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Helicopter Ben: Arsonist Turned into Firefighter

Many view Bernanke as a typical academic crony: a corrupt academician who make his career licking butts of Milton Friedman's pseudo-theories and then was picked up by Maestro Greenspan as a useful tool for justifying  Fed policies. Economics is one of the few professions where groupthink is royally rewarded. And as speaking and consulting fees grow so is the reinforcement of any pre-existing sycophantic tendencies. 

In reality Bernanke problem (in a slightly hyperbolized way) can be classified along the line of the psychological phenomenon called  "brainwashing", "indoctrination" or, even "beliefs induced idiocy" ( see, for example, discussion of malicious animal magnetism in The psychology of conviction: a study of beliefs and attitudes).  Despite his IQ he behaved and still behaves more like a brainwashed lemming moving with the crowd off the cliff then as an independent thinker capable of challenging the detached form reality orthodoxy. He is one of Wall Street financialization apparatchiks. Much like Greenspan, Rubin and Summers, financial apparatchiks troika which graced Time cover some time before Dr. Bernanke.   

First of all Bernanke is a neo-classical economist and as such has really limited (if any) understanding of dynamic economic phenomenon, especially such complex and multi-layered as the Great Depression.  Bernanke is popularly portrayed as an expert on the Great Depression—the person whose intimate knowledge of what went wrong in the 1930s saved us from a similar fate in 2009.  In reality actions of Bernanke were not out of line with typical mainstream thinking. And other countries including those without reserve currency managed to escape meltdown, despite absence of  a "great Depression scholar" at the helm. Moreover Bernanke views on Great Depression are naive and sycophantic:

attempter:

Those who think “Heckuva job” Bennie is well qualified to lead through the crisis are those who simply want more of the same, since it’s clear he learned nothing and forgot nothing.

The hype that Bernanke is an “expert” on the Great Depression is just one of those lies that the media sound machine repeats ad nauseum to the point that everyone is supposed to assimilate its truthiness rather than examine whether or not it is in fact true.

But a little examination reveals how he’s simply a monetarist flat earther. The dogma that the economy was basically sound, had a hiccup, and just needed liquidity easing, is a lie meant to obscure the fundamental contradiction of useless, concentrated wealth stolen from a putative consumer base no longer wealthy enough to consume.

And today the black magic of infinite exponential debt is supposed to keep that going. I guess Bernanke hopes we’ll soon make contact with extraterrestrials who are heavy savers with an economy based on cheap exports. Who else will be able to perform the miracle he and his colleagues propose, of somehow levitating this utterly destroyed consumer debt market?

He’s the same Wall Street financialization apparatchik he was from day one, and his only idea is to look for new bubbles to reflate to enable further top-down looting. The whole thing, bubbles, Bailout, and the same going forward, is history’s biggest police riot.

 

Someone I read put it very well–the Fed is like the World War I generals who couldn’t bring themselves to believe that the nature of warfare had changed and the machine gun and improved artillery had made the close-formation bayonet charge obsolete. For four years Haig, Joffre, et al. (and also some in the German high command) continued to maintain their image of a great calvary charge that would break through the enemy lines and bring the war to an end. Bernancke, the lickspittle, and the scholastic Fed economists are still waiting for that magical interest rate cut to “reignite” the economy, and they’ll do their best to frustrate any attempts at solutions which undermine their ability to remain in “command” of monetary policy.

Clemenceau said, “War is too important to be left to the generals.” Monetary policy is too important to be left in the hands of a Bernanke Fed.

They served him well to enhance his academic career but are disaster for the country when this relentless careerist became the Chairman of Fed. This Great Recession is not about excess inventory. This Great Recession is about excess debt which is quite a different animal from a typical recession. That means that the great economic adjustment we are experiencing will necessary entail a structural adjustment (including dismantling of dominance of FIRE sector), adjustments that like in Great Depression will cause a great deal of pain. Quite simply too much Credit Money has been created and as must now needs to be destroyed. Over the years our fractional reserve banking system has been made into a virtual Ponzi scheme. As Professor Steve Keen noted in his the-economic-case-against-Bernanke:

In fact, his ignorance of the factors that really caused the Great Depression is a major reason why the Global Financial Crisis occurred in the first place.

The best contemporary explanation of the Great Depression was given by the US economist Irving Fisher in his 1933 paper “The Debt-Deflation Theory of Great Depressions”. Fisher had previously been a cheerleader for the Stock Market bubble of the 1930s, and he is unfortunately famous for the prediction, mere days before the 1929 Crash:

Stock prices have reached what looks like a permanently high plateau. I do not feel that there will soon, if ever, be a fifty or sixty point break below present levels, such as Mr. Babson has predicted. I expect to see the stock market a good deal higher than it is today within a few months. (Irving Fisher, New York Times, October 15 1929)

When events proved this prediction to be spectacularly wrong, Fisher to his credit tried to find an explanation. The analysis he developed completely inverted the economic model on which he had previously relied.

His pre-Great Depression model treated finance as just like any other market, with supply and demand setting an equilibrium price. However, in building his models, he made two assumptions to handle the fact that, unlike the market for say, apples, transactions in finance markets involved receiving something now (a loan) in return for payments made in the future. Fisher assumed

• (A) The market must be cleared—and cleared with respect to every interval of time.
• (B) The debts must be paid. (Fisher 1930, The Theory of Interest, p. 495)

I don’t need to point out how absurd those assumptions are, and how wrong they proved to be when the Great Depression hit—Fisher himself was one of the many whose fortunes were wiped out by margin calls they were unable to meet. After this experience, he realized that his previous assumption of equilibrium blinded him to the forces that led to the Great Depression. The real action in an economy occurs in disequilibrium:

We may tentatively assume that, ordinarily and within wide limits, all, or almost all, economic variables tend, in a general way, toward a stable equilibrium… But the exact equilibrium thus sought is seldom reached and never long maintained. New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below the ideal equilibrium…

It is as absurd to assume that, for any long period of time, the variables in the economic organization, or any part of them, will “stay put,” in perfect equilibrium, as to assume that the Atlantic Ocean can ever be without a wave. (Fisher 1933, p. 339)

A disequilibrium-based analysis was therefore needed, and that is what Fisher provided. He had to identify the key variables whose disequilibrium levels led to a Depression, and here he argued that the two key factors were “over-indebtedness to start with and deflation following soon after”. He ruled out other factors—such as mere overconfidence—in a very poignant passage, given what ultimately happened to his own highly leveraged personal financial position:

I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt. (p. 341)

Fisher then argued that a starting position of over-indebtedness and low inflation in the 1920s led to a chain reaction that caused the Great Depression:

1. Debt liquidation leads to distress selling and to
2. Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
3. A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
4. A still greater fall in the net worths of business, precipitating bankruptcies and
5. A like fall in profits, which in a “capitalistic,” that is, a private-profit society, leads the concerns which are running at a loss to make
6. A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to
7. Pessimism and loss of confidence, which in turn lead to
8. Hoarding and slowing down still more the velocity of circulation. The above eight changes cause
9. Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest. (p. 342)

Fisher confidently and sensibly concluded that “Evidently debt and deflation go far toward explaining a great mass of phenomena in a very simple logical way”.

