The Senate Banking Committee will be chatting with Ben Bernanke this Thursday to vote on his reappointment.
Demand that the Committee ask the following questions for our esteemed Esteemed Chairman (and contact your own Senators also and demand that they find out the answers to the following questions). If you are a Senate aide, please get these questions to your Senator.
High-Level Fed Officials Slam Bernanke
Fed Vice Chairman Donald Kohn conceded that the government’s actions “will reduce [companies’] incentive to be careful in the future.” In other words, he’s admitting that the government’s actions will encourage financial companies to make even riskier gambles in the future.
Kansas City Fed President and veteran Fed official Thomas Hoenig said:
Too big has failed….
The sequence of [the government’s] actions, unfortunately, has added to market uncertainty. Investors are understandably watching to see which institutions will receive public money and survive as wards of the state…
Any financial crisis leaves a stream of losses among the various participants, and these losses must ultimately be borne by someone. To start the resolution process, management responsible for the problems must be replaced and the losses identified and taken. Until these actions are taken, there is little chance to restore market confidence and get credit markets flowing. It is not a question of avoiding these losses, but one of how soon we will take them and get on to the process of recovery….
Many of the [government’s current policy revolves around the idea of] “too big to fail” …. History, however, may show us a different experience. When examining previous financial crises, both in other countries as well as the United States, large institutions have been allowed to fail. Banking authorities have been successful in placing new and more responsible managers and directions in charge and then reprivatizing them. There is also evidence suggesting that countries that have tried to avoid taking such steps have been much slower to recover, and the ultimate cost to taxpayers has been larger…
The current head of the Philadelphia fed bank, Charles Plosser, disagrees with Bernanke’s strategy of the endless printing-press and ever-increasing fed balance sheet:
Plosser urged the Fed to “proceed with caution” with the new policy. Others outside the Fed are much more strident and want plans in place immediately to reverse it. They believe an inflation storm is already in train.***Bernanke argued that focusing on the size of the balance sheet misses the point, arguing the Fed’s various asset purchase programs are not easily summarized in a single number.
But Plosser said that the growth of the Fed’s balance sheet was a key metric.“It is not appropriate to ignore quantitative metrics in this new policy environment,” Plosser said.***Plosser is bringing the spotlight right back to the Fed’s balance sheet.“The size of the balance sheet does offer a possible nominal anchor for monitoring the volume of our liquidity provisions,” Plosser said.
The former head of the Fed’s Open Market Operations says the bailout might make things worse. Specifically, the former head of the Fed’s open market operation – the key Fed agency which has been loaning hundreds of billions of dollars to Wall Street companies and banks – was quoted in Bloomberg as saying:
“Every time you tinker with this delicate system even small changes can create big ripples,” said Dino Kos, former head of the New York Fed’s open-market operations . . . “This is the impossible situation they are in. The risks are that the government’s $700 billion purchase of assets disturbs markets even more.”
And William Poole, who recently left his post as president of the St. Louis Fed, is essentially calling Bernanke a communist:
Poole said he was very concerned that the Fed could simply lend money to anyone, without constraint.In the Soviet Union and Eastern Europe during the Cold War era, economies were inefficient because they had a soft-budget constraint. If a firm got into trouble, the banking system would give them more money, Poole said.The current situation at the Fed seems eerily similar, he said.“What is discipline – where are the hard choices – when does Fed say our resources are exhausted?” Poole asked.
But the strongest criticism may be from the former Vice President of Dallas Federal Reserve, who said that the failure of the government to provide more information about the bailout could signal corruption. As ABC writes:
Gerald O’Driscoll, a former vice president at the Federal Reserve Bank of Dallas and a senior fellow at the Cato Institute, a libertarian think tank, said he worried that the failure of the government to provide more information about its rescue spending could signal corruption.
“Nontransparency in government programs is always associated with corruption in other countries, so I don’t see why it wouldn’t be here,” he said.
