Bernanke Tries to Defend the Fed

In a sign that the Federal Reserve is circling the wagons, chairman Ben Bernanke has an op-ed in the Washington Post that attempts to defend the central bank’s role. What is interesting is how much the tables have turned. The Obama effort to make the Fed into the uber bank regulator has become a rout, with decent odds that the Fed will have its powers reduced, and an increasing possibility that Bernanke might not be reconfirmed (which is frankly the right outcome, no CEO who presided over a similar disaster would still be in charge).

This piece has so many artful finesses that I must limit myself to the most salient points. From Bernanke:

As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

Yves here. He’s only one paragraph into the article and he is already discrediting himself. If he is looking only to last two years for lessons, he is looking in the wrong place. This crisis was at a minimum a decade in the making, and I’d say more like 30 years. Where are the post-mortems? There is absolutely no evidence that the Fed sees its own policies, namely the Greenspan and then Bernanke puts, and the extreme laissez-faire attitude towards bank regulation, as major culprits.

For instance, the Fed was the architect of the “let a thousand flowers bloom” policy towards derivatives, and made inadequate (one might say no) effort to understand new financial technology. Bernanke himself rationalized burgeoning consumer debt, claiming that consumer balance sheets were in good shape. Hun? This is Japan circa 1989 thinking. The measure of whether a borrower can handle his debt load is primarily his debt coverage ratios (income versus debt service costs). And by those measures, consumer creditworthiness had been deteriorating (admittedly, the data series aren’t great here, but merely looking at zero consumer saving rates would tell anyone with an operating brain cell that things were out of whack). And why do we want to encourage consumer borrowing? Unlike businesses, consumers are not funding in productive investments (and before you offer student loans as an example, one reader has done an analysis and had concluded the returns are lousy). Balance sheets are relevant only in a distress or liquidation scenario. If you need to revert to a conversation about balance sheets to defend debt levels, it should be obvious you are on shaky ground.

Similarly, I had a chat with a Fed official in the early stages of the subprime crisis, and the Fed was absolutely unwilling to see the banks as having any culpability for the disaster.

This is hardly a complete list of pre-crisis failures; I’m sure readers can make numerous additions. Back to Bernanke:

I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions. Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers. And a House committee recently voted to repeal a 1978 provision that was intended to protect monetary policy from short-term political influence. These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States. The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.

Yves here. Notice how Bernanke invokes a “global consensus,” which is wonderfully vague and ignores the fact that the pre-crisis “global consensus” of minimally regulated markets and financial institutions, is precisely what caused the crisis. Moreover, even if the Fed’s mandate in theory was appropriate, its governance structure is not. The Bank of England and the ECB are not peculiar largely private institutions, accountable to almost no one, as the Fed now is. The Fed’s insistence on secrecy regarding many of its emergency operations is unwarranted and deeply troubling. And “the Fed played a major role in arresting the crisis” ignores the fact that the Fed played a major role in creating it, namely, via negative real interest rates for a protracted period. And he is declaring the Fed’s policies to be successful when the jury is still out.

Back to Bernanke:

The proposed measures are at least in part the product of public anger over the financial crisis and the government’s response, particularly the rescues of some individual financial firms. The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly were — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society. (I know something about this, having spent my career prior to public service studying these issues.) My colleagues at the Federal Reserve and I were determined not to allow that to happen.

Yves here. This is actually very arrogant once you translate it: “What we did was correct, but the public is on a witch hunt and is incorrectly taking it out on the Fed. And I do know better because I am an expert on the Depression.” First, if we are going to get into dueling experts, Anna Schwartz has been enormously critical of the Fed’s conduct, both pre-crisis and in seeing providing liquidity as the primary solution. She also warned explicitly against drawing comparisons between the gold standard era Depression and now. Second, Bernanke’s reading of the Depression (which is pretty conventional, that the Fed blew it by not providing more liquidity) is contradicted by other evidence. As Paul Krugman has pointed out repeatedly, the monetary base, which is what the Fed controls, grew in 1930. But the money supply collapsed. Third, the vast majority of economists tend to look for single factor explanations of why the Depression ended, and within those, tend to focus on the ones that are the easiest policy levers, namely monetary or fiscal stimulus. But the Depression also saw considerable institutional reform, as well as a protracted period of debt reduction, via restructuring (via the Home Owners Loan Corporation) and defaults. Drawing simple conclusions from a complex phenomenon strikes me as misleading and misguided.

Back to Bernanke:

Moreover, looking to the future, we strongly support measures — including the development of a special bankruptcy regime for financial firms whose disorderly failure would threaten the integrity of the financial system — to ensure that ad hoc interventions of the type we were forced to use last fall never happen again. Adopting such a resolution regime, together with tougher oversight of large, complex financial firms, would make clear that no institution is “too big to fail” — while ensuring that the costs of failure are borne by owners, managers, creditors and the financial services industry, not by taxpayers.

