Bernanke’s Cockroaches

Yet again, the long-suffering public is subjected to what passes for a leader during the crisis engaging in image-burnishing, in this case, Bernanke via an interview with the Financial Times: Ben Bernanke attacks Congress for failing to foster US rebound.

The former Fed chairman is getting a round of media hype attention due to the publication of his memoirs. It may seem like a myth from ancient times, but it really was not all that long ago that “public service” really did mean putting the needs of the citizenry as a whole first. And that included having enough of a sense of respect for one’s former office so that one didn’t go ringing the cash register and engaging in personal brand enhancement, or at least not visibly and not all that close to one’s departure.

And if Bernanke really is incapable of resisting the lure of a big payday, can’t he just take his filthy lucre from hedge fund Citadel and keep the rest of us out of it?

The idea that Bernanke did a praiseworthy job has been widely debunked. Bernanke continued the “Greenspan put” that stoked speculation all across the credit markets, to the point that anyone who was paying attention had heard of the “wall of liquidity” and massively compressed credit spreads by mid 2006. The Fed did even less to enforce the Home Ownership and Equity Protection Act meant to curb subprime lending than the bank-cronyistic OCC did.

As the crisis unfolded, the Fed failed to take the risk posed by the credit default swaps market seriously, even though CDS contagion risk was the most important reason for bailing out Bear Stearns, otherwise too small to be deemed worthy of a rescue. Instead, the Fed went into “mission accomplished” mode after Bear’s bailout.

Worse, after the crisis, the Fed consistently pursued policies to save banks, in particular the bank executive incumbents, and let the cost of the crisis fall on Main Street, particularly workers and homeowners in the bottom 90%. Did Bernanke say a peep when the big financial firms that had just been saved from certain death went to pay their executives and staffs record bonuses in 2009 and 2010 rather than rebuild their equity bases? The Fed was so deeply complicit that it didn’t even attempt a private scolding.

And the central bank was fully on board with the Treasury’s treatment of the mortgage-backed securities market as too big to fail, which amounted to a second, stealth bailout. The refusal to pressure banks to do principal modifications resulted in unnecessary foreclosures, and a massive loss of wealth, not just to homeowners but also to investors in mortgage backed securities. The Fed joined the Treasury and OCC in all of the various bank “get out of liability for almost free” mortgage and servicer settlements. It was thus a full, albeit quiet, partner with the Geithner “foam the runway” program of wrecking borrowers’ lives for the dubious purpose of preserving bank profits.

Bernanke apparently feels compelled to up his game in self-hagiography a bit, since at least some of the public recognizes that he’s an arsonist trying to take credit for putting out a fire, except the fire-fighting wasn’t all that well done, since the rubble is still smoldering years later. As the Financial Times tells us:

Mr Bernanke levels frequent criticism at Congress in the book, calling for less confrontation and implicitly contrasting the bitter partisanship on Capitol Hill with a collegiate, consensus-building approach within the Fed.

First, Obama had a majority in the House and Senate when he came into office. The failure to do enough in the way of fiscal stimulus lies with the Administration’s failure to push for it, particularly since Christine Romer estimated $1.2 trillion of spending was called for, and Larry Summers rejected it for political rather than economic reasons. The Fed, contrary to its pretenses, is not independent; Greenspan compromised it long ago when he pushed for Social Security reform and told consumers to go buy homes with adjustable rate mortgages. Bernanke continued with the Fed faux-independence by calling for debt reduction in 2011. The Fed could easily have supported an Obama push for aggressive fiscal policy, particularly in light of the fact that it was stepping well outside its traditional role on other fronts in response to the crisis. But no, the lousy state of the economy is all Congress’ fault.

Second, the Fed had it well within its powers to do far more vis-a-vis the banks, via supervision as well as jawboning. That’s been proven years later through the not-well-publicized efforts of Fed governor Danny Tarullo, who according to independent sources, had finally gotten the banks to understand that the Fed is deadly serious about increasing capital levels and reducing risk taking. Having the full weight of the Fed behind that agenda in 2009 would have made an enormous difference.