So what did Ben Bernanke, the alleged modern expert on the Great Depression, make of Fisher’s argument? In a nutshell, he barely even considered it.

Bernanke is a leading member of the “neoclassical” school of economic thought that dominates the academic economics profession, and that school continued Fisher’s pre-Great Depression tradition of analysing the economy as if it is always in equilibrium.

With his neoclassical orientation, Bernanke completely ignored Fisher’s insistence that an equilibrium-oriented analysis was completely useless for analysing the economy. His summary of Fisher’s theory (in his Essays on the Great Depression) is a barely recognisable parody of Fisher’s clear arguments above:

Fisher envisioned a dynamic process in which falling asset and commodity prices created pressure on nominal debtors, forcing them into distress sales of assets, which in turn led to further price declines and financial difficulties. His diagnosis led him to urge President Roosevelt to subordinate exchange-rate considerations to the need for reflation, advice that (ultimately) FDR followed. (Bernanke 2000, Essays on the Great Depression, p. 24)

This “summary” begins with falling prices, not with excessive debt, and though he uses the word “dynamic”, any idea of a disequilibrium process is lost. His very next paragraph explains why. The neoclassical school ignored Fisher’s disequilibrium foundations, and instead considered debt-deflation in an equilibrium framework in which Fisher’s analysis made no sense:

Fisher’ s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects. (p. 24)

If the world were in equilibrium, with debtors carrying the equilibrium level of debt, all markets clearing, and all debts being repaid, this neoclassical conclusion would be true. But in the real world, when debtors have taken on excessive debt, where the market doesn’t clear as it falls, and where numerous debtors default, a debt-deflation isn’t merely “a redistribution from one group (debtors) to another (creditors)”, but a huge shock to aggregate demand.

Crucially, even though Bernanke notes at the beginning of his book that “the premise of this essay is that declines in aggregate demand were the dominant factor in the onset of the Depression” (p. ix), his equilibrium perspective made it impossible for him to see the obvious cause of the decline: the change from rising debt boosting aggregate demand to falling debt reducing it.

In equilibrium, aggregate demand equals aggregate supply (GDP), and deflation simply transfers some demand from debtors to creditors (since the real rate of interest is higher when prices are falling). But in disequilibrium, aggregate demand is the sum of GDP plus the change in debt. Rising debt thus augments demand during a boom; but falling debt substracts from it during a slump.

In the 1920s, private debt reached unprecedented levels, and this rising debt was a large part of the apparent prosperity of the Roaring Twenties: debt was the fuel that made the Stock Market soar. But when the Stock Market Crash hit, debt reduction took the place of debt expansion, and reduction in debt was the source of the fall in aggregate demand that caused the Great Depression.

 Classical and neoclassical economic theory are based upon incredibly simplistic, reductionist assumptions. And for someone like Bernanke, thoroughly indoctrinated in classical and neoclassical doctrines there should be any surprise that despite high level of IQ and considerable political skills in complex situations his reaction was  intellectually inadequate. Of cause this characterization has elements of satire, but such characterization has long historical roots.  Johathan Andews argued that eighteen-century satirists (Images of idiocy):

armed themselves to stigmatize all of those members of society, from poets and literary hacks to clergymen and politicians, whom they conceived to be claiming insight and talents beyond their natural capacities, or failing to rain in their passions by exercising their judgment"

Thomas Kuhn in his influential book The Structure of Scientific Revolutions  argued that scientists work within a conceptual paradigm that strongly influences the way in which they see data. Scientists will go to great length to defend their paradigm. Changing a paradigm is difficult, as it requires an individual scientist to break with his or her peers. Neo-classical economics is one such paradigm, which in a way is similar to Lysenkoism and while it marginally useful as a perverse reaction to the excesses of Keynesianism, it quickly outlived its usefulness and became a new "religious economic" or in a less flattering way "masturbation using mathematical symbols". 

In view of Bernanke as indoctrinated personality one should surprised is that not all Bernanke reactions to events were absurd. This is the same problem of theory that does not correspond to reality that faced Bolshevism. So in a way, Bernanke can be characterized as "economic Bolshevik".   In Marx words "History repeats itself, first as tragedy, second as farce."

The defining point of Bernanke biography probably was that, either sincerely or as a career-enhancing move he had found a convenient, career-enhancing prophet in Friedman and a new religion in monetary policy, despite solid evidence that most of the dogmas of monetarism are empirically false. Monetarism aside, Bernanke is a typical laissez-faire market fundamentalist cut from the same cloth as his objectivist predecessor Greenspan. While absurdity of Ann Rand doctrine exceed the absurdity of monetarism, extremes meet. Like Friedman and Greenspan, Bernanke is a conservative economist who promoted the view that markets are rational and self regulating. The fact  that during economic collapse of 2008 he was printing money as fast as he can in no way indicates that he shares anything philosophical with Keynes. Keynes was astute observer of market behavior, hugely successful as an investor. Bernanke was never successful as investor (and never could be due to his indoctrination). Moreover he was as bad as Greenspan as economic forecaster, which is achievement in itself,   Please don't forget that Greeenspan's forecasting acumen was universally despised by Wall Street sharks.

Several of his bad judgments raise questions about Bernanke's "feel for the market" — his understanding of market psychology (hugely important) as well as his ability to interpret market signals. Both are key to Fed policymaking, unlike his academic credentials which are not so important especially if we can legitimately suspect that most of his academic base was bogus economic Lysenkoism.   So its probably not accidental that he, unlike, say, Michael Hudson, did not see the train wreck coming.