Yves here. This is way oversold. First, financial firms decay catastrophically, as we saw with Bear and Lehman. No one has a template for how to resolve a big capital markets trading firm, save a subsidized gunshot wedding. This is like pretending you know how to build a nuclear weapon in 1935. What do you do about counterparty exposures? No one wants to be at risk of having his positions frozen. And if you have the government backstop a firm while it continues trading, you get into another huge can of worms. And layer the political problems, that to resolve a big financial firm, you need a very large check. Congress is not about to cede that kind of spending authority to the Treasury, and there do not appear to be any proposals on the table to come up with emergency approval processes (as in some pre-set frameworks and ground rules). But even so, there are massive thorny issues that Bernanke is pretending are solved, when they have not even been addressed. What do you do with Citibank’s $500 billion of foreign deposits, for instance, a fair chunk of which are presumably uninsured? How do you justify having US taxpayers bail out foreign depositors? What responsibility (if any) does the US have for trading operations in other countries? This is thorny because trading books are passed across time zones, again putting operational issues in conflict with legal jurisdiction. And it isn’t clear that a US desire for a resolution regime will dovetail well, or at all, with the bankruptcy regimes in various countries (bankruptcy is handled where the legal entities are domiciled, the Fed’s fond wishes for a US-driven process to the contrary). I have not seen anything to indicate that anyone in authority has grappled with the complexity of the issues, which means statements like this are mere empty sloganeering.

Back to Bernanke:

Working with other agencies, we have toughened our rules and oversight. We will be requiring banks to hold more capital and liquidity and to structure compensation packages in ways that limit excessive risk-taking. We are taking more explicit account of risks to the financial system as a whole.

Huh? Toughening oversight? We’ve seen the reverse, massive regulatory forbearance. Yes, I am told the Fed is now making all the banks disclose their derivatives positions to them, but the Fed lacks the analytical capacity to do much with this information (and I am further told the Fed staff understands that too). So that does not fit my notion of “tougher oversight.” And the rest is just empty promises. Back to the op-ed:

We are also supplementing bank examination staffs with teams of economists, financial market specialists and other experts. This combination of expertise, a unique strength of the Fed, helped bring credibility and clarity to the “stress tests” of the banking system conducted in the spring. These tests were led by the Fed and marked a turning point in public confidence in the banking system.

Yves here. The worst is the folks at the Fed clearly believe the bogus stress tests were a meaningful exercise. That alone should disqualify them from getting a bigger role in bank supervision. And if you read their pronouncements, they plan to continue to use them, and have the process run by….monetary economists! Pray tell, what do they know about bank operations? Help me! And some of the help the Fed has enlisted in the stress test exercise includes the consulting firm McKinsey, which has the biggest banking practice in the consulting industry. Think McKinsey is going to devise anything that might be rough on its biggest meal tickets? Bernanke also conveniently ignores the fact that the rally might also have a wee bit to do with the fact that he threw a bit over $1 trillion at the markets, as announced in mid-March.

I could go on, but you get the picture. The Fed seems to believe its own PR.

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42 comments

  1. attempter

    These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States.

    That it’s “out of step” with the “global consensus” of banksters is a strong indicator that it’s headed in the right direction.

    The phrase “seriously impair”, and much else in the piece, for some reason put me in mind of the old Daley quote:

    “The policeman is there to preserve disorder.”

    Now more than ever, America needs a strong, nonpolitical and independent central bank…

    I agree. So let’s get one. The Audit can get us started.

    1. john c. halasz

      Get old Papa Doc right:” Da police aren’t out dere to create disorder; da’re out dere to preseerve disorder!”

  2. Brian Hayes

    Yes, “a complete list of pre-crisis failures” is where it’s all hinged.

    After a long line of false friends apologize, after we scupper too many fools, after we teach how we arrived here, we give ourselves answers, but leave ourselves blank.

    The list of our success is the list we truly seek, because we’re doomed without it.

  3. Bill

    Great to see you back in full fine form Yves.

    Devastatingly accurate critique, hope the WH and Congress are reading. This stuff needs to change.

  4. i on the ball patriot

    From your really great article;

    “Yves here. He’s only one paragraph into the article and he is already discrediting himself. If he is looking only to last two years for lessons, he is looking in the wrong place. This crisis was at a minimum a decade in the making, and I’d say more like 30 years. Where are the post-mortems?”