And we get an addition to a tired excuse:

He argues in the book, however, that invoking worries about moral hazard in the midst of a major crisis would have been “misguided and dangerous”. While admitting that he winced when he saw bumper stickers saying “where’s my bailout?”, Mr Bernanke defends the Fed’s financial interventions, as well as its monetary policy rescue, which involved cutting rates to near-zero and a vast bonds purchase programme.

Bernanke conveniently conflates bailing out institutions (which was necessary) with the issue of responsibility, as in holding individuals accountable. The refusal to replace boards and top executives, particularly at institutions with obviously weak leadership (Citigroup and Bank of America were top of the list) was indefensible. Even if there was not enough readily locatable recently retired bank executives to fill the ranks of all the wobbly banks, forcing changes upon Citi and Bank of America would have sent a very powerful message to the rest. And we’ve argued at length, for years, that there was no dearth of legal theories that were simply not even attempted as far as prosecuting bank executives was concerned, starting with the one designed for the task, Sarbanes Oxley.

But what pathetic new line do we get from Bernanke? His feelers were hurt when he read a bumper sticker? People lost their businesses, their jobs, their homes as a result of the crisis, and we are supposed to feel sorry for his wounded feelings when he is called out in the tamest terms possible?

This illustrates how insulated and preening our ruling classes have become, that they are unable even to take mild criticism, let alone a remotely accurate assessment of the job they’ve done. By contrast, as Jim Collins found in his book on true top performers, Good to Great, the heads of those companies did the opposite of the diseased norms exhibited by Bernanke: they gave credit for success to their teams, and took full blame for failure.

The time is past to deal with these intellignce-insulting efforts at revisionist history. When I read a new, improved set of excuses from people like Bernanke, I feel like I’ve walked into my kitchen and turned on the lights after the exterminator paid a visit, only to find cockroaches scuttling all over my counter yet again.

Every time you read self-serving justifications from the perps of the crisis, visualize cockroaches on a counter. Only when the officialdom realizes you’ve programmed your own Pavlovian defenses against their Big Lies might you be able to stop them.

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  1. abynormal

    “The lectures are consistently lucid and informal . . . and above all intelligent and interesting. . . . [I]t would be difficult to find a better short and not very technical account of what went wrong, and of how the Fed (and the Treasury) managed to keep it from getting much worse.”–Robert Solow, New Republic

    Bernanke Hates

    Ben Quotes:
    (November 15, 2005) “With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.”

    (October 31, 2007) “It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.”

    “The GSEs are adequately capitalized. They are in no danger of failing.”

    (June 10, 2008) “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”

    (October 4, 2006) “If current trends continue, the typical U.S. worker will be considerably more productive several decades from now. Thus, one might argue that letting future generations bear the burden of population aging is appropriate, as they will likely be richer than we are even taking that burden into account.”

    lastly, the Howdy Doody moment: “Not all information is beneficial.”

    1. Teejay

      wrt “Ben Quotes” : May be he could take a page from Senator Kyl’s staff:
      “his remark was not intended to be a factual statement” […].

  2. craazyboy

    “His feelers were hurt when he read a bumper sticker?”

    Also too, remember Hank Paulson had his queasy stomach moment where he almost lost his cookies upon realizing the world may end due to the financial system melting down. It took $800 Billion in Treasury funds bailout to make Hank’s tummy feel better.

    These people do care.

    Alan G got a $10 million advance for his novel. Wonder what Ben will get for his?

    1. rusti

      That line resonated with me too. It illustrates in one short observation just how few feedback mechanisms there appear to be for Beltway insiders to understand life in the rest of the country. It makes some of them slightly more sympathetic in my eyes, for what little that might be worth while the world burns.

      I wonder if Congresspeople, who spend a non-trivial amount of time in their actual districts, are any more cognizant of reality?

    2. Mb

      I deeply wish someone could dig up archival footage of Hank Paulsen being interviewed on ABC Sunday AM political show the morning before the Olympics in China. (July?) The economy was soon to crash, he was outgoing Treasury Secretary and he was sweating bullets with softball questions. He looked like a bank robber being stopped for an interview on his way out the door of a heist. Maybe he had been secretly negotiating with the Chinese to buy up our treasuries when the shit was about to hit the fan, leaving Geithner & Bernanke next in line? I have never and I mean never seen anyone so nervous chatting about his soon to be job departure at this ceremonial Olympics welcome chat.