Of course, former Fed chairman Paul Volcker has also strongly criticized current Fed policies.Given such harsh criticism from within the Fed, how can Bernanke justify his actions to date?
Global Agencies Slam Bernanke
The Bank of International Settlements (BIS) – called “the central banks’ central bank” – has slammed the Fed for blowing bubbles and then “using gimmicks and palliatives” which “will only make things worse”.
As the Telegraph wrote in June 2007:
The Bank for International Settlements, the world’s most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood…
The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system…
The bank said it was far from clear whether the US would be able to shrug off the consequences of its latest imbalances …
“Sooner or later the credit cycle will turn and default rates will begin to rise,” said the bank.
A year later, in June 2008, the Telegraph wrote:
A year ago, the Bank for International Settlements startled the financial world by warning that we might soon face challenges last seen during the onset of the Great Depression. This has proved frighteningly accurate…
[BIS economist] Dr White says the US sub-prime crisis was the “trigger”, not the cause of the disaster.
Indeed, BIS slammed the Fed and other central banks for blowing the bubble, failing to regulate the shadow banking system, and then using gimmicks which will only make things worse. As the 2008 Telegraph article notes:
In a pointed attack on the US Federal Reserve, it said central banks would not find it easy to “clean up” once property bubbles have burst…
Nor does it exonerate the watchdogs. “How could such a huge shadow banking system emerge without provoking clear statements of official concern?”
“The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low,” he said.
The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning…
“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.
“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.
In other words, BIS slammed the easy credit policy of the Fed and other central banks, and the failure to regulate the shadow banking system.
More dramatically, BIS slammed “the use of gimmicks and palliatives”, and said that anything other than (1) letting asset prices fall to their true market value, (2) increasing savings rates, and (3) forcing companies to write off bad debts “will only make things worse”.
But Bernanke and the other central bankers (as well as Treasury and the Council of Economic Advisors and Barney Frank and Chris Dodd and the others in control of American and British and French and Japanese and German and virtually every other country’s economic policy) ignored BIS’ advice in 2007 and 2008, and they are still ignoring it today.
Instead, they are doing everything they can to (2) prop up asset prices by trying to blow a new bubble by giving banks trillions, (2) re-write accounting and reporting rules to let the big banks and other giants keep bad debts on their books (or in sivs or other “second sets of books”) and to hide the fact that they are bad debts, and (3) encourage consumers to spend spend spend!
“The world’s most prestigious financial body”, “the ultimate bank of central bankers” has condemned Bernanke and all of the other G-8 central banks, and stripped bare their false claims that the crash wasn’t their fault or that they are now doing the right thing to turn the economy around.
As Spiegel wrote in July of this year:
White and his team of experts observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies. In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market…
As far back as 2003, White implored central bankers to rethink their strategies, noting that instability in the financial markets had triggered inflation, the “villain” in the global economy…
In the restrained world of central bankers, it would have been difficult for White to express himself more clearly…
It was probably the biggest failure of the world’s central bankers since the founding of the BIS in 1930. They knew everything and did nothing. Their gigantic machinery of analysis kept spitting out new scenarios of doom, but they might as well have been transmitted directly into space…In their report, the BIS experts derisively described the techniques of rating agencies like Moody’s and Standard & Poor’s as “relatively crude” and noted that “some caution is in order in relation to the reliability of the results.”…
In January 2005, the BIS’s Committee on the Global Financial System sounded the alarm once again, noting that the risks associated with structured financial products were not being “fully appreciated by market participants.” Extreme market events, the experts argued, could “have unanticipated systemic consequences.”
They also cautioned against putting too much faith in the rating agencies, which suffered from a fatal flaw. Because the rating agencies were being paid by the companies they rated, the committee argued, there was a risk that they might rate some companies too highly and be reluctant to lower the ratings of others that should have been downgraded.