    Glad you said that, and right up front too! I agree with that thirty year assessment and credit elite neocon influence as the prime mover. One of the problems with the day in and day out exposure of scamerican hypocrisy is that it limits the viewpoint to the hypocrisy at hand and continually omits that more comprehensive broad brush picture you allude to. It is a day after day look at the bits and pieces of the pattern in the skin that always deflects from the greater reality that it is a snake’s skin that we are looking at.

    That broader viewpoint, the snake, must always be kept at the forefront of the daily deceptions. Sooo … kudos for saying it but it could be said more forcefully with a link on the type (“more like thirty years”) to a comprehensive ‘anchor’ article expanding upon that thirty year development, and its causes, from which you could then excerpt pre written, “For, Instances” as desired (or perhaps a link to your forthcoming book). Viewpoints are wedges but it is persistence and repetition that drive them home.

    Deception is the strongest political force on the planet.

  5. DownSouth

    Bernanke said:

    The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly were — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society.

    Sounds like just one more example of Naoimi Kline’s “disaster capitalism” to me:

    The book argues that the free market policies of Nobel Laureate Milton Friedman and the Chicago School of Economics have risen to prominence in countries such as Chile under Pinochet, Russia under Yeltsin, the United States (for example in New Orleans after Hurricane Katrina, specifically the privatization of the New Orleans Public Schools), the privatization of Iraq’s economy under the Coalition Provisional Authority, not because they were democratically popular, but because they were pushed through while the citizens of these countries were reacting to disasters or upheavals. It is implied that some of these shocks, such as the Falklands war, may have been created with the intention of being able to push through these unpopular reforms in the wake of the crisis.

    http://en.wikipedia.org/wiki/The_Shock_Doctrine

    1. john bougearel

      DS,

      Yes it does sound like a page ripped out of the disaster capitalism ideology espoused by the Chicago school of economics. And Bernanke’s revisionist accounting of the events makes it sound as if he has been on some sort of “Noble Mission” all this time.

      More importantly, we can expect more “financial shocks” of this nature because of the inability of policymakers and lawmakers to learn anything from this crisis and achieve any meaningful financial reform beyond “Loophole Legislation” that as Yves has repeatedly pointed out, you could drive a truck through. The loophole legislation itself is designed to ensure the structure and cycle of crisis remains intact so that it can be repeated. Post crisis regulations and reforms ensure that the financial innovation model that grew out of the past thirty years remains intact so that cycle of mutually assured destruction can be repeated. Financial reforms create laws on the books that read like the back of a shampoo bottle: Lather, rinse, repeat. Lather, rinse, repeat.

  6. john

    And why do we want to encourage consumer borrowing? Unlike businesses, consumers are not funding in productive investments

    Consumer debt is massively productive and profitable…for the finance sector.

  7. But What Do I Know?

    What’s a damn shame is that Yves’ rebuttal won’t be published anywhere but here. This is a thoughtful, reasoned, well-elucidated response to Bernancke’s half-truths and evasions. It especially gets me steamed when he insists that he knows all about the Great Depression–its causes and what could have been done to prevent/alleviate it, as if there is only one explanation for what happened and that policy decisions were the only cause of the problem.

    If Yves’ post could be published in the NYT then this country might be on its way to becoming better informed–and more rational.

    1. run75441

      “But What Do I Know?:

      Yves’ points and words will be reposted in other places. Granted these places are not the NYT; but then, many Americans do not read newspapers anymore and subscribe to 60 minutes of commercials, sports, weather, community, national, and international news (in order of priority and/or time allocation) to get their “nightly news fix” which superficially touch the news worthy topics.

  8. OregonGuy

    Bernanke lied in his article. Greenspan/Bernanke/the Fed didn’t fall short in their efforts to regulate risk. They chose not to regulate, lobbied Congress, and marginalized critics to increase risk and FIRE economy profit. Millions of unemployed Americans can thank Greenspan/Bernanke/the Fed for their current plight.

    The Fed should be run in the interests of the American people, not the FIRE economy. It must be reformed. Bernanke has proven he is a tool of FIRE economy interests and is incapable of leading the necessary reform. He should not be re-confirmed.

  9. psychohistorian

    Thanks for the great posting Yves. Mark Thoma at Economists View has a posting up about Bernanke’s article and says that he supports it. Why can neither the fresh nor salt water economists see the structural failures in our current social/political arrangements? Why can’t they talk about the moral and ethical failures of the participants? They are making the coming crash more damaging by not admitting the structural problems with our current corporatist/fascist economy.

    Faith based “free” (only in name) market economies are killing the masses. Government of, by and for the masses would regulate markets to keep them competitive and socially focused.

    1. Andrew Bissell

      Mark Thoma at Economists View has a posting up about Bernanke’s article and says that he supports it. Why can neither the fresh nor salt water economists see the structural failures in our current social/political arrangements? Why can’t they talk about the moral and ethical failures of the participants?