  3. cnchal

    To me, the GFC, with the Bernank right in the middle is the first great crime of this millennium.

    The timing was perfect, Bush on his way out, and not really knowing who was to be the next president, there was a power vacuum in Washington that was fully taken advantage of by the criminals. I include the Bernank as one of the criminals.

  4. Carla

    Excellent piece. Thank you, Yves. (There is a typo in the bolded sentence “His feelers were hurt when he read a bumper sticker.”)

  5. griffen

    Well said. Highly unfortunate for the majority of us, but it was indirectly beneficial to Paulson, Geithner, et al, to attempt preserving status quo such as that continued to even exist.

    The additional bailouts allowed to Citi, and to Bank of America (both included a ring fencing of the very bad investments or asset holdings) was particularly aggressive. Still unbelievable.

  6. Tyler

    Yves, I just tweeted this excellent piece. I’ve been hesitant to criticize Obama because the Obots are everywhere, but I’m changing my behavior now – and it starts with this article. Thanks!

  7. craazyman

    when ya think back
    on all the crap they learn in grad school
    it’s a wonder
    they can think at all
    and though a life of education
    didn’t hurt them none
    they can’t read the writing on the wall

    bailout the the lever pullers
    savin’ the world’s shlt bullers
    sayin’ their ain’t no other way, oh yeah
    They got lifetime brainwash
    They wanna make loads of cash
    Mamma won’t take that fraudochrome away

    I’m dating myself here, making up fake Paul Simon lyrics, but so what. And sorry this is pretty bad, I admit, but it’s early and I have to work the day job

      1. craazyman

        Yeah I read it again and it was better than I thought. I didn’t think “shlt bullers” would work but somehow it does. But, to be fair, it’s not as good as the original! bowhahahahah. I have to be honest. The original was pretty dam good, even though it’s now a 50+ golden oldie. whoa!

    1. Martin Finnucane

      At this point I have to wonder who they think will believe them.

      It doesn’t matter. This story qualifies as part of the standard narrative, and that’s all that matters.

    2. GuyFawkesLives

      Right. If Lynch wanted to prosecute some bankers, all she would have to do is enforce Sarbanes Oxley. And wa-la….some bankers in jail.

      It is hyperbole.

  8. Peter Pan

    Some of the following comments on Brenanke’s view of fiscal matters may be at times somewhat faulty due to memory lapse.

    1st, he starts out as the head of the Fed stating that he doesn’t have any comments toward fiscal policy since his domain is monetary policy.

    2nd, he tells legislators that they must do more work toward reducing the fiscal deficit. The Republicans rejoice.

    3rd, he tells legislators that they must address the entitlement crisis of Social Security and Medicare/Medicaid via a grand bargain. The Republicans and Obama rejoice.

    4th, he tells legislators that they are making the Fed’s work difficult but doesn’t provide specifics. The MSM reports only the views of Republicans who interpret this to mean more fiscal deficit reduction.

    5th, in his last year heading up the Fed, he tells legislators again that they’re making the Fed’s work more difficult and that they should employ fiscal stimulus (shocked, I am, totally shocked).

    So he starts out at one end of the spectrum and ends up at the other end regarding fiscal policy. Well, at least he changed his mind. Other than that, Yves nails it.

    1. Yves Smith Post author

      The issue was the Fed compromising its vaunted independence, and Greenspan and Bernanke were on the same page in the Greenspan era. In fact, Bernanke’s role was to give intellectual legitimacy to Greenspan, who did not have a PhD in economics. The taking a position on fiscal matters in only one part of the Fed not being as independent as it professes to be.

      Moreover, Bernanke saying in 2006 he did not have any comments on fiscal policy is counterfactual. He had been for years and was merely pretending otherwise for official consumption.

      In his famous 2002 Helicopter Ben speech, having the Fed throw cash out of helicopters is fiscal, even if Bernanke was trying to pretend otherwise.