Like Greenspan Bernanke is subservient to the powers that be and like his mentor he is much more screwed politician then economist. One minor difference is that Greenspan did not have any academic credentials (Fed staffers used to laugh at his mis-usage of economic terminology at the beginning of his career)  and make his way via Republican party nomenclature and his very questionable (most probably mostly career enhancing) association with Ann Rand and positivism.  This is not the case with Bernanke who did not plaed an active role in Rupublican Party. As noted in The Institutional Risk Analyst A Global House of Cards Interview with Josh Rosner:

... Bernanke seems completely co-opted by Paulson and the Goldman Sachs mafia that runs the Treasury. Both Bernanke and Geithner seem so weak and lacking in market experience that is almost sad to watch them testify next to banksters like Steel and Paulson.

Like Bush, Paulson, Geithner and Summers he have been playing the game long enough to become cynical opportunist. This is another common trait with Bolshevik leaders that Bernanke possesses.

The key metaphor that is applicable to people like Bernanke, Greenspan, Rubin and line is probably "the firefighter arsonist" metaphor. With the slight difference that the firefighter arsonist is intentionally causing an evil in order to participate in the form of a good. People like Bernanke just serve the unrealistic and destructive for society doctrine for personal benefit. Jeremy Grantham  make the following observation in his Nov 2009 letter to investors (Just Desserts and Markets Being Silly Again The Big Picture):

Bernanke, the most passionate cheerleader of Greenspan's follies, is picked as his replacement, partly, it seems, for his belief that U.S. house prices would never decline and that at their peak in late 2005 they largely just reflected the unusual strength of the U.S. economy. As well as missing on his very own this 3-sigma (100-year) event in housing, he was completely clueless as to the potential disastrous interactions among lower house prices, new opaque financial instruments, heroically increased mortgages, lower lending standards, and internationally networked distribution. For these accumulated benefits to society, he was reappointed! So, yes, after the fashion of his mentor, he was lavish with help as the bubble burst. And how can we so quickly forget the very painful consequences of the previous lavishing after the 2000 bubble?

Rewarding Bernanke is like reappointing the Titanic's captain for facilitating an orderly disembarkation of the sinking ship (let's pretend that happened) while ignoring the fact that he had charged recklessly through dark and dangerous waters.

 Here is couple of comments that reflect this view taken from Bernanke and Regulation of the Financial Sector:

lavy:

Ben Bernanke is a small town schmuch who has agreed to be the boy. That is the only way that an American youth rises. It surely has not been on the strength of his ideas. Come on, " savings glut". I know that Brad De Long and our host support this idea (at least they used too).

At the end of the day, this man is a tool of the Plantation Capitalist movement that has little or nothing to do with the crap they are teaching at the University.

Uncle Billy Cunctator:

Don't forget Dr. Bernanke's academic pedigree. His thesis advisor was Stanley Fischer. IMF, World Bank, Citibank, Governor of Bank of Israel, Group of 30 (PK, you never answered my question about the Group of 30's direct affiliations with Bellagio. Are there any currently?)

Fischer's other doctoral student (per mildly imperfect Wikipedia) was the entertaining Mankiw (who it seems is so tainted by the stink of the Bush administration that his ideas just don't manage to launch). Fischer authored a textbook on macroeconomics with Rüdiger Dornbusch, who apparently leave a glowing economic legacy.

Who was Fischer's academic papa? Franklin Fisher, who has taught at MIT for many years. According to Wikipedia,: "He has served as an expert witness in matters involving antitrust, contract disputes, valuation, damages, and trademark infringement for many years. Expert witness. Sort of an... opinion for hire? He's been a director of NBER for a very long time too, that organization that channels most of the funding to economists for their "independent" research.

Finally, just as we wondered at how the country's number one expert on flight safety procedures happened to be at the controls of the plane that glided to a safe landing on the Hudson, don't we marvel again and again how the number one scholar on the great depression (one of?) came to be sitting at the controls of the Fed as we headed into a greater depression? Well some of us did, that well-spun phrase "soft landing" tickling our ear.

Herr Professor, did they suck you in too with membership in a secret club and promises of building a better world?

IdahoSpud:

What is pathetic is that the esteemed Mr. Bernanke (an economist?) was seemingly unable to perceive the epic collapse of housing in real-time when he had all the data at his fingertips.

I find THAT very disturbing. Roach, Ritholtz, Hamilton, and Roubini had all pointed to the building imbalances while Bernanke clung to his "savings glut" theory.

It's difficult to conclude anything other than he is myopic or disingenuous. Neither trait inspires confidence.

In this sense reappointment of Bernanke is troubling: he was/is too closely identified with Fed policies that landed the global economy in its current sorry state. I don't know if replacing Bernanke makes any difference, but I want this guy gone. His recommendation to the Congress (which actually is outside of Fed mandate) to take money from the poor and elderly and give it to the banks is disgusting. Kevin Phillips noted that Bernanke was the chairman of George Bush’s Council of Economic Advisers and added:

“Imagine if FDR had retained Herbert Hoover’s chief economic advisor and loyal Republican Fed Chairman in 1933….To think that the pussycat Fed (would become) a saber-toothed tiger is a deception.” Worse still, ruinous economic policies “could prove fatal” if White House policies favor “Wall Street but not the national economy or American people” — the very direction they’ve now taken.

Academically Bernanke's writings are suffering from troubling oversimplifications and Milton Freidman's influence.  He proved to be extremely bad forecaster (in this respect very similar to Greenspan, who was just a joke in the eyes of his Wall street colleagues like Jim Rogers):

As Fed Governor Bernanke supported the flawed policies of Alan Greenspan - he never recognized the housing bubble or the lack of oversight - and there is no question, as Fed Chairman, Bernanke was slow to understand the credit and housing problems. And I'd prefer someone with better forecasting skills.

However once Bernanke started to understand the problem, he was very effective at providing liquidity for the markets. The financial system faced both a liquidity and a solvency crisis, and it is the Fed's role to provide appropriate liquidity. Bernanke met that challenge, and I think he is a solid choice for a 2nd term (not my first choice, but solid).

The thrust of his academic writings was development of Friedman idea that the Depression was a pure "financial event" that supposedly could have been avoided if the Fed had flooded the economy with money (by bond purchases) to prevent a banking crash. While naive, the theory of enthusiastic about monetary policy Friedman  has some merits. Monetary expansion along with cutting rates to zero is a really powerful weapon but not without other elements of government intervention, especially direct job creation program. 