      In a fundamental sense both “camps” are peopled by economic interventionists who, at the end of the day, need to circle the wagons around the Men Behind the Curtain like Bernanke in order to preserve the foundations of their belief in an economy “administered” and “directed” by elites. Thoma’s support for Bernanke comes as absolutely no surprise to me.

      Authoritarian Audacity Is Going to Crash: http://safehaven.com/article-15135.htm

  10. Robbie

    “If he is looking only to last two years for lessons, he is looking in the wrong place. This crisis was at a minimum a decade in the making, and I’d say more like 30 years. Where are the post-mortems? There is absolutely no evidence that the Fed sees its own policies, namely the Greenspan and then Bernanke puts, and the extreme laissez-faire attitude towards bank regulation, as major culprits.”

    The FED is a Captured Regulator, and is behaving as such an entity; so the outcome of the last couple decades is to be expected. The FED has made decisions that benefit the banks, and only the banks. Labor, manufacturing and the society at large have been thrown-under-the-bus with the blessing of economic “experts”.
    A financial coup d’état has happened in this country. Expanding financial numbers backed by the quacks from the economic profession; who are in effect picking the winners and losers in some perverse race track where only one horse keeps winning the purse. We have a docile population that accepts the results as the truth, and will happily immiserate themselves with the belief that this system is beneficial to everyone.
    Most people walk around and point fingers; Dodd, Bush, Pelosi, Socialism and Capitialism are the primum movens of all the problems, but few accept these villains for what they are: Belief in witches, and thus, people still need witch hunts. We can audit the FED, chase out the Socialists, Facists, or unpopular politicians; but all we will have done is burn someone at the stake, for sins of everyone.
    The FED is “The simulacrum…” and “…is never that which conceals the truth–it is the truth which conceals that there is none. “

  11. john c. halasz

    Well, I’ll just repost my comment from Thoma’s site on the same Bernanke op-ed to save some effort:

    “It’s not just financial firms that are too big/concentrated, it’s the whole financial sector that’s hyper-trophied. Does anyone think the Fed, in laying claim to expanded regulatory powers would have any interest in downsizing the financial sector and constricting the large rents it draws off the real productive economy? Does anyone think that the Fed would ever develop real oversight capacity in an opaque world of debt securitizations, derivatives, and complex “arbitrage” strategies, which don’t actually promote any real efficiencies, but rather entail large information losses, risk “dispersals” that don’t impossibly reduce underlying risks, let alone eliminate endemic uncertainty, but rather concentrate them unpredictably and induce dysfunctional conflicts of interests and incentives, and complex strategies aimed not at stabilization of planning, but rather evasion of taxes and regulations? Why are the Fed’s proposed “reforms” anything but an attempt to perpetuate the prevailing regime of regulatory capture by predatory elites?”

  12. Siggy

    Mr. Benanke is beating a dead horse. Over the past 30 years, neither the Fed nor the Treasury have done their job. Where there has been, and remains to some extent, sufficient law to prosecute the massive fraud that has occurred, nothing has been done.

    To accept the massive tort, if not fraud that was perpetrated by AIG as simply a bet gone bad is beyond my comprehension. To believe that depository institutions can lever up 20, 30, 40 to 1 and not be held accountable is incomprehensible.

    To believe that markets are efficient in achieving equitable prices requires a degree of intellectual retardation that I cannot comprehend. One only needs to examine a few time series to observe that prices achieve equitable equilibrium only momemtarily. Consider any market and you will find that there is substantial asymmetry of information that is coupled with substantial asymmetry of perception.

    To believe that markets are self regulating is an expression of naivete that borders on the self delusional. These blindly accepted canards have created an environment that has destroyed the middle class. I say destroyed in that there was a time when being middle class could be achieved on one household income. Today, to be middle class requires two incomes and then some.

    The fact that the 1914 Dollar has lost 95% of its purchasing power in today’s economy speaks volumes about the relative success of the Federal Reserve System.

    While Yves comments are very well taken and made, parsing the spin of a culprit misses the mark. This discussion should be examining the impact of fractional reserves coupled with a pure fiat currency. Add to that the absolute abrogation of regulatory responsibility and the incapacity of a Congress to address the need to supply the financial system with the regulations that operate to limit malfeaseance and you get what we have today.

    It is my opinion that we lack the leadership that could lead in the dialogue to develop a cure for our distress. It is also my opinion that the halls of academia have failed us in that I hear very little about the core causes of our distress and what might be done to set matters right. The current solution appears to be an even bigger stimulus package. Just where will the funds for that package come from? Just watch what the poltroons in Congress do, you can expect reduced entitlements and higher taxes coupled with rising prices.