      Similarly, in 2008, former central banker Willem Buiter was criticizing the Fed for operating in an unconstitutional quasi fiscal role:

      He did opine on the size of the stimulus in 2009. That is a fiscal matter:

      So I beg to differ with your chronology. It’s one Bernanke would like to have you believe but it does not line up with his actions.

      1. Dugh

        It’s good to see you, Yves, focus your laser like intellectual horsepower on this guy! Thank you!

        These reality challenged academic “high priests” drive me nuts.

        From his book website:

        “An unrivaled look at the fight to save the American economy.”

        “When the economic well-being of their nation demanded a strong and creative response, my colleagues at the Federal Reserve, policymakers and staff alike, mustered the moral courage to do what was necessary, often in the face of bitter criticism and condemnation. I am grateful to all of them.” -Ben S. Bernanke


  9. Trent

    he wasn’t doing it just for the banks, he had to protect the American way of life Yves. God forbid creative destruction destroyed mega corps and opened room for small to medium sized business to grow. All at the same time providing jobs and spreading the wealth out among a larger portion of the population.

  10. JustAnObserver

    And the sad, infuriating, dementing thing is that Bailout Ben probably believes every single word in his book. “What’s good for Goldman is good for America” is etched indelibly into whatever remains of his soul.

  11. susan the other

    I noticed that when the Hankster did his book and the initial promotion only stirred up all the anger and hatred all over again, he quickly got very quiet and has only recently crawled out of his hole. One thing the banksters can be counted on to do is protect each other. Make up any excuse, it doesn’t matter as long as the 99 pay for it. Congress was remiss all right – it should have given us public banking then and there.

  12. readerOfTeaLeaves

    This post puts me in mind of something that I spotted on Facebook over the weekend, while checking on family:
    It’s starting to look like between gerrymandering, poll testing, issue pandering and the vile influence of a few people’s money dominating our entire political system that we’re starting to see the play out of something called the ultimatum game, which, I’m not sure you’re familiar with it, but I’d remind you very quickly in case you may have forgotten. The ultimatum game is a game in which one person decides what both people get. Think of it as five pieces or ten pieces of bread. And if I give you five pieces and I keep five pieces for myself, everybody is happy. I keep six, you get four, you’re not happy, but you’re not gonna blow up the whole game up. I keep seven, you keep three now you start to get very irritated with me. Now the counter-party, you, in this instance, has one option, which is either to accept what I give you no matter what or blow the whole thing up so neither of us get anything. It is irrational because one or two or three pieces of bread is better than no pieces of bread. But the whole point of the ultimatum game is that if you abuse people and their intelligence too much they would sooner burn the place to the ground than take a bad deal Even if it’s against their own self interest. And that’s what we’re seeing play out here because the political system has become so abusive to so many people you’re starting to see actual decisions that are counter on the maximum level to your own interests being played out simply to try to bring the entire thing to its knees..

    I don’t think that Bernanke is an evil person.
    I think that he made some huge errors, as we all do. Because of his position, his errors wrought terrible damage on a lot of people.

    Bernanke, in essense, told all of us trying to get businesses off the ground, who had to repay loans to TBTF banks in a hellish economic environment, that we could have 1 piece of bread, but he had to give the banks 9 pieces b/c if he didn’t they’d destroy the economy. That our innovation and hard work was less valued than TBTF predators, who couldn’t even make reasonable lending decisions.

    And I think that a lot of decent, hard-working people like myself have said, “This whole ‘the banks get 9 pieces, and you get 1’ is not fair, it’s not reasonable, and it is caving to thugs.”
    I doubt that Mr. Bernanke thought very carefully about this outcome, which is part of a very large tragedy.

    I think that Ratigan’s analysis is flat brilliant.

    1. MikeNY

      Bernanke is intellectually captured. He doesn’t question the system, because the system has worked for him.

    1. Just Ice

      “Euthanization of the rentier” takes on new meaning when it’s retirees who are being euthanized?

  13. Gio Bruno

    Wow! Now that’s a take-down!!

    There is no one that can explain real events accurately like Yves. I would love to see a video interview between Yves and Bernanke over this topic.

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