Sen. Merkley, Dem. on Banking Committee, to Vote Against Bernanke

This morning, Senator Jeff Merkley, a freshman Senator from Oregon, announced he would vote against Bernanke’s confirmation:

Tomorrow, I will vote against confirming Ben Bernanke as Chairman of the Federal Reserve. The reason, in short, is that as Chairman, Dr. Bernanke failed to recognize or remedy the factors that paved the road to this dark and difficult recession. Following our economic collapse, it is also apparent that he has not changed his overall approach to prioritizing Wall Street over American families.

My decision is based on my fundamental belief that our economy cannot recover if we do not put Main Street first.

Our nation is just beginning to emerge from the greatest financial crisis since the Great Depression, and there is no guarantee we will continue on the road to recovery over the long or short terms. Unemployment remains far too high, credit is unavailable to too many businesses, and families are plagued by falling home prices and high foreclosure rates. Even as we move forward with our efforts to get our economy back on track, it is critical we carefully examine what led us to this point.

For too many years, federal regulators turned a blind eye to signs of an impending financial crisis. Tricks and traps proliferated in the credit card and consumer lending industries. Predatory mortgage loans exploded, fueling an unsustainable housing bubble. Regulators lifted rules requiring banks to keep adequate capital, and a laissez-faire approach to securitization, derivatives, and proprietary trading encouraged excessive risk-taking on Wall Street….Dr. Bernanke supported each of these decisions, failing to take the necessary precautionary steps that could have averted or mitigated financial collapse..

We need economic leaders who understand that the ultimate goal of economic policies and the key to meaningful economic recovery should be financially successful families, not oversized Wall Street profits.

Indeed, it should be recognized that although Wall Street prospered in the short-term from reduced leverage requirements, securitization of faulty mortgages, and the explosion of derivatives, Americans did not. The expansion that occurred from 2002 to 2007 became the first economic expansion in which working families were worse off at the end than at the beginning. This is not a path that we can afford to travel again.

While it is still likely that Bernanke will be approved by a large margin in the Senate Banking Committee vote tomorrow, this move is significant because:

1. Markley is a freshman Senator who is defying Democratic leadership, which is trying to jam the nomination through. He is clearly more concerned the interests and views of his constituents. While many Republicans are opposed to his confirmation, a Democratic defection is significant. It says at least some Senators believe the public is taking note of this vote, and they do not want to be on the wrong side of it.

2. Disapproval of Bernanke runs high. We cited a Rasmussen poll that found a mere 21% approved of Bernanke’s confirmation about two weeks ago, with nearly twice as many disapproving. A poll released today found that by an even larger margin (more than 2 to 1) Americans believe that Bernanke favors Wall Street over Main Street.

3. Note that Merkley took his stand the very same day Time announced Bernanke as Man of the Year. What favors were exchanged for THAT to happen? As reader Vinny asked, did Time Warner become a bank holding company recently? But perhaps I am too cynical here; after all, such august figures as Hitler and Stalin (twice) were also Man of the Year, so the recipient merely needs to have had an impact, not necessarily a positive one.

Please keep the pressure on. If you have time, call one or both of your Senators and say you disapprove of the confirmation. Please call a LOCAL (meaning in-State) rather than DC office (those calls get more serious consideration, I am told).

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  1. DownSouth

    Time just named Bernanke “Person of the Year”:

    But the main reason Ben Shalom Bernanke is TIME’s Person of the Year for 2009 is that he is the most important player guiding the world’s most important economy. His creative leadership helped ensure that 2009 was a period of weak recovery rather than catastrophic depression…

    Read more:,28804,1946375_1947251,00.html#ixzz0ZshRKcHT

    Barf! These guys have no integrity and no shame.

  2. Vinny G.

    This senator has guts.

    Too bad it doesn’t take a unanimous vote to keep the dirty, rotten BB rascal in.


    1. Doug Terpstra

      I can’t believe it either. BB’s withdrawal would practically guarantee a Fed audit. He seems to fear that most—unless he knows that something even more dire is imminent. Maybe a black swan landed in his pool yesterday.