    We have gone from creditor nation to debtor nation in less than 35 years. Two hundred years of contract law is being shredding in the name of politcal expediency. While one can easily point to the political system and the financial sector, they are not alone in their malfeasance, look to the society at large that is hell bent on getting for itself before anyone else does. I paraphrase Pogo, the enemy is us!

    1. Andrew Bissell

      Over the past 30 years, neither the Fed nor the Treasury have done their job.

      Actually, they did their jobs quite well, in that they were trying to push easy money and credit into the economy and accomplished that in spades. It’s practically the raison d’etre of central banks, as well as federal creations like the FDIC and GSEs, to create credit that would otherwise not exist. When the party was raging everyone was quite happy to go along. It’s only now that the hangover has started and the bill has been delivered that the recriminations have begun.

      1. Skippy

        Andrew B. with respect, they did know the bell tolls, its always just not in their life times..eh.

        Skippy…not very fun being the champ like Ali (boxing) only to sputter utterances in your after glory days, found to be a fool for taking to many hits to the head aka DIA.

  13. emca

    Sycophant alert! Sycophant alert! Well argued Yves.

    Bernanke, “Certified Great Depression Expert” and his band to FEDs saved us all from ourselves by secret machinations to kick the can down the road. Well I an indeed humbled and eternally (3rd and 4th quarter) grateful. Of course my understanding a central bank’s primary role differs than Bernanke, that banks justification is not clean-up after a cancer has metastasized, but to provide conditions under which no corrective action after fact is necessary (allowing you to truncate 30 some years of ‘superfluous’ events to focus on real solutions doesn’t cut gravy in my book).
    While I would applaud the FED’s finding religion, I seriously doubt any significant change; that the organization’s goals where, and still remain, the protection of a few at the expense of many, in part a kind of trickle-down, leftovers and other scrap for dogs under the table mentality of neo-American thought.

  14. Juvenal

    A nice argument, Yves, but you are writing for a literate group while Bernanke is not. Perhaps you should submit your own argumetns to the WashingtonPost or NYTimes so that the general public can also understand.

  15. Doug Terpstra

    Bernanke is conveniently following Obama in looking forward and not dwelling on the past. War crimes, torture, massive banking fraud, constitutional violations, political corruption…hey, stuff happens. Let’s agree that “mistakes were made”, avoid the finger-pointing, witch hunts and unpleasantness and just move on. Why get mired in history? It’s messy.

    Ives’ critique efficiently disintegrates Bernanke’s lame boilerplate nonsense about the need for independence (secrecy)—which is especially hollow after Greespan’s forced confession of a “fatally-flawed worldview”. although not sugar-coated, her analysis is actually rather cool compared to Karl Denninger’s fire-and-brimstone tirade: “The Black Hats Strike Back (Bernanke)” at The Market Ticker. Denninger opens on the same ridiculous two-year retrospective Ives does:

    “That’s correct Ben. Indeed, the only people who aren’t calling for change are those who have abused their power to loot, pillage, and violate Americans over the last thirty years or so. They’re quite content with how things are now, and indeed, have gone so far as to threaten Congress with events that will lead to martial law if they don’t get their way.” Link below:

    http://market-ticker.denninger.net/archives/1671-The-Black-Hats-Strike-Back-Bernanke.html

  16. craazyman

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    Federales, a fashionable Tex-Mex bar/restaurant in New York’s financial district, seeks waitstaff with experience catering to demanding high-net worth Wall Street banker clientele. Bring your liquidity expertise to work at our famous Margarita Bar and use your depression-fighting skills in our late night lap dance lounge, where you can tactfully advise out-of-work bankers making merry with curvaceous staff while desperately seeking a bailout at taxpayer expense. Previous experience serving Mexican cuisine highly desireable. Federales is an Equal Opportunity employer. Ex central bankers welcome to apply. Must be willing to sing Mexican folk songs and play the tambourine during happy hour.

    Please send resume with complete list of liquidity facility experience to:

    attn: Human Resources
    FEDERALES
    “The Place Where Wall Street Drinks”
    44 Gold Street
    New York, NY

  17. andrew

    I echo other responses here in asking Yves to submit this post or a dumbed down version to the NYT and WPO.

  18. Hugh

    This is a comment I cross-posted at firedoglake where Yves’ post also appeared.

    When I read Bernanke’s op-ed this morning I thought somebody should go through that paragraph by paragraph debunking all the false assertions, contradictions, and misdirection. Yves does a great job here.

    Bernanke and the Fed blew it on an order of magnitude not seen since the Great Depression. Yet Bernanke takes no responsibility for his and the Fed’s role in this disaster. This is as close as he comes:

    “The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis. We have extensively reviewed our performance and moved aggressively to fix the problems.”