These comments show that the central bankers knew exactly what was going on, a full two-and-a-half years before the big bang. All the ingredients of the looming disaster had been neatly laid out on the table in front of them: defective rating agencies, loans repackaged to the point of being unrecognizable, dubious practices of American mortgage lenders, the risks of low-interest policies. But no action was taken. Meanwhile, the Fed continued to raise interest rates in nothing more than tiny increments…
The Fed chairman was not even impressed by a letter the Mortgage Insurance Companies of America (MICA), a trade association of US mortgage providers, sent to the Fed on Sept. 23, 2005. In the letter, MICA warned that it was “very concerned” about some of the risky lending practices being applied in the US real estate market. The experts even speculated that the Fed might be operating on the basis of incorrect data. Despite a sharp increase in mortgages being approved for low-income borrowers, most banks were reporting to the Fed that they had not lowered their lending standards. According to a study MICA cited entitled “This Powder Keg Is Going to Blow,” there was no secondary market for these “nuclear mortgages.”…
William White and his Basel team were dumbstruck. The central bankers were simply ignoring their warnings. Didn’t they understand what they were being told? Or was it that they simply didn’t want to understand?
The head of the World Bank also says:
Central banks [including the Fed] failed to address risks building in the new economy. They seemingly mastered product price inflation in the 1980s, but most decided that asset price bubbles were difficult to identify and to restrain with monetary policy. They argued that damage to the ‘real economy’ of jobs, production, savings, and consumption could be contained once bubbles burst, through aggressive easing of interest rates. They turned out to be wrong.
Given such piercing criticisms from BIS and the World Bank, how can Mr. Bernanke justify his actions to date?
Economists Slam Bernanke
Stephen Roach (former chief economist for Morgan Stanley, and now director of Morgan Stanley Asia) is one of the most influential and respected American economists. Roach told Charlie Rose recently that we have had terrible Federal Reserve policy for the past 12 years under Greenspan and Bernanke, that they concocted hair-brained theories (for example, that we should let the boom and bust cycle occur, but then “clean up the mess” once things fall apart), and that we really need to reform the Fed.
Specifically, here’s the must-read portion of the interview:
STEPHEN ROACH: And what’s missing in the debate that drives me nuts is going back to the very function of central banking that’s at the core of our financial system. Do we have the right model for the Fed to go forward? And, you know, I think we’ve minimized the role that the custodians, the stewards of our financial
system, the Federal Reserve, played in leading to this crisis and in making sure that we will never have this again. I think we’ve had horrible central banking in the United States for the past dozen of years. I mean, we elevate our central bankers, we probably .CHARLIE ROSE: From Greenspan to Bernanke.
STEPHEN ROACH: Yeah.
CHARLIE ROSE: Both.
STEPHEN ROACH: We call them maestro, and, you know, we make them sound larger than life. And, you know, and the fact is, they condoned policies that took us from one bubble to another. They failed to live up to their regulatory responsibility granted them by law. They concocted new theories to explain why these things could go on forever, and they harbored the belief, mistakenly in my view, that monetary policy is too big and blunt an instrument, and so you just bring it in to clean up the mess
afterwards rather than prevent a mess ahead of time. Well, look at the mess we’re in right now. We need a different approach here. We really do.
Leading economist Anna Schwartz, co-author of the leading book on the Great Depression with Milton Friedman, told the Wall Street journal that the Fed’s entire strategy in dealing with the financial crisis is wrong. Specifically, the Fed is treating it as a liquidity problem, when it is really an insolvency crisis.
Moreover, prominent Wall Street economist Henry Kaufman says that the Federal Reserve is primarily to blame for the financial crisis:
“I am convinced that the misbehavior of some would have been much rarer — and far less damaging to our economy — if the Federal Reserve and, to a lesser extent, other supervisory authorities, had measured up to their responsibilities …
Kaufman directly criticized former Federal Reserve Chairman Alan Greenspan for not using his position to dissuade big banks and others from taking big risks.
“Alan Greenspan spoke about irrational exuberance only as a theoretical concept, not as a warning to the market to curb excessive behavior,” Kaufman said. “It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective.”