Pure monetary response neglects important aspects of what caused Great Depression: combination of overleveraged financial sector and  industrial over-capacity created by the 1920s bubble, so similar to today but without huge external debt hanging over and with a dynamic manufacturing sector, the envy of other nations. Also the dramatic slowing down of the velocity of money makes injections far less useful.

In any case the current situation is immensely more complex not only because of the deterioration of manufacturing base under Reaganimics (which pushed financization and riding on the back of the dollar as world reserve currency instead of rebuilding manufacturing base). That makes the USA more like Great Britain in 30th, then the USA of that time. Additional similarity with Great Britain in 30th is that foreigners own 40% of US Treasury debt and have a partial veto on the monetary policy.  Overt attempts to "monetize" US debt (aka unleashing printing press) might cause the policy to short-circuit. Foreign investors could simply dump US bonds, destroying the dollar. As Mark Twain put it: "It aren't what you don't know that gets you into trouble. It's what you know for sure that just aren't so."

Some people may argue that Bernanke’s situation is much closer to that of The Magician’s Apprentice. He’s playing with a system far more complicated, chaotic and reflexive than he with his broken Friedman mental model can possibly hope to understand, model or control. Clearly Bernanke had Friedman inspired "libertarian sympathies" until the moment of truth after Lehman bankruptcy cured him, at least temporary from his folly.  His failures are an apt manifestation of the failure of a broader class of neoclassical economists: serving the powerful financial interests, a lack of humility in the face of the complexity of the economic world coupled with an aggressive, quasi-platonic "free market" economic messianism.

less is better says...

Bernanke is the last choice possible. The best description in the looting of the American people should be "unindicted co-conspirator." Bernanke first decides what is right for his friends, what is right for the Reserve and what is right for his family. The American public is the last thing he thinks of and never has cared a dime about ruining their lives.

Bernanke stubbornly refuses to drop the insane propaganda put out by the economists that totally disregards nepotism, favors, friends' influence, pure bribes and that an enormous amount of money is not able to be accounted for and screams for "unregulated markets." which time after time after time have been shown to be unadulterated horseshit. Somalia has "unregulated markets." Perhaps sending Bernanke on a fact finding tour there would end the problem of the Federal Reserve.

The highest that I would like to see Bernanke is to make him the money washer for the Harlem mob. They would kill him for what he does to the American public every stinking day.

Link to comment | Aug 13, 2009 at 04:13 PM

The role of Goldman& Sachs that was depicted in a brilliant Matt Taibbi article  Inside The Great American Bubble Machine Rolling Stone is fully applicable to Bernanke. He is just another self-serving "financial parasite": If America is circling the drain, Bernanke and his friends has found a way to benefit from this misfortune helping financial capital to exploit an unfortunate loophole in the system of Western democratic capitalism: in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy. As Simon Johnson noted:

Matt Taibbi has rightly directed our attention towards the talent, organization, and power that together produce damaging (for us) yet profitable (for a few) bubbles.  Most of Taibbi’s best points are about market microstructure – not the technological variety usually studied in mainstream finance, but more the politics of how you construct a multi-billion dollar opportunity so that you can get in, pull others after you, and then get out before it all collapses.  (This is also, by the way, how things work in Pakistan.)

In addition, of course, all good bubble-blowing needs ideology.  Someone needs to persuade policymakers and the investing public that we are looking at a change in fundamentals, rather than an unsustainable and dangerous surge in the price of some assets.

It used to be that the Federal Reserve was the bubble-maker-in-chief. In the Big Housing Boom/Bust, Alan Greenspan was ably assisted by Ben Bernanke – culminating in the latter’s argument to cut interest rates to zero in August 2003 and to state that interest rates would be held low for “a considerable period”.  (David Wessel’s new book is very good on this period and the Bernanke-Greenspan relationship.)

In this particular respect Bernanke is yet another a "Smooth Criminal"  as some call him who has no empathy for the victims of the financial crisis. Bernanke Channels Willie Sutton In Assault On Social Security 'That's Where The Money Is':

Ben Bernanke has overseen the greatest expansion of the Federal Reserve's balance sheet in its history, pouring trillions of dollars into Wall Street firms at roughly zero interest rates.

His generosity, however, has a limit.

In testimony before the Senate Banking Committee today, where he's seeking re-appointment as the Fed's chairman, Bernanke called for cutbacks in Medicare and Social Security even as unemployment rises and the middle class is endangered.

Citing legendary bank robber Willie Sutton, Bernanke said of the retirement and health care funds that are the legacy of the New Deal: "That's where the money is."

Sen. Bob Bennett (R-Utah) sympathized with Bernanke, saying that, because of entitlement spending, "you're going to be looking at a situation where the Congress will be unable to provide any kind of fiscal discipline because of the mandatory spending. That puts an enormous burden on your plate."

"Well, Senator, I was about to address entitlements," Bernanke replied. "I think you can't tackle the problem in the medium term without doing something about getting entitlements under control and reducing the costs, particularly of health care."

Bernanke reminded Congress that it has the power to repeal Social Security and Medicare.

"It's only mandatory until Congress says it's not mandatory. And we have no option but to address those costs at some point or else we will have an unsustainable situation," said Bernanke.

Yet despite being a die-hard Greenspan school market fundamentalist,  he managed to do something useful during the crisis, the feat which was not possible if he continued with the standard right-wing "f*ck off and die" mentality toward the government intervention. This was the moment when an arsonist turned into firefighter:  

June 26, 2009 Ben Bernanke: "Smooth Criminal"

I know this isn't a universally held opinion, but to me there is a simple reality. Between September and December we were facing a significant chance of another Great Depression. Beyond that, we were potentially looking at a financial disaster from which the United States would never recover.

Today, it looks like we are merely facing a very bad recession.

Who deserves credit? Certainly not Hank Paulson and the Bush administration. They choose philosophy over pragmatism every chance they got. They gave in to the moronic "moral hazard" bullshit argument. They stuck to their right-wing "fuck off and die" mentality toward the banking system. That worked out great didn't it? Then when they had the chance to use the TARP right, they failed miserably. Again, they gave into the moral hazard wing of the Republican party and instead of buying up bad securities, they initiated the Capital Assistance Program. No moral hazard there!

Before becoming Fed chairman he was one of the key promoter of Greenspan's reckless policies.  As Roubini noted in his generally "pro-Bernanke" oped in NYT (The Great Preventer, July 25, 2009) :

Mr. Bernanke, a Fed governor in the early part of this decade, supported flawed policies when Alan Greenspan pushed the federal funds rate (the policy rate set by the Fed as its main tool of monetary policy) too low for too long and failed to monitor mortgage lending properly, thus creating the housing and credit and mortgage bubbles.