    But that is the whole thing about this op-ed. It is all upside down. He talks about lessons learned when it is clear they haven’t learned a thing. He wants the Fed to be the pre-eminent regulator when it has shown it is miserable at regulation. He talks about the importance of keeping the Fed independent when he and Greenspan have steered it into the orbit of Treasury. He talks up the Fed’s core mission of monetary policy without pointing out that its monetary policies failed, spectacularly. Nor does he mention the Fed’s move away from monetary issues into the far more political realm of fiscal policy. As Yves points out, he mentions with pride the bogus stress tests which just underlines his cluelessness. Finally, he goes off on how the “Fed is highly transparent” which tanslates roughly as the Fed tells outsiders only what it wants to tell them and not what they (as in Congress and the rest of us) have a right and need to know.

    Quite simply the Fed needs to be audited, restructured, and Bernanke needs to be gone. And I have to say I am not a Yellen fan. I can’t think of anyone in the banking or monetary field who would be a good candidate to replace him. But to be honest, I think the Fed needs a reformer more than a monetarist and there actually are quite a few of those around. I doubt that he would take it but Bill Black is smart and sensible and would fit this mold.

    1. DownSouth

      I agree that Bill Black would be a perfect choice.

      He of all persons seems to understand that these massive financial crimes must be investigated and prosecuted. Anything short of that and the social fabric of the country starts to unravel.

      Skippy linked to the video by

      I’m going to keep working
      While I have buyers
      In the United States

    2. DownSouth

      I agree that Bill Black would be a perfect choice.
      He of all persons seems to understand that these massive financial crimes committed by the social and economic crème de la crème must be investigated and prosecuted. Anything short of that and the social fabric comes completely unraveled.

      The United States is already a country of massive social problems. Skippy above linked to the video by Los Incomparables de Tijuana, and the following lines struck me:

      I’m going to keep working
      While I have buyers

      In the United States
      Is where there are the best

      They buy 100 kilos of powder
      Like they were buying some flowers

      This echoes a study Vinny G. linked the other day that showed 29% of Americans suffer from either some sort of substance abuse or mental/emotional disorder. (That 29% compares to 12% in Mexico.)

      The United States also has a culture that celebrates violence. Just look at its popular culture, especially its movies.

      So create a situation in the United States like you have in Mexico, with criminals installed in Los Pinos (Mexican equivalent of the White House), kept in power by US neoliberals and neocons, that operate with impunity, and it will not be long until criminals take over the streets as well. But in the US, with its rampant drug usage and unparalleled celebration of violence, I suspect the results will be much more virulent.

      People in the US hear a lot about the drug wars, but they don’t hear much about the kidnappings in Mexico. I have a friend who married into the upper stratosphere of society in Mexico City. A couple of years ago he told me a month hardly goes by that they don’t have an acquaintance that some member of their family is kidnapped. He lamented that his two children were getting to the age that they wanted to go outside and play, but he said you couldn’t even let them ride their bikes in the street for fear of being kidnapped. So he finally packed his family up and moved them to the United States.

      Now the kidnappers have begun kidnapping for ransoms as little as $5,000 usd. I have another friend who owned a furniture store in San Miguel de Allende and a couple of months ago they kidnapped his boyfriend. He refused to pay the ransom so they threatened to kill him. He too packed up and moved to the states.

      I suppose rich people always think they can run. But if the US implodes, where do you run to then? Where does that leave the people who don’t have the money to run?

  19. Anonymous

    Bernanke Tries to Defend the Fed

    Well it would be strange if he tries to demolish his own place, n’est pas ?

    In a sign that the Federal Reserve is circling the wagons, chairman Ben Bernanke has an op-ed in the Washington Post that attempts to defend the central bank’s role. What is interesting is how much the tables have turned. The Obama effort to make the Fed into the uber bank regulator has become a rout, with decent odds that the Fed will have its powers reduced, and an increasing possibility that Bernanke might not be reconfirmed (which is frankly the right outcome, no CEO who presided over a similar disaster would still be in charge).

    Ben Bernanke was chosen by G.W.Bush in Oct 24 2005, and became FED chairman in Feb of 2006, at that time it became clear to everybody that the US of A was in big trouble because of the sky-high home value. When I was in California in Sept 06, I see for myself a disaster in the making when a house made of mostly compressed paper sell for US$ 700,000. With that money in Poland, or Vietnam, or Germany or probably anywhere else excerpt Japan, you can build a small fortress. So, yes, he was in charge of the FED, but the damage have been done mostly by the 30 years of printing without proper colaterials, as I remember, Alan Greenspan could not believe that the money he printed was used by his underlings to play in a biggest cassino ever constructed by human greed and imagination.