Partly because the Fed did not strongly oppose the repeal in 1999 of the Depression-era Glass-Steagall Act, more large financial conglomerates that were “too big to fail” have formed, Kaufman said, citing a factor that has made the global credit crisis especially acute.
“Financial conglomerates have become more and more opaque, especially about their massive off-balance-sheet activities,” he said. “The Fed failed to rein in the problem.”…
“Much of the recent extreme financial behavior is rooted in faulty monetary policies,” he said. “Poor policies encourage excessive risk taking.”
Economist Marc Faber says that central bankers are money printers who create bubbles, and that the system would be much better now if the Fed hadn’t intervened. Specifically, Faber says that – if the Fed hadn’t intervened – the system would be cleaned out, the system would be healthier because debt load and burden on taxpayers would be reduced.Economist Jane D’Arista has shown that the Fed has failed miserably at its main task: providing a “counter-cyclical” influence (that is, taking the punch bowl away before the party gets too wild).
The Fed has also failed miserably in its role as regulator of banks and their affiliates. As well-known economist James Galbraith says:
The Federal Reserve has never been an effective regulator for the straightforward reason that it is dominated by economists and bankers and not by dedicated skeptics who make bank regulation a full-time profession.
As PhD economist Steve Keen has pointed out, the Fed (along with Treasury) has also given money to the wrong people to kick-start the economy.Given such devastating criticism from prominent economists, how can Mr. Bernanke justify his actions to date?
Unemployment
The Federal Reserve is mandated by law to maximize employment. The relevant statute states:
The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
However, PhD economist Dean Baker says:
The country now has almost 25 million people who are unemployed or underemployed as a result of the Fed’s disastrous policies. Millions of people are losing their homes and tens of millions are losing their life savings. The country is likely to lose more than $6 trillion in output ($20,000 per person) due to the Fed’s inept job performance.
The Fed could have stemmed the unemployment crisis by demanding that banks lend more as a condition to the various government assistance programs, but Mr. Bernanke failed to do so.
Ryan Grim argues that the Fed might have broken the law by letting unemployment rise in order to keep inflation low:
The Fed is mandated by law to maximize employment, but focuses on inflation — and “expected inflation” — at the expense of job creation. At its most recent meeting, board members bluntly stated that they feared banks might increase lending, which they worried could lead to inflation.
Board members expressed concern “that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation.” That summary was spotted by Naked Capitalism and is included in a summary of the minutes of the most recent meeting…
Suffering high unemployment in order to keep inflation low cuts against the Fed’s legal mandate. Or, to put it more bluntly, it may be illegal.
In fact, the unemployment situation is getting worse, and many leading economists say that – under Mr. Bernanke’s leadership – America is suffering a permanent destruction of jobs.
For example, JPMorgan Chase’s Chief Economist Bruce Kasman told Bloomberg:
[We’ve had a] permanent destruction of hundreds of thousands of jobs in industries from housing to finance.
The chief economists for Wells Fargo Securities, John Silvia, says:
Companies “really have diminished their willingness to hire labor for any production level,” Silvia said. “It’s really a strategic change,” where companies will be keeping fewer employees for any particular level of sales, in good times and bad, he said.
And former Merrill Lynch chief economist David Rosenberg writes:
The number of people not on temporary layoff surged 220,000 in August and the level continues to reach new highs, now at 8.1 million. This accounts for 53.9% of the unemployed — again a record high — and this is a proxy for permanent job loss, in other words, these jobs are not coming back. Against that backdrop, the number of people who have been looking for a job for at least six months with no success rose a further half-percent in August, to stand at 5 million — the long-term unemployed now represent a record 33% of the total pool of joblessness.
And see this.
Given that the law mandates that the Fed maximize employment, but that unemployment is instead becoming catastrophic under Mr. Bernanke’s watch, how can Mr. Bernanke justify his actions to date?
Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to “leverage up” by buying one another’s securities. In the new, post-crisis financial system, the role of securitization will likely be held in check by more stringent financial regulation and by the recognition that it is important to prevent excessive leverage and maturity mismatch, both of which can undermine financial stability.
And as a former economist at the New York Fed, Richard Alford, wrote recently:
On Friday, William Dudley, President of FRBNY, gave an excellent presentation on the financial crisis. The speech was a logically-structured, tightly-reasoned, and succinct retrospective of the crisis. It took one step back from the details and proved a very useful financial sector-wide perspective. The speech should be read by everyone with an interest in the crisis. It highlights the often overlooked role of leverage and maturity mismatches even as its stated purpose was examining the role of liquidity.
While most analysts attributed the crisis to either specific instruments, or elements of the de-regulation, or policy action, Dudley correctly identified the causes of the crisis as the excessive use of leverage and maturity mismatches embedded in financial activities carried out off the balance sheets of the traditional banking system. The body of the speech opens with: “..this crisis was caused by the rapid growth of the so-called shadow banking system over the past few decades and its remarkable collapse over the past two years.”
In fact, every independent economist has said that too much leverage was one of the main causes of the current economic crisis.
Federal Reserve Bank of San Francisco President Janet Yellen said recently that it’s “far from clear” whether the Fed should use interest rates to stem a surge in financial leverage, and urged further research into the issue.“Higher rates than called for based on purely macroeconomic conditions may help forestall a potentially damaging buildup of leverage and an asset-price boom”.
And on September 24th, Congressman Keith Ellison wrote a letter to Mr. Bernanke and Geithner stating:
As you know, excessive leverage was a key component of the financial crisis. Investment banks leveraged their balance sheets to stratospheric levels by using short-term wholesale financing (like repurchase agreements and commercial paper). Meanwhile, some entities regulated as bank holding companies (BHCs) used off-balance-sheet entities to warehouse risky assets, thereby evading their regulatory capital requirements. These entities’ reliance on short-term debt to fund the purchase of oftentimes illiquid and risky assets made them susceptible to a classic bank panic. The key difference was that this panic wasn’t a run on deposits by scared individuals, but a run on collateral by sophisticated counterparties.
The Treasury highlights this very problem in its policy statement before the recent summit of G-20 finance ministers in London. To address this problem, the Treasury advocates stronger capital and liquidity standards for banking firms, including “a simple, non-risk-based leverage constraint.” The U.S. is one of only a few countries that already has leverage requirements for banks. Leverage requirements supplement risk-based capital requirements that federal banking regulators have in place pursuant to the Basel II Accord, an international capital agreement. While important features of our system of financial regulation, leverage requirements only apply to banks and bank holding companies and therefore have not covered a wide array of financial institutions, including many that are systemically important. Moreover, leverage requirements have generally not captured the considerable risks associated with off-balance-sheet activities.
Of course, the Administration looks to address the shortcomings in the existing regulatory system through a proposal to regulate large, systemically-significant financial institutions as Tier 1 Financial Holding Companies (FHCs). Building upon its existing authority as the consolidated supervisor of all BHCs (which includes FHCs), the Federal Reserve would be responsible for overseeing and regulating the Tier 1 FHCs under the plan. In the legislative draft of the proposal, the Federal Reserve would have the authority to prescribe capital requirements and other prudential standards for these institutions that are stronger than those for all other BHCs. To that point, the text specifically says, “The prudential standards shall be more stringent than the standards applicable to bank holding companies to reflect the potential risk posed to financial stability by United States Tier 1 financial holding companies and shall include, but not be limited to—(A) risk-based capital requirements; (B) leverage limits; (C) liquidity requirements; and (D) overall risk management requirements.”
The application of leverage limits – as advanced by the Treasury’s G-20 policy statement and by the Administration’s financial regulatory reform plan – is a simple and elegant way to limit risk at specific financial institutions (and within the overall financial system). The financial crisis has underscored the importance of leverage requirements and manifested the problems associated with relying upon risk-based capital requirements alone …
Nevertheless, there are some open questions regarding exactly how a leverage requirement should be applied. Some scholars and policy experts have advocated putting in place a leverage requirement for banks and other financial institutions that is set in statute. As Congress moves forward on comprehensive financial regulatory reform, it may consider such a requirement. I would therefore be interested to hear your views regarding the wisdom of such an approach.