  3. rickstersherpa

    If the President wants to get the bankers attention and not be treated with the withering contempt he has been the last few days, the next time he meets with the bankers he should tell announce that Tim Geithner and Larry Summers have resigned and that the new Treasury Secretary is Paul Volker, Meredith Whitney as the new Deputy, and Steve Waldman replaces Summers.

    From Waldman’s blog,

    “…It’s unfair to say that the government now supplies all large bank capital. Stockholders still suffer price volatility and there is some uncertainty that the government will remain politically capable of being so generous. But the vast majority of large-bank economic capital is now supplied by the state, regardless of the private identities and legal forms associated with bank funding arrangements. So long as the political consensus to support them is strong, American megabanks are in fact exceedingly well capitalized, as the US dollar risk-bearing capacity of their public guarantors is infinite. But that is not a good thing.

    No iron law of economics ensures that those who bear the risk of an enterprise enjoy the fruit of its successes. Governments have the power to absorb the downside of formally private enterprises (and the libertarian so principled as to refuse a bail-out is very rare indeed). But they have no automatic ability to collect profits or capture gains from organizations that they economically capitalize, but do not legally own. Bearing the downside risk of a project with no claim on the upside is the circumstance of the writer of an option. Private parties who write options, either explicitly or implicitly via credit arrangements, demand to be paid handsomely for accepting one-sided risk. Governments do not. Banks pay deposit insurance premia, but only on a fraction of the liabilities the government guarantees and in a manner that does not discriminate between the prudent and reckless (which creates a public subsidy to recklessness). When governments have lent to banks during the crisis, they have lent at well below the rates even untroubled, creditworthy nonfinancial borrowers could obtain on the market, so that the implicit option premia embedded in credit spreads were somewhere between negligible and negative. Governments paid banks for the privilege of insuring their risks, or to put it more accurately, they acknowledged that they had already insured bank risks and found ways of paying out claims via subsidies sufficiently hidden as to be politically palatable.

    As we think about how to regulate banks going forward, we must first be clear about what we are doing. We are negotiating the terms of options that the government will offer to bank stakeholders. It is important to understand that, for both practical and philosophical reasons. As long as the state substantially bears the downside risks of the financial system, by virtue of explicit legal arrangements or de facto political realities, philosophical arguments for deregulation are incoherent. Deregulation is equivalent to a blank check from the state. If you are philosophically in favor of free market capitalism, you must be in favor of very radical changes in the structure of banking, towards a system under which the state would have no obligation to intervene, and would in fact not intervene, to support bank stakeholders even when their enterprise threaten to collapse. The “resolution regimes” currently proposed do not restore “free market” incentives, because those proposals codify rather than forbid state assumption of risk and losses in the event of a crisis. A free market resolution regime would allocate losses among private stakeholders only, and prevent any loss-shifting to the government. For the moment, such a regime, and the structural changes to the banking system that would be required to make it credible, are politically beyond the pale.

    So, the options written by government to bank stakeholders will remain in place. All that remains, then, is to negotiate the terms of those options. Framing bank regulation in terms of option contracts underlines a reality that is tragic but true: options are zero-sum games. One party’s benefit is another party’s cost. Very deeply, there is no confluence of interest we can seek between our best and brightest financiers and the public good. Terms that are good for banks are bad for taxpayers. Negotiating the terms of an option with a wealth-seeking counterparty is an inherently adversarial affair. When President Obama is on the phone with Jamie Dimon, do you think he keeps that in mind? A fact of life that our President seems not to enjoy is that while sometimes there are miscommunications that can be resolved via open exchange, sometimes there are genuine conflicts of interest that must simply be fought out. Bank regulation, alas, is much more the latter.