He and the Fed made three major mistakes when the subprime mortgage crisis began.

• First, he kept arguing that the housing recession would bottom out soon (it has not bottomed out even three years later).
• Second, he argued that the subprime problem was a contained problem when in reality it was a symptom of the biggest leverage and credit bubble in American history.
• Third, he argued that the collapse in the housing market would not lead to a recession, even though about one-third of jobs created in the latest economic recovery were directly or indirectly related to housing. Mr. Bernanke’s analysis was mistaken in several other important ways. He argued that monetary policy should not be used to control asset bubbles. He attributed the large United States current account deficits to a savings glut in China and emerging markets, understating the role that excessive fiscal deficits and debt accumulation by American households and the financial system played.

Bernanke came to office with great fanfare based on his life-long study of the Great Depression and his theories for warding off a recurrence. In this regard, fighting deflation was a topic he had spoken about at length. On November 21, 2002, in his speech titled "Deflation: Making Sure "It" Doesn't Happen Here", Bernanke made reference to a "helicopter drop" of money into the economy.

Despite often being quoted out of context, the nickname Helicopter Ben stuck. True to the name, he has dropped a record-breaking amount of cash into the economy as he steers the United States through its worst period since the Great Depression.

The approximately $4 trillion in loans from the Fed to help struggling financial firms, insurers, automakers and other firms has been credited with keeping the economy afloat. Bernanke's  knowledge of the Depression and his theories of how to prevent its return have not been effective, to put it mildly. Apart from stopping the run on the banks, none of his policies of that time actually worked.

Helicopter Ben statement that government always has a tool to fight deflation: it is called printing press is disingenuous in the situation when foreigners hold two trillion of US debt.  Here the exact quote:

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

I think that one of the most insightful analysis of Helicopter Ben was done by Stephen Roach in his essay :  The case against Bernanke:

August 25 2009

Barack Obama has rendered one of his most important post-crisis verdicts: Ben Bernanke will be nominated for a second term as chairman of the Federal Reserve. This is a very shortsighted decision. While America’s head central banker deserves credit for being creative and courageous in orchestrating an unusually aggressive monetary easing programme, it is important to remember that his pre-crisis actions played an equally critical role in setting the stage for the most wrenching recession since the 1930s. It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure. Maybe the patient needs a new doctor.

Mr. Bernanke made three critical mistakes in his pre-Lehman incarnation:

• First, and foremost, he was deeply wedded to the philosophical conviction that central banks should be agnostic when it comes to asset bubbles. On this count, he stood with his predecessor – serial bubble-blowing Alan Greenspan – who argued that monetary authorities are best positioned to clean up the mess after the bursting of asset bubbles rather than to pre-empt the damage. As a corollary to this approach, both Mr. Bernanke and Mr. Greenspan drew the wrong conclusions from post-bubble strategies earlier in this decade put in place after the bursting of the equity bubble in 2000. In retrospect, the Fed’s injection of excess liquidity in 2001-2003, which Mr. Bernanke endorsed with fervor, played a key role in setting the stage for the lethal mix of property and credit bubbles.
• Second, Mr. Bernanke was the intellectual champion of the “global saving glut” defense that exonerated the US from its bubble-prone tendencies and pinned the blame on surplus savers in Asia. While there is no denying the demand for dollar assets by foreign creditors, it is absurd to blame overseas lenders for reckless behavior by Americans that a US central bank should have contained. Asia’s surplus savers had nothing to do with America’s irresponsible penchant for leveraging a housing bubble and using the proceeds to fund consumption. Mr. Bernanke’s saving glut argument was at the core of a deep-seated US denial that failed to look in the mirror and pinned blame on others.
• Third, Mr. Bernanke is cut from the same market libertarian cloth that got the Fed into this mess. Steeped in the Greenspan credo that markets know better than regulators, Mr. Bernanke was aligned with the prevailing Fed mindset that abrogated its regulatory authority in the era of excess. The derivatives’ explosion, extreme leverage of regulated and shadow banks and excesses of mortgage lending were all flagrant abuses that both Mr. Bernanke and Mr. Greenspan could have said no to. But they did not. As a result, a complex and unstable system veered dangerously out of control.

Notwithstanding these mistakes, Mr. Obama may be premature in giving Mr. Bernanke credit for the great cure. No one knows for certain as to whether the Fed’s strategy will ultimately be successful. The worst of the US recession appears to have been arrested for now – a fairly typical, but temporary, outgrowth of the time-honored inventory cycle. But the sustainability of any post-bubble recovery is always dubious. Just ask Japan 20 years after the bursting of its bubbles.

While financial markets are giddy with hopes of economic revival – in part inspired by Mr. Bernanke’s cheerleading at the Fed’s annual Jackson Hole gathering – there is still good reason to believe that the US recovery will be anemic and fragile. US consumers are in the early stages of a multi-year retrenchment as they cut debt and rebuild retirement saving. The unusual breadth and synchronicity of the global recession will restrain US export demand from becoming a new growth engine.

It would be the height of folly to reward Mr. Bernanke for the recovery that never stuck. Yet Mr. Bernanke’s apparent reward is, unfortunately, typical of the snap judgments that guide Washington decision-making. In this same vein, it is hard to forget Mr. Greenspan’s mission-accomplished speech in 2004 that claimed “our strategy of addressing the bubble’s consequences rather than the bubble itself has been successful”. Eager to declare the crisis over, the Obama verdict may be equally premature.

The Bernanke reappointment is a welcome chance for a broader debate over the conduct and role of US monetary policy. Mr. Obama has made sweeping proposals that give the Fed broad new powers in managing systemic risks. I argued in the Financial Times 10 months ago that the Fed should not be granted these powers without greater accountability as required by a “financial stability mandate” – in effect, forcing the Fed to shape monetary policy with an aim towards avoiding asset bubbles and imbalances. Without a revamped policy mandate, it is conceivable that we could face another destabilizing crisis.

Ultimately, these decisions boil down to the person – in this case, Mr. Bernanke – who is being charged with the awesome responsibility as America’s chief economic policymaker. As a student of the Great Depression, he should have known better. Yes, he reacted strongly after the fact in taking actions to avoid the pitfalls highlighted by his own research. But he lacked the foresight and courage to resist the most reckless tendencies of the era of excess. The world needs central bankers who avoid problems, not those who specialize in post-crisis damage control. For that reason, alone, he should not be reappointed. Let the debate begin.