    This piece has so many artful finesses that I must limit myself to the most salient points. From Bernanke:

    This guy is good but the problem he faces is the result of investments in wrong places for an extended time frame, “defence” (offence) spending that is over the capacity of a 300 million nation, because the US propaganda machine has created a bigger enemy for itself, and believe in its own propaganda. No man, in this world can undo all that mistakes by himself.

    As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

    Yves here. He’s only one paragraph into the article and he is already discrediting himself. If he is looking only to last two years for lessons, he is looking in the wrong place. This crisis was at a minimum a decade in the making, and I’d say more like 30 years. Where are the post-mortems? There is absolutely no evidence that the Fed sees its own policies, namely the Greenspan and then Bernanke puts, and the extreme laissez-faire attitude towards bank regulation, as major culprits.

    For instance, the Fed was the architect of the “let a thousand flowers bloom” policy towards derivatives, and made inadequate (one might say no) effort to understand new financial technology. Bernanke himself rationalized burgeoning consumer debt, claiming that consumer balance sheets were in good shape. Hun? This is Japan circa 1989 thinking. The measure of whether a borrower can handle his debt load is primarily his debt coverage ratios (income versus debt service costs). And by those measures, consumer creditworthiness had been deteriorating (admittedly, the data series aren’t great here, but merely looking at zero consumer saving rates would tell anyone with an operating brain cell that things were out of whack). And why do we want to encourage consumer borrowing? Unlike businesses, consumers are not funding in productive investments (and before you offer student loans as an example, one reader has done an analysis and had concluded the returns are lousy). Balance sheets are relevant only in a distress or liquidation scenario. If you need to revert to a conversation about balance sheets to defend debt levels, it should be obvious you are on shaky ground.

    The returns from students loans are lousy or not depends on what they’re tought in university. If all of them were taught to play a zero-sum game, like in Las Vegas, it’s obvious that the returns should be lousy. The education system nowadays put emphasis on passing a particular sets of questions. In the era of the internet, every sets of known questions will be revealed or can be bought on ebay, so I for my part have pass some difficult Microsoft exams just in a few days by learning some sets of questions bought on ebay. What kind of knowledge is that ? The people who have credentials that does not represent real knowledge, or only a small set of the required knowledge will make more problem for themselves and others, unless they’re well aware of what they know, and what they don’t.

    Similarly, I had a chat with a Fed official in the early stages of the subprime crisis, and the Fed was absolutely unwilling to see the banks as having any culpability for the disaster.

    This is hardly a complete list of pre-crisis failures; I’m sure readers can make numerous additions. Back to Bernanke:

    I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions. Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers. And a House committee recently voted to repeal a 1978 provision that was intended to protect monetary policy from short-term political influence. These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States. The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.

    Yves here. Notice how Bernanke invokes a “global consensus,” which is wonderfully vague and ignores the fact that the pre-crisis “global consensus” of minimally regulated markets and financial institutions, is precisely what caused the crisis. Moreover, even if the Fed’s mandate in theory was appropriate, its governance structure is not. The Bank of England and the ECB are not peculiar largely private institutions, accountable to almost no one, as the Fed now is. The Fed’s insistence on secrecy regarding many of its emergency operations is unwarranted and deeply troubling. And “the Fed played a major role in arresting the crisis” ignores the fact that the Fed played a major role in creating it, namely, via negative real interest rates for a protracted period. And he is declaring the Fed’s policies to be successful when the jury is still out.

    Back to Bernanke:

    The proposed measures are at least in part the product of public anger over the financial crisis and the government’s response, particularly the rescues of some individual financial firms. The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly were — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society. (I know something about this, having spent my career prior to public service studying these issues.) My colleagues at the Federal Reserve and I were determined not to allow that to happen.

    Yves here. This is actually very arrogant once you translate it: “What we did was correct, but the public is on a witch hunt and is incorrectly taking it out on the Fed. And I do know better because I am an expert on the Depression.” First, if we are going to get into dueling experts, Anna Schwartz has been enormously critical of the Fed’s conduct, both pre-crisis and in seeing providing liquidity as the primary solution. She also warned explicitly against drawing comparisons between the gold standard era Depression and now. Second, Bernanke’s reading of the Depression (which is pretty conventional, that the Fed blew it by not providing more liquidity) is contradicted by other evidence. As Paul Krugman has pointed out repeatedly, the monetary base, which is what the Fed controls, grew in 1930. But the money supply collapsed. Third, the vast majority of economists tend to look for single factor explanations of why the Depression ended, and within those, tend to focus on the ones that are the easiest policy levers, namely monetary or fiscal stimulus. But the Depression also saw considerable institutional reform, as well as a protracted period of debt reduction, via restructuring (via the Home Owners Loan Corporation) and defaults. Drawing simple conclusions from a complex phenomenon strikes me as misleading and misguided.