As you know, setting capital standards requires decisions regarding what institutions would be covered, how capital would be defined, and what levels the requirements would be set. In light of that, what specific difficulties would you anticipate Congress facing with respect to specifying such a requirement? In addition, would a statutory requirement be too inflexible and place too many constraints on regulators with respect to refining regulatory capital requirements and negotiating with bank regulators from other countries?
On November 13th, Mr. Bernanke responded to Ellison (I received a copy of the letter from a Congressional source):
The Board’s authority and flexibility in establishing capital requirements, including leverage requirements, have been key to the Board’s ability to require additional capital where needed based on a banking organization’s risk profile. One of the lessons learned in the recent financial crisis is the need for financial supervisors to have the ability to react quickly to changing circumstances, as in the capital assessments conducted in the Supervisory Capital Assessment Program. The Board and other federal banking agencies initiated this program to conduct a comprehensive, forward-looking assessment of the capital positions ofthe nation’s 19 largest bank holding companies (BHCs). The Board’s authority to mandate specific levels of capital was critical to this exercise because each BHC had a unique set of risks and circumstances that demanded careful supervisory scrutiny and evaluation in order to identify the amount of capital appropriate for its safe and sound operation. The Board required corrective actions on a case-by-case basis and continues to assess the capital positions ofthese institutions as well as all others under its supervision.
We note that in other contexts, statutorily prescribed minimum leverage ratios have not necessarily served prudential regulators of financial institutions well. Previously, the minimum capital requirements for the housing government-sponsored enterprises Fannie Mae and Freddie Mac (collectively, “GSEs”) were fixed in statute; the risk-based capital requirement for the GSEs was based on a stress test that was also set forth in statute; and the GSE’s regulator, the Director ofthe Office of Financial Housing Enterprise Oversight (the predecessor agency to the Federal Housing Finance Authority) did not have the authority to establish additional capital requirements for the GSEs. This limitation was different from the authority that the federal banking agencies have to set the leverage and risk-based capital requirements for banking organizations. In 2008, Congress enacted the Housing and Economic Recovery Act of 2008, which created FHFA and empowered it to establish additional minimum leverage and risk-based capital requirements for the GSEs.
With regard to the Board and other U.S. banking agencies’ efforts to join with international supervisors to strengthen capital requirements for internationally active banking organizations, the Basel Committee is working on proposals for an international supplement to minimum risk-based capital ratios. While this work is in process, it is likely that these efforts will take the form of a minimum leverage ratio. It will be important for the international regulatory community to carefully calibrate the aggregate effect ofthis initiative, along with other efforts underway that are intended to strengthen capital requirements, to ensure that they protect against future financial crises while not raising capital requirements to such a degree that the availability of credit to support economic growth is unduly constrained. The current authority and flexibility the Board has to establish and modify leverage ratios as a banking organization regulator is very important to the successful participation of the Board in the process of establishing and calibrating an international leverage ratio.
The Supervisory Capital Assessment Program Mr. Bernanke refers to were the infamous “stress tests“. There’s just one little problem: the stress tests were a complete complete sham.
In reality, the Fed has been one the biggest enablers for increased leverage. As anyone who has looked at Mr. Bernanke and Geithner’s actions will tell you, many of the government’s programs are aimed at trying to re-start securitization and the “shadow banking system”, and to prop up asset prices for highly-leveraged financial products.
Indeed, Mr. Bernanke said in February:
In an effort to restart securitization markets to support the extension of credit to consumers and small businesses, we joined with the Treasury to announce the Term Asset-Backed Securities Loan Facility (TALF).