The writer is chairman of Morgan Stanley Asia and author of The Next Asia to be published next month

Old News ;-)

[Feb 04, 2010]  Alford “Why Bernanke Should Resign” «  By Richard Alford

February 4, 2010 | naked capitalism

By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.

There was a long period of time during which I believed that Mr. Bernanke should have resigned the Chairmanship of the Board of Governors of the Federal Reserve System. Subsequently, I came to believe that he would not be nominated for a second term as Chairman -- a satisfactory outcome from my perspective. However, he was nominated for a second term. For a while, it appeared possible that the Senate (post the Massachusetts election) would not confirm him for a second term- an unsatisfactory outcome from my perspective. Now, Bernanke has been confirmed by the Senate-albeit with a record number of Senators voting nay. And I am back to my original position- I believe that Bernanke should resign. In fact, the arguments for a resignation are more compelling than ever.

The reasons that I believe Bernanke should resign and the reasons behind my “I was for a Bernanke departure, before I was against it and now I am for it again” position are straightforward.

The Chairman of the Board of Governors of the Federal Reserve System must be able to function as a leader. Not only must he be a leader of the Board of Governors and the FOMC, he also must be able to use his position to influence the financial markets, the real side of the economy, the course of regulation and supervision of financial institutions, and insulate the Fed from election- cycle-political pressures. Unfortunately, Mr. Bernanke has abdicated any claim to leadership.

The Bernanke Fed has time and again stressed the importance of talk as a policy instrument to be used to influence expectations and the course of the economy. However, given his forecasting record and policy stances, it is unlikely that Mr. Bernanke will have the influence and stature that the Chairman ought to possess. The markets will not have confidence in someone who denied the existence of the housing bubble and then said the aftermath of the housing bubble would be well contained. He also has stated the obvious: the worst recession since the Great Depression took him by surprise. It will be difficult for Mr. Bernanke to influence market expectations of inflation and growth, given that he failed to see the underlying financial and economic imbalances that so many others saw.

Furthermore, a significant number of mainstream economists (as well as market participants) are now of the belief that interest rates were too low for too long. Given that Mr. Bernanke does not acknowledge even the possibility that this is true, it will make it difficult for many in the market to believe that Mr. Bernanke will commence the as yet undefined exit strategy at the appropriate time.

Also given the recent record of the Fed on bank regulatory matters and the animus towards Bernanke in the Congress, it will be difficult for him to influence the course of regulatory reform. This is unfortunate as most of the world is leaning towards regulatory systems with some role for the central bank as a bank or systemic regulator. This is complicated by the absence of any evidence that Mr. Bernanke attached any weight to regulatory concerns prior to the crisis.

From a Federal Reserve perspective, given the animosity towards Mr. Bernanke by many in the Congress (especially since the revelation about the AIG bailout), it is unlikely that Bernanke will be an effective spokesman for a Fed independent of election cycle politics This is especially true since he went hat in hand to the Hill asking Senators for their support as parts of his efforts to win reconfirmation.

Defenders of Mr. Bernanke argue that he was and is uniquely qualified to head the central bank during this period of financial stress. However, it seems with the possible exception of Iceland that every country has found someone capable of stabilizing their financial system short of total collapse.

Furthermore, none of the policy prescriptions undertaken by the Fed are unique or outside those recommended by mainstream economists. The most salient aspect of Mr. Bernanke’s uniqueness is that he has become a lightning rod for all the criticism that the Congress can offer.

All that said, it would have been counterproductive to have had Bernanke’s nomination rejected in the politically charged aftermath of the election in Massachusetts. Ever since Greenspan assumed the Chairmanship, the Fed has become progressively more involved in issues that are properly left to the Congress and the Executive Branch. If the president had decided against nominating Mr. Bernanke, it would have been in keeping with a pre-determined calendar and entirely appropriate. If prior to Scott Brown’s election, a majority of the Senate had been publicly opposed to a Bernanke renomination, then I would have supported the Senate denying Bernanke the reappointment. However, given the appearance of the flight from Bernanke based primarily on short-term political expediency, I had to step back. Under those conditions, denying Bernanke the appointment would have dragged the Fed further into the political quagmire. The odds of the Fed becoming the next Fannie or Freddie are already too high.

A Bernanke resignation would allow for (but not guarantee) an effective leader; diffused much of the criticism directed at the Fed; and allowed for the perception that Fed policymakers are responsible for major policy mistakes without turning the Fed into a political football.

The country, the economy, the financial markets and the Fed itself deserve a Chairman who can marshal the support of Main Street and Wall Street and artfully deal with the Hill. Bernanke cannot do it. It would be best if at some point in the near future Mr. Bernanke steps aside. To aide in the process, a draft press release announcing Mr. Bernanke’s resignation is provided below:

After pondering deeply the general trends in the financial markets and the actual conditions obtaining in our economy today, I have resorted to another extraordinary measure.

To strive for price stability, the common prosperity and happiness of all as well as the security and well-being of our financial markets is the solemn obligation implied by the Fed’s mandate.

Indeed, I declared war on inflation and deflation out of a sincere desire to insure sustained growth at full employment and the stabilization of the price level, it being far from my thought either to compromise financial stability or to inflate a housing bubble.

But now we are faced with prolonged financial and economic dislocations. Despite the best that has been done by everyone–the efforts of the economists at the Federal Reserve, the diligence and assiduity of the Treasury Department and the efforts of the Congress and the President-the TARP and stimulus package–the economic and financial situation has developed not necessarily to America’s advantage.

This is the reason why I have take the step necessary to allow the President to appoint a new Chairman.

attempter:

Those who think “Heckuva job” Bennie is well qualified to lead through the crisis are those who simply want more of the same, since it’s clear he learned nothing and forgot nothing.

The hype that Bernanke is an “expert” on the Great Depression is just one of those lies that the media sound machine repeats ad nauseum to the point that everyone is supposed to assimilate its truthiness rather than examine whether or not it is in fact true.

But a little examination reveals how he’s simply a monetarist flat earther. The dogma that the economy was basically sound, had a hiccup, and just needed liquidity easing, is a lie meant to obscure the fundamental contradiction of useless, concentrated wealth stolen from a putative consumer base no longer wealthy enough to consume.