    There are indirect as well as direct effects of option contracts, so maybe I’ve framed things too harshly. After all, we allow and encourage formal derivatives exchanges because, even though the derivative contracts themselves are zero-sum, they permit businesses to insure against risks, and that insurance can enable real wealth creation that might not have otherwise occurred. We claim that derivatives markets make indirect positive contributions to the real economy, despite the fact that their direct effect is simply to shuffle money between participants. Banking also just shuffles money around, but we generally think that it enables important business activity. So one might argue that banks and the public have a common interest after all, and smart regulation to evolve could from a more consensual process. But, one would be wrong. We all have a stake in the existence of a payments system, and banks provide one, but managing that is a largely riskless activity, conceptually separable from the lending and investing function of banks. We would also like our economic capital to be allocated productively. But the effect of writing a more bank-friendly options contract is to reduce the penalties for poor capital allocation while enhancing the payoffs to big, long-shot risks. Banks destroy Main Street wealth and create Wall Street crises by making foolish and indiscriminate use of the capital entrusted to them. If we desire a better banking system, we must limit the degree to which private stakeholders can expect to be made whole by the state. With respect to regulation, what’s good for Goldman Sachs is quite opposed to what is good for America. The point of regulating is to align public and private interests by imposing costly limitations on how banks can behave. Indirect considerations of public welfare reinforce rather than reduce the degree to which bank regulation is zero-sum, a fight that pits the health of the real economy against the distributional interests of bank stakeholders.”

    1. emca

      I don’t know who Steve Waldman is, but I’ve browsed some of his posts and comments on small business finance, and he has my vote for Treasury.

      By the way, I would give Volker a shot as a returning FED chair. Whatever his drawbacks, I don’t buy the Volker-is-too-old argument. What I’ve heard lately seems more coherent and sound than what’s coming from Bernanke’s mouth organ. If he’s a one termer, maybe that’s for the better.

  4. Peripheral Visionary

    It would be a stretch to say that this has any momentum, but with McCain now out as being against (as noted, he may be facing a very tough primary opponent from the populist wing of the Rep Party), it’s not going to be the smooth sailing that was initially predicted.

  5. Doug Terpstra

    I had already called McCain earlier and will call Kyl once again.

    Interestingly, Merkley’s reasons for voting no, while clear and compelling, are based soley on the manifest failure of the Fed’s mission, nothing more. He does not even broach, nor does he need to, the violation of Fed charter, market manipulation, and the heavy circumstantial evidence of fraud addressed in Ives’ earlier post, “Bernanke Stonewalls and Prevaricates…”

  6. bobh

    I also saw a story today that Howard Dean is saying Democrats should vote against the health care reform bill because it is worse than doing nothing. More Democrats should be breaking away from Obama and his policies in order to get the message out that these center right, corporatist policies are not what real Democrats stand for. There needs to be a primary challenge to Obama from the left in 2012 and this effort needs to start very soon. It needs to be led by someone smart and articulate who will make a reasoned case to the entire spectrum of voters from a progressive perspective–Senator Cantwell?–not someone who is just focused on stirring up angry Democrats on the left. I don’t think there is any chance of beating Obama for the nomination, but I also don’t think he has much chance of winning the general election. It is important that at least part of the Democratic party get some visibility as being critical of what Obama is doing for the bankers, of his health care reform capitulation to insurers and pharmas, and of the squandering of our national wealth while getting very litte for it. The republicans will run and win against Obama on these issues, and they will try to label the Democrats as responsible for the worsening economic crisis, for the failed and corrupt bailouts, and for the coming rapid escalation of health care costs and industry profits. Obama shouldn’t be allowed to discredit the whole party because of his strange infatuation with the power elite. Voting against, and defeating, his health care plan and additional banker bailouts would be first steps for this.

    1. Doug Terpstra

      Howard Dean is right—the healthcare bill is worse than nothing. Of dubious constitutionality, it violates Obama’s campaign pledge against mandates by forcing all citizens to buy private insurance without any public option, and although it gives taxpayer subsidies to those who cannot afford it, it is otherwise overt corporate welfare without a government middleman. No wonder Obama and insurance companies are keeping a low profile.