And he said it again in September:
The Term Asset-Backed Securities Loan Facility, or TALF … has helped restart the securitization markets for various types of consumer and small business credit. Securitization markets are an important source of credit, and their virtual shutdown during the crisis has reduced credit availability for many borrowers.
Given that the Fed admits that too much leverage is destabilizing to our financial system, how can Mr. Bernanke justify his actions to date in increasing leverage?
Has the Fed Manipulated any Markets?
There are allegations that the Fed has manipulated the markets.
Has the Fed – directly or as part of the President’s Working Group on Financial Markets or any other group or organization – manipulated any markets?
Trillions in Unnecessary Interest to the American People
Many people – including former analyst for the U.S. Treasury Richard Cook – argue that credit is too important a function to be left to the private banks. AFL-CIO president Richard Trumka told Congress recently:
If the Federal Reserve were made a fully public body, it would be an acceptable alternative.
Bloomberg News columnist Matthew Lynn writes:
The U.K. government needs to start thinking about what it will do with all the banks it now owns. The answer is simple: Hand them to the people…
Instead of selling the stakes it acquired in the financial system to other banks, or listing the shares on the stock market, it could create mutually owned societies. Royal Bank of Scotland Group Plc could be a people’s bank, owned by everyone.That would ensure more diversity, competition and stability, all goals just as worthy as getting back the money Prime Minister Gordon Brown’s government spent on bank rescues…
Michael Moore recommends that the American people demand:
Each of the 50 states must create a state-owned public bank like they have in North Dakota. Then congress MUST reinstate all the strict pre-Reagan regulations on all commercial banks, investment firms, insurance companies — and all the other industries that have been savaged by deregulation: Airlines, the food industry, pharmaceutical companies — you name it. If a company’s primary motive to exist is to make a profit, then it needs a set of stringent rules to live by — and the first rule is “Do no harm.” The second rule: The question must always be asked — “Is this for the common good?” (Click here for some info about the state-owned Bank of North Dakota.)
As Moore notes, the state of North Dakota already has such a bank, and – because of that – North Dakota is just about the only state which is not running a huge deficit.
PhD economist and candidate for Florida governor Farid Khavari wants to create a Bank of the State of Florida, to create credit without burdening the state and its citizens with high interest charges by private banks. See this for details.
If the power to create credit were taken away from the Federal Reserve system and its private banks and given back to the government (as the Constitution envisioned), then American taxpayers would save hundreds of billions or trillions of dollars in unnecessary interest charges in paying off the national debt, as the government would not have to pay interest to finance its debt (sovereign nations such as the U.S. and England have the power to create credit and money; see this, this, this, and this).
Given that America is already deeply in debt, how can Mr. Bernanke justify the ongoing mountain of interest debts placed on the backs of the American people by the private credit-creation system of which the Fed is a part?
Failure to Disclose Who Received Bailout Money
The whole issue of the Fed’s failure to disclose who received bailout money and other emergency largess courtesy of the American taxpayer is another important line of questioning. Many others have already written extensively on this issue, so I will not reinvent the wheel here.
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Wow, thank you GW— an ironclad indictment of the Creature (Hyde) from Jekyll Island.
The too-many warnings, within the Fed, from the BIS, the World Bank, and the Mortgage Insurance Association were so explicit and timely that the ‘failures’ are too staggering and outrageous to avoid charges of gross negligence, dereliction of duty, malfeasance or criminal conspiracy. Who DO they answer to??
It seems quite clear that behind the black curtain of secrecy without any accountability, the Fed is double-dealing and purchasing trash assets (not lending on collateral) in clear violation of its legal authority.
Thus, I would offer one—and only one—question for our ‘Esteemed Chairman’:
“Will you agree to name your co-conspirators and testify against them as part of a plea agreement for a reduced sentence?”
The only puzzling point is the ink spent on leverage, seemingly belaboring the obvious. I mean, DUH, high leverage problem was a pivotal cause of the ’29-33 crash and Great Depression, or so I learned that from my high school Econ— a long, long time ago. Is this really a revelation to the guys driving the bus? Uh, please stop and let me out here before the next bend.
Bottom line, I vote for Bloomberg, Matthew Lynn’s and Michael Moore’s solution: “The…government needs to start thinking about what it will do with all the banks it now owns. The answer is simple: Hand them to the people…” And this includes the Fed. Let’s stop this failed rush to corporatize everything and instead repatriate our commonwealth for socially useful, productive, wealth-creating investments.
BTW, here’s what Nassim Taleb says about the reappointment of Bernanke posted at ZeroHedge:
http://www.zerohedge.com/article/nassim-taleb-protests-bernanke-reappointment-going-self-appointed-exile
“What I am seeing and hearing on the news — the reappointment of Bernanke — is too hard for me to bear. I cannot believe that we, in the 21st century, can accept living in such a society. I am not blaming Bernanke (he doesn’t even know he doesn’t understand how things work or that the tools he uses are not empirical); it is the Senators appointing him who are totally irresponsible — as if we promoted every doctor who caused malpractice. The world has never, never been as fragile. Economics make homeopathic and alternative healers look empirical and scientific.”
This post reminds me that we need well paid, well trained professional citizens devoting at least 8 hours a day, 5 days a week to supervise our public servants.
I will have more to say after a leisurely break for dinner.
Bernanke is a dogged, determined fool who does not have the courage to own up to his mistakes in creating this mess. He also feels since he has studied great depression and has a few pet theories on how to handle it is hell bent on doing it his way.
Look at what he has done in the last 2 years .. according to him he has saved the world .. according to me he has just done 2 things which does not need great knowledge ..
put his grubby fingers into tax-payers grubby even without a by-your-leave
printed money as if there will be no tomorrow if he does not..
and other things such as ..
keeping interest rates low for an extended period (remember 2003 .. same stuff … shows he does not learn a thing)
bailed out institutions which should have been buried
allowed fraudsters to walk away with the loot …
too numerous to list …
if he is going to be reappointed GOD SAVE AMERICA!
Quite a detailed condemnation. I think it extends to quite a variety of market and non-market actors beyond the Fed. From flip this house television programing to mathematicians playing with faulty risk assessment tools. I think it all begs question.
Our now crestfallen maestro, Greenspan’s, dogmatic adherence to laissez faire market principles was quite religious, to the absurd new earth creationist, Jonah inside the fish for three days, unicorns shooting out of god’s butt kind of way. The bubble we could probably liken to a Salem Witch trial mass hysteria kind of collective delusion. They work on both ends, in floating the bubble and trampling innocents under foot too escape the resulting fire.
Now behavioural economics has been rather pleasant about this, carving at the edges of our suspected rationality. We can use euphemisms like information asymetries and bounded rationality all we want. But, can we get over it already and admit market participation is a highly irrational and often delusional endeavor, one which many of us can get carried away in buying massively overpriced tulips or internet startups.
On a lighter note my credit union is doing rather well, the interest rate on the credit card is low.
A very minor point about North Dakota. It’s got 600,000 people and a major oil boom going on. That’s why it’s in decent fiscal shape.
Um mm..says something about heads per acre and natural resources..whoops repeat there!
Was watching a report not long back on the invasion, drilling crews (ye-haw Texans), the fast money, fast cars, the housing boom, the increase in long term property values (not welcomed by long term residents), the price of every thing going up on fast easy money, etc.
Skippy….They were doing fine before the gas boom, well not in Wall St eyes, too much fast wealth to extract. 20 to 30 years and it could look like Detroit, if their lucky!
Senate: “Chairman Bernanke, the people would like to know…[pick any question from above]”
Bernanke: “Thank you for having me hear. That is an excellent question. It is good to ask questions but answering that question would lead to all the major banks collapsing, unemployment rising, Venus colliding with Mars, cats and dogs making love, and the return of Donnie Osmond.”
Senate: “Chairman, thank you for your time. Please continue saving the world from the evil poor people. Appointment confirmed.”