And today the black magic of infinite exponential debt is supposed to keep that going. I guess Bernanke hopes we’ll soon make contact with extraterrestrials who are heavy savers with an economy based on cheap exports. Who else will be able to perform the miracle he and his colleagues propose, of somehow levitating this utterly destroyed consumer debt market?

He’s the same Wall Street financialization apparatchik he was from day one, and his only idea is to look for new bubbles to reflate to enable further top-down looting. The whole thing, bubbles, Bailout, and the same going forward, is history’s biggest police riot.

Glen:

We all know that Bernskanky should never have been reappointed let alone elected to the position in the first place but he’s there and getting all cut up about it isn’t going to change anything. Until someone can produce a conclusive piece of hard evidence (even when it was it didn’t do much) then all the conjecture in the world will not dislodge him from office. Keep up the rage but we’re going to have to work a lot smarter.

stevenstevo:

“However, it seems with the possible exception of Iceland that every country has found someone capable of stabilizing their financial system short of total collapse.”

Huh? What about Greece? And Portugal? And that little thing we call Europe? Nearly every country in the world is in a recession just as bad as ours is -- many countries are worse off than we are actually. The ones that have fared well never suffered much in the first place.

And our financial system is stable, very stable actually. And we never experienced total collapse. The Lehman bankruptcy froze our capital markets for a week or so, but we recovered. Did Bernanke not stabilize the markets, just short of collapse?

Richard Smith:

“Huh” straight back at you stevenstevo.

Try again when you’ve grasped the difference between a financial system collapse and a recession.

stevenstevo:

“He also has stated the obvious: the worst recession since the Great Depression took him by surprise. It will be difficult for Mr. Bernanke to influence market expectations of inflation and growth, given that he failed to see the underlying financial and economic imbalances that so many others saw.”

Anyone who doubts Bernanke because he failed to predict the worst recession in 80 years, then they are stupid.

Not sure who the “so many others are” that Who are these people? I can only think of a couple. Literally. That’s it, which is absolutely nothing compared to the millions of investors, homeowners, journalists, economists, etc. who did not see it coming. Merely looking back in hindsight, through 20/20 eyeglasses, and realizing that there were signs does not mean you should have seen it coming. Unless you shorted the hell out of the market ala John Paulson, then you cannot say you saw the recession coming.

In addition, these signs did not show up until right before the financial crisis. At that point, the only thing Bernanke could do was keep rates low.

And what is this exit plan? TARP is being repaid rapidly. Surely this is not implying interest rates should be raised. It’s far too early for that. And no one has a clue whether we will have problems with inflation several years from now, or even sooner. Bernanke’s actions in the future will be largely dictated by the direction of our economy. The plan is obvious: once the economy starts picking up, with improvements in employment, GDP, etc., Bernanke will raise rates. If inflation starts showing warning signs, he will raise rates even more.

The future of our economy occurs in the future. Embedded in life and in the future is an element of what’s commonly referred to as randomness. No one can predict the future. Period.

Yves Smith:

You have just revealed you are not very well read. There was a very large cohort that decried the global credit bubble and said it would end VERY badly.

The FT from late 2006 onward, daily, was saying how extremely overvalued all asset markets were. Jeremy Grantham declared every asset class to be a bubble. Marc Faber and Jim Rogers saw this coming. Bob Shiller, Raghuram Rajan, and William White all warned the Fed and were ignored. I can add 20 names to this list without thinking very hard.

If you want to keep putting your foot in your mouth and chewing, I must tell you it is not a pretty spectacle.
 

Mannwich:

Steve-O revealed a lot of things in his post, in addition to “not being well read”.

Clampit:

“No one can predict the future. Period.”

Well after jumping from the plane sans parachute…your future is reasonably assured.

Hugh:

I admit I came to the housing bubble late. I first became aware of it in late 2005. (The housing bubble blew up on August 9, 2007 with the freeze of the BNP Paribas funds and the subsequent panic.)

I started writing about price manipulations in oil in 2006-2007. I suppose you could say I was late on this as well since such speculation had been going on since 2004. (Oil prices spiked to $140/bbl in June 2008.)

Oh, I did say back in the late summer of 2007 that the economy was going to go into recession. (The NBER places the beginning of the recession in December 2007.)

In 2008, I and others sat around trying to predict which were the next shoes to fall and wondering when the whole house of cards would go. (The meltdown hit on September 15, 2008.)

I said last fall that the stock market represented a fully mature bubble and could go at any time. I would have expected it to go this winter, but I underestimated the effect of Bernanke’s low interest rates in propping it up. Even so, it has been going sideways the last while and will go at some point.

I consistently discounted all the talk of greenshoots and recovery. I suppose I am different from others in that I don’t see this as a double dip recession. I thought we would hit a plateau or a period of slower fall before further descent.

I said that no second stimulus was likely this year, but since 2010 is an election year I predicted a lot of piecemeal efforts to keep things together and give the appearance of action to get incumbents through November. I thought this would keep the economy, if not the Democrats, from collapse through November.

I have written repeatedly about how our elites are incapable of either real reform or effective action. 2011 continues to look like a horror show to me in economic terms.

When I started out on this, I had no background and little interest in economics. I never had any special access to technical data. What I did get is freely available to anyone on the internet. The one advantage I have I suppose is that I have a better understanding of the intersection of politics and economics than most pure economists or market followers. And, of course, I did not have the ideological baggage of most contemporary economists.

My opinion may be overly harsh but I think the only people in the markets who didn’t see this coming are A) lying, B) stupid, or C) were blinded by their own greed.

craazyman:

Could be “all of the above” Hugh.

Fed Up:

I recommend this article titled “No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models”

http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf

See page 9 of the article/page 10 of the .pdf. I believe the person has added to the list.

I would like to know more about bernanke’s mortgage because if he can’t do personal finance, he’ll never get debt deflation/defaults.

APM:

The extent to which the US Government and the Fed have been captured by the Financial Industry (and several other Industries too) is truly appalling. Any pretense of independence is gone. There are no precedents in history for a system in such a state of crisis and with such a level of corruption to have reformed itself without a major exogenous shock such as a revolution or a war. This time will be no different, the question is only when: in 3 years, in 10 years, … In the meantime it will be more of the same intertwined by timid efforts to reform the system that will be rendered mostly void by the stakeholders that have the most to lose. Other regions of the world such as Europe and Japan are facing similar economic and social challenges but at least they are facing a lower level of Government capture by Business (that does not mean it will end necessarily well though as there are so many other things that could go wrong).

justaslakker:

I repeat my comment of Jan 25 when there was talk of Bernanke not being confirmed: Bernanke is going to be shoved down our throats whether we like it or not.