      For great candidates, Governor Doctor Howard Dean tops my list, hopefully as an Independent.

  7. DownSouth

    Yves said: “But perhaps I am too cynical here; after all, such august figures as Hitler and Stalin (twice) were also Man of the Year, so the recipient merely needs to have had an impact, not necessarily a positive one.”

    Nope. Wishful thinking but it ain’t so. The Times story is not only an unapologetic puff piece for Bernanke, but an attack piece on anyone who dares to disparage him. It appears the editors of Time are taking their lead from the Nobel Peace Prize committee. As Michael Hudson commented in his article in today’s Links: “Deliberately or not, it (the Nobel Prize) represents the Royal Swedish Academy’s endorsement or recognition of the political influence of some economist in helping to defend some (presumptively) laudable government policy.”

    Time is blatantly and unabashedly pushing a political agenda.

    Here are just a couple examples:

    ► His arguments aren’t partisan or ideological; they’re methodical, grounded in data and the latest academic literature. When he doesn’t know something, he doesn’t bluster or bluff. He’s professorial, which makes sense, because he spent most of his career as a professor.

    ► Professor Bernanke of Princeton was a leading scholar of the Great Depression. He knew how the passive Fed of the 1930s helped create the calamity — through its stubborn refusal to expand the money supply and its tragic lack of imagination and experimentation. Chairman Bernanke of Washington was determined not to be the Fed chairman who presided over Depression 2.0. So when turbulence in U.S. housing markets metastasized into the worst global financial crisis in more than 75 years, he conjured up trillions of new dollars and blasted them into the economy; engineered massive public rescues of failing private companies; ratcheted down interest rates to zero; lent to mutual funds, hedge funds, foreign banks, investment banks, manufacturers, insurers and other borrowers who had never dreamed of receiving Fed cash; jump-started stalled credit markets in everything from car loans to corporate paper; revolutionized housing finance with a breathtaking shopping spree for mortgage bonds; blew up the Fed’s balance sheet to three times its previous size; and generally transformed the staid arena of central banking into a stage for desperate improvisation. He didn’t just reshape U.S. monetary policy; he led an effort to save the world economy.

    ► Bleeding-heart liberals and tea-party reactionaries alike are trying to block his appointment for a second four-year term.

    1. Doug Terpstra

      Well then, if “bleeding-heart liberals and tea-party reactionaries” are trying to block him he must surely be a church elder and pillar of the community above reproach.

      It sounds like the full court press is on for his confirmation. Perhaps changing horses while running the rapids could prove “awkward” to those not wearing suits. Probably a lot more shrinkage than anyone wants to expose or see.

    2. craazyman

      “The latest academic literature”

      Oh My God!

      That is so funny I can’t stand it. I want Sasha Baron Cohen to make a movie about “the latest academic literature”.

      Especially in Economics. ha ha. Literature and economics, in the same sentence, ha ha ha hahaha hahahahah. Sorry I can’t stop laughing.

      I’m sure it’s something Borat the Khazakstan reporter could get a handle on for us all. ha ha ha

      This is Time Magazine, oh my Lord, is there one institution in the USA that isn’t thoroughly corrupted or totally incompetent? I wonder, really and sadly, I wonder.

  8. Hugh

    America had become a corporate kleptocracy. That is what all this looting we are always talking about means. Time and the media are part of the corporacy. Their supporting the biggest sugar daddy and facilitator of looting in our history is really a no-brainer when you think about it.

  9. EmilianoZ

    If you wanna block Bernanke’s re-appointment, you’d better have a credible alternative. Otherwise it’s gonna be our friend Larry. We all love tall Paul, but he might be a tad too old (no disrespect).

  10. SDmatt21

    EmilianoZ, that isn’t our job, but there are plenty of alternatives. Isn’t America supposed to have the world’s best economists? If you want someone with practical experience then why not look at some of the former American IMF chief economists: Simon Johnson, Raghuram Rajan (warned Greenspan about derivatives), and Kenneth Rogoff. If you want some people who predicted the crisis and actually have a chance of being appointed then why not look at Nouriel Roubini or Robert Shiller? Obviously there are many other alternatives, but I’m just providing food for thought.