    IMHO, the main different between 1930s and this crises is the global nature of this crises. In the 30s people thought in term of gold, nowadays, iphones, BMWs or what ever that they fancy.
    What a piece of gold can do is to give you security in adversity, but now, unless you’re living in a war-torn country like Afghanistan or Iraq, an iphone is much more valuable. Thus most people still see more positives in what the Americans can create, not what they can destroy, and English is still the dominant language of science and culture, despite many things that people don’t like about Americans. Ben Bernanke can still taps from that source of credibility. As real bankers 3 C goes, the USA is still capable of getting more credits from God/Allah/Jehova or what ever nature can offer, but it must be aware of the fact that its time is not unlimited. If the USA supposed to be the home of the brave and the land of the free, then its people must be able to implement the rule of law, and not the rule of the cleptocracy in charge of 9/11.

    Back to Bernanke:

    Moreover, looking to the future, we strongly support measures — including the development of a special bankruptcy regime for financial firms whose disorderly failure would threaten the integrity of the financial system — to ensure that ad hoc interventions of the type we were forced to use last fall never happen again. Adopting such a resolution regime, together with tougher oversight of large, complex financial firms, would make clear that no institution is “too big to fail” — while ensuring that the costs of failure are borne by owners, managers, creditors and the financial services industry, not by taxpayers.

    Yves here. This is way oversold. First, financial firms decay catastrophically, as we saw with Bear and Lehman. No one has a template for how to resolve a big capital markets trading firm, save a subsidized gunshot wedding. This is like pretending you know how to build a nuclear weapon in 1935. What do you do about counterparty exposures? No one wants to be at risk of having his positions frozen. And if you have the government backstop a firm while it continues trading, you get into another huge can of worms. And layer the political problems, that to resolve a big financial firm, you need a very large check. Congress is not about to cede that kind of spending authority to the Treasury, and there do not appear to be any proposals on the table to come up with emergency approval processes (as in some pre-set frameworks and ground rules). But even so, there are massive thorny issues that Bernanke is pretending are solved, when they have not even been addressed. What do you do with Citibank’s $500 billion of foreign deposits, for instance, a fair chunk of which are presumably uninsured? How do you justify having US taxpayers bail out foreign depositors? What responsibility (if any) does the US have for trading operations in other countries? This is thorny because trading books are passed across time zones, again putting operational issues in conflict with legal jurisdiction. And it isn’t clear that a US desire for a resolution regime will dovetail well, or at all, with the bankruptcy regimes in various countries (bankruptcy is handled where the legal entities are domiciled, the Fed’s fond wishes for a US-driven process to the contrary). I have not seen anything to indicate that anyone in authority has grappled with the complexity of the issues, which means statements like this are mere empty sloganeering.

    Back to Bernanke:

    Working with other agencies, we have toughened our rules and oversight. We will be requiring banks to hold more capital and liquidity and to structure compensation packages in ways that limit excessive risk-taking. We are taking more explicit account of risks to the financial system as a whole.

    Huh? Toughening oversight? We’ve seen the reverse, massive regulatory forbearance. Yes, I am told the Fed is now making all the banks disclose their derivatives positions to them, but the Fed lacks the analytical capacity to do much with this information (and I am further told the Fed staff understands that too). So that does not fit my notion of “tougher oversight.” And the rest is just empty promises.

    I’m writing this in a casino. I’ve just won 200%, and I think nobody can control how a dime will turn, it is hardly new that they say they can’t control the biggest casino ever seen on earth. :-) If we know this is a casino, then people who play should be labeled as such, and not financial engineers.

    Back to the op-ed:

    We are also supplementing bank examination staffs with teams of economists, financial market specialists and other experts. This combination of expertise, a unique strength of the Fed, helped bring credibility and clarity to the “stress tests” of the banking system conducted in the spring. These tests were led by the Fed and marked a turning point in public confidence in the banking system.

    Yves here. The worst is the folks at the Fed clearly believe the bogus stress tests were a meaningful exercise. That alone should disqualify them from getting a bigger role in bank supervision. And if you read their pronouncements, they plan to continue to use them, and have the process run by….monetary economists! Pray tell, what do they know about bank operations? Help me! And some of the help the Fed has enlisted in the stress test exercise includes the consulting firm McKinsey, which has the biggest banking practice in the consulting industry. Think McKinsey is going to devise anything that might be rough on its biggest meal tickets? Bernanke also conveniently ignores the fact that the rally might also have a wee bit to do with the fact that he threw a bit over $1 trillion at the markets, as announced in mid-March.

    I could go on, but you get the picture. The Fed seems to believe its own PR.

    Well, its strange, but sometimes one must believe in oneself. PR or not, Que Sera, Sera…

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