The financial predators are much more entrenched than we realize. They control the white house, the congress, the military, the media, face it the entire country (as well as others). Their strategy is deception. As is illustrated in this one commentary, one player Bernanke is a complete fraud.

As for war and revolution, we are already at war. It will simply be continually expanded and shifted to other areas of the world (Iran).

Revolution? The politico’s would like nothing better than riots in the streets. They can then declare martial law and bring the troops home to fight Americans on their home turf.
Paulson tipped his hand when he blackmailed Congress into giving him complete authority to bail out the banks.

There is a solution, but it does not fit present economic theory, and would be ridiculed by academia, and I dare say everyone one this blog. The solution is to replace our debt based money with debt free money. It is an idea that gained popularity during the last great depression and has been ridiculed and ignored ever since it was introduced. That simply tells you that it is a sound idea that would effectively break the bankers strangle hold on our society.

Fed Up:

“There is a solution, but it does not fit present economic theory, and would be ridiculed by academia, and I dare say everyone one this blog. The solution is to replace our debt based money with debt free money. It is an idea that gained popularity during the last great depression and has been ridiculed and ignored ever since it was introduced. That simply tells you that it is a sound idea that would effectively break the bankers strangle hold on our society.”

Actually, I agree. Maybe present economic theory is bunk or just “works” for the spoiled and rich under supply constrained conditions.

asphaltjesus:

That “who really owns America” link is disjointed declarations strung together to create a bogeyman.

I believe American economic and political power is concentrated. I just don’t think it’s as fantastical as writers like that make it out to be.

Simon:

LOL, this is like the wimp coming up with some great comeback lines at home in bed after the bully belittled him on the school playground.

But What Do I Know?:

Someone I read put it very well–the Fed is like the World War I generals who couldn’t bring themselves to believe that the nature of warfare had changed and the machine gun and improved artillery had made the close-formation bayonet charge obsolete. For four years Haig, Joffre, et al. (and also some in the German high command) continued to maintain their image of a great calvary charge that would break through the enemy lines and bring the war to an end. Bernancke, the lickspittle, and the scholastic Fed economists are still waiting for that magical interest rate cut to “reignite” the economy, and they’ll do their best to frustrate any attempts at solutions which undermine their ability to remain in “command” of monetary policy.

Clemenceau said, “War is too important to be left to the generals.” Monetary policy is too important to be left in the hands of a Bernancke Fed.

Hugh:

Re Bernanke, I think financial players are perfectly happy with him. They fully expect Helicopter Ben to keep interest rates low so they can keep their bubbles in stocks and commodities inflated. As for meaningful regulation, they already feel comfortable they can kill any on their own. They certainly know Bernanke is going to propose, let alone enforce any.

jdmckay:

I think financial players are perfectly happy with him.

Yes, me too. Actually, I think the underlying point of author’s article here is that he, Geithner and Summers are one w/those guys… or more directly, the reason we got a bailout instead of a long overdue financial system fix.

re: “financial players perfectly happy w/him”, one of my more enduring memories along the way of this debacle was (from memory) around Spring ‘09: a time when those paying attention (even including most in financial crowd who didn’t see it coming) knew that the “crisis” was on it’s way, but that it hadn’t quite bit the general public in a big way yet. Dow had lost thousands, home values were dropping, but pain hadn’t hit hard yet and retirement funds and such hadn’t realized their losses.

I was watching CNBC one evening, they had a panel of derivative fund managers. These guys all had lost massive amounts, mostly tied to various mortgage bond incarnations. They were all dressed to perfection, relaxed, smiling, looked confident.

They were the “markets are god” crowd, the guys who demanded regulation inhibited financial “innovation” etc.

To a man, each of these dudes said not to worry, everything’s going to be fine, because we still have a deep untapped source of capital that will carry us through: THE US TAXPAYER.

And, that’s exactly how it played out.

RebelEconomist :

It is possible that Bernanke genuinely did not see the danger of a bust; a less charitable but probably more realistic suggestion is that he did, but that he preferred not to be a party pooper. Ditto Greenspan. The truth is that rigorous central bankers have been more valued in theory than in practice. Even Volcker, with success to show for his hawkishness, was dispensed with once he had served his purpose.

Eric L. Prentis:

President Obusha the blah blah is the problem, Ben and Barack are two peas in a pod, both Wall Street shills.

scharfy:

Even if Bernanke got axed, nothing would change.

What would replace him? Would he have a DEEP and understanding of the great depression? Deeper? PhD in inflation? Doctorate in deflation? Would he be the biggest supergenius on the planet? Straight A’s from birth? As smart as Obama? Smarter?

As long as monetary policy is run by technocrats, plutocrats, or other -crats, expect further turbulence passengers…

I am in favor of returning the power to regulate money, and the value thereof, back to congress. This is in our constitution, until it was amended in 1913, delegating it to the Fed.

This is too awesome a responsibility for 12 men, never mind the moral implications.

kievite:

While Bernanke is definitely not a saint but as attempter aptly put it “Wall Street financialization apparatchik” the key here is to understand that it is the ideology of “free market fundamentalism” that drove the economics of the country off the cliff.

It’s like case against Soviet Politburo. It’s naive to thing that the General Secretary of Politburo is the source of all evil but other members and the ideology behind the organization are minor factors. In reality it was ideology that was the main factor and that helped to drive those, often pretty capable men to commit crimes and stupidities that they did.

So far the carrier of the ideology like a carrier of the virus is the large part of Republican party ("the wrecking crew" of Bushists and neocons as a core) and “Wall Street affiliated” wing of Democratic party.

So in this chess game Bernanke is just one of figures, and probably not the most important.  He was moved into this position by forces beyond his control just by virtue of being an active promoter of the ideology in question. His sycophantic admiration of Milton Friedman probably served him well.

Actually great Russian Anarchist Duke Kropotkin one said “People are better then institutions”.

So attack on Bernanke is to certain extent is like witch hunt: burning the sick person in case of epidemics instead of eliminating the source of infection and creating hygienic measures preventing its spread.

[Feb 3, 2010] Rosner “Has the New York Fed been serving the public trust Has Geithner”

naked capitalism

By Joshua Rosner, a managing director of an independent financial services research firm who writes for New Deal 2.0

In Geithner’s AIG testimony before the House Oversight Committee, the Secretary again