    1. Carlo Ponzi

      It’s not a fluke that Bernanke was appointed to succeed Greenspan. He was appointed because he’s willing to serve his political masters by fomenting asset bubbles. If Bernanke is not reappointed, his successor will be at least his equal in terms of Zimbabwean proclivities. Anyone who thinks his replacement would be a Volcker is seriously deluded. The Volckers of the world are anathema to the powers-that-be until there’s a hyperinflation problem that needs to be dealt with.

  11. ScottB

    Merkley is my senator, and I wrote to him about Bernanke last week. It’s nice to be proud of an elected representative once in a while!

  12. dlr

    Yves, do specifically recommended phone calls. How about emails? Do they do any good, or are they just ignored? I strongly prefer sending emails to calling. But I am wondering if I am just wasting my time. Does anyone have any insight into this?

  13. Siggy

    Sen. Merkley deserves our gratitude. The Great BB deserves our disdain. He may have committed a fraud and perjury, however, proving it would be very difficult. He has committed us to the very real potential for hyperinflation. In a perverse way we are now experiencing accelerated inflation by way of the artificially low interest rates that the Fed is fostering.

    If an audit of the Fed is accomplished I fear that it will be made known that what the Fed has accepted as collateral has a market price of less that 40 cents of face amount. What the government hands out as stimulus must eventually be funded by revenue . . . TAXES. It’s a pay me now, pay me later game. If you’re very ‘sophisticated’, you can debase the currency and levy a tax in that fashion. The politcal appeal of debasement(inflation – loss of purchasinf power) is that it’s difficult to measure. After fostering inflation, the greatest sin of the Fed has been its abrogation of regulatory oversight.

    The sin of Congress has been its failure to audit the regulatory activites of the Fed, the Treasury, the SEC, the CFTC and the ineptitude of the Justice Department in the few prosecutions that have come forward.

    Two facts are becoming increasingly clear. A fiat currency is a failure at its inception. Fractional reserve banking is the engine profligate lending.

    Since 1946, the mandate of the Fed has been to foster economic growth and to preserve the purchasing power of the Dollar. The Fed has succeeded in fostering a number of asset bubbles. It has failed in its charge to preserve the purchasing power of the Dollar. Since 1946, the Dollar has been losing purchasing power at the compound rate of approximately 3.25% per year.

    Instead of recognizing that a significant number of ‘primary dealer’ banks were insolvent, seeking legislation to nationalize them, restructure them and selling them to NEW owners; the Fed and the Treasury have colluded to bail them out with Taxpayer monies.

    What once engendered envy and admiration abroad was our ability to change poltical course without a revolution. We did it by ballot and open debate. Today we are viewed with disdain for our secret Presidential Findings and our rendition of suspected terrorists. Too often we have engaged in wars that are tribal and inherently self destructive to the principals. Left to their own those civil wars would end of their own accord.

    The collapse of the Soviet Union was an inevitability whose occurance was only a matter of when not whether and our singular concern was to be prepared lest the Polit Bureau decide that a nuclear war was the best course to stay in power.

    If we are to be the world’s military and economic hegemon we need to conduct ourselves in a manner that commands the respect of the world. Liking us is not a rationale goal, respect is what we should be seeking. You garner respect by application of the rule of law and the prosecution of fraud. You garner respect by having a stable currency.

    It is my view that the Republican Party threw the Presidential election and is now hoping to see President’s Obama’s administration fall into a one term, lame duck fiasco. What saddens me most is that I see little evidence of clear thinking and integrity in the halls of Congress.

    Again I applaud Sen. Merkely and wish him well.

  14. Kay4

    Senator Merkely, regardless of whether he is right or wrong (I do believe he is right about Bernanke) stood up and opposed most of his colleagues. I take my hats of to him and I hope people who have the power to appoint someone listen to him.

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