would have failed or been barred by the Supreme Court. And decisions had to be made quickly, albeit only because Bernanke and Paulson and others had been so incompetent in not seeing it coming.
I do think the US government needed to intervene to keep the financial sector working. But there were other ways to do that than borrowing and creating money to gift new equity to the shareholders of insolvent banks.
What's nauseating is the suggestion that American citizens shouldn't be debating now whether Bernanke did the right thing. It is a very important debate.
But that was only the subtext at the hearing in question, which revolved around the BoA-Merrill deal. I think there was legitimate suspicion that Bernanke overstepped his authority to pressure BoA executives to do his bidding. I'm not sorry for BoA shareholders, quite possibly Bernanke saved them from losing everything, and quite possibly he knew that and so felt justified in sticking them with the Merrill deal. But the Fed chairman should not be running our banks like some Chinese minister. I don't know Bernanke personally, and I have no idea whether he's a man of integrity or not. But it's quite clear that if he were not, he could do enormous damage. There's just not much checks and balances on Fed powers. It's a recipe for disaster.
Posted by: Tom at June 30, 2009 06:10 PM
The question is whether the world would be worse off today if major banks had been allowed to fail after September, 2008.
The prompt action of Bernanke to prop up the credit system shows how different 2008 is from the situation in 1931. The cooperation between the EUB and Fed shown in 2008 did not exist in 1931. Because things continued downhill after 1930 provides no guidance, in my mind, for what will happen in 2009. To understand the forces at work today, foreclosure potential is a much better predictor than the impotence of the international banking system in 1931.
We are all guessing about what would have happened if Bernanke had taken a different course. I just think Paulson and Bernanke were excessively fixated on not letting the downturn gather speed. A more confident financial leader, such as exists in Germany, would have assumed that more than one big financial institution could fail without destroying the entire system.
I realize that Bernanke was concerned about the problems of European banks. I agree that he should have been concerned and that his currency swaps were a brilliant response to the situation, nevertheless, those banks got into trouble by making bets that did not work out and it is questionable to what degree such firms deserve U.S. taxpayer support
Posted by: ReformerRay at June 30, 2009 06:50 PM
JDH, thanks for enabling an informal poll on Bernanke, though that may not have been your original intention. Blog comments are not representative of mass opinion, but this one is possibly representative of opinion leaders on financial topics. At any rate, when the opinions run 90+% negative, its a reasonable bet that a broader sample would also view Bernanke's performance negatively. No doubt he's smart; his intentions may be mostly good ones, but his performance is widely viewed as terrible. This can't be a secret to the Obama team, and Ben will be gone at the first opportunity. Such is life in the fast lane, when you're driving a slow car in the wrong lane.
Posted by: Mike Laird at June 30, 2009 07:14 PM
The FDIC did not remotely have the funds to bail all of those banks out, although probably Congress would have put more in. But that is messier than you let on, and the same would have been going on in many other countries.
I have no problem with people debating whether Bernanke did the right thing, including giving him a hard time on his legally questionable actions with regard to BoA and Merrill-Lynch. When I used the term "nauseating," it was in relation to people calling Bernanke a "thief" without providing a shred of evidence (and I have yet to hear a whisper from any source of anything of the sort in regard to him).
Needless to say, we do not know what would have happened if he had just sat on his hands in mid-September of 2008. But it was very responsible of him to think about the relevant history from 1931, which was a major subject of his academic research. Maybe he was too focused on that, but many of us think the danger was very much there, and since it was avoided, quite possibly due to his actions, as many of us also think, it is now easy to second guess and say, "well, he did not really have to do that."
Yeah, again, we do not know what would have happened. However, it is a joke to now point to Germany as a financial leader given that Bernanke bailed out their banks, and still is (to the tune of about $300 billion on the TALF reportedly, not public information, tsk tsk). Given that the problem was systemic, I really do not have much sympathy with the "they should have known better and to heck with them, let them fail" argument, when we are talking about a rather huge chunk of the world's leading financial institutions. Indeed, that was what 1931 was all about, a huge chunk of the world's leading financial institutions all failing within a short time period of each other. For better or worse, Bernanke kept that from happening, and I, for one, think it was for the better, although cannot prove it.
Posted by: Barkley Rosser at July 1, 2009 10:36 AM
Questions for Bernanke:
- Why not allow AIG to fail? It wasn't a bank and keeping it afloat has been monstrously costly.
- Was the failure if Lehman orchestrated as an example?
- What prompted you to declare in April of 2008 that the the economic difficulties at that time were confined to subprime mortgage lending?
- Were you personally involved with the JP Morgan- Chase buyout of Bear Stearns at terms that were extraordinarily favorable to JPM?
- Since the consensus argument is that the cause of our current unraveling is related to credit quality, why do you not demand an accurate autit of credit quality in the Fed's regulatory ambit?
- Since the consensus argument is that the cause of the current unraveling is related to credit quality, why do you support defective credit by swapping it onto the Fed's balance sheet or guaranteeing it? Why not simply force banks to write it off? Isn't this how a 'Credit' crisis is managed?
- Why is your Fed talking a credit crisis and actually walking an energy crisis?
- On what legal authority does the Fed act to stimulate asset bubbles such as is currently taking place in equities, commodities and government finance?
- Is this current unraveling a credit crisis at all? It seems that Fed actions are designed to keep the credit market participants and bondholders whole at the expense of others; stockholders, bank clients and Fed- serviced banks which are not overleveraged.
- Why do you not regulate bank activities 'around the corner' in the shadow banking system?
- Do you know where TALF and other lending facilities' funds are spent? Why do you allow Broker- dealers like GS to gamble/speculate with Fed- provided liquidity?
- Can your Fed account for all the trillions commited - in haste - to various and dubious 'players' in international finance?
- What legal authority does your Fed invoke to lend to non- banks, lend to foreign entities, to purchase Treasury securities directly, to create lending and funding programs outside the specifics of the Federal Reserve Act?
I can go on and on and this is off the top of my head. A little digging and I can fill this entire blog with questions. Why bother?
Bernanke may be a nice fellow and he hasn't vomited into the Japanese Prime Minister's lap, but will all due respect, I think he's a boob.
Posted by: steve from virginia at July 1, 2009 08:12 PM
I share concern about hauling the chief monetary officer in front of the cameras for a lashing. It's not enough to have a legally seperated central bank, it has to be politically isolated as well. Notice that it's been open season on the ECB since Merkel dropped her unwavering support of its tight money policies.
If a bad decision was made (no personal opinion) then we should certainly review and learn from it but that process doesn't include projectors and tirades. You don't conduct an investigation when the fire is still burning, you help the firefighters put it out.
Posted by: Brice Mckalip at July 2, 2009 11:31 AM
His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil
That's conjecture. Can you offer any proof to back up your assertion?
My opinion is that he has done everything in his power to protect the banksters, including allowing them to continue to perpetuate their fraudulent balance sheets. The fact that Bernanke is subservient to the banks is not really surprising since the Fed is a cartel of banks.
Posted by: Fu at July 12, 2009 02:47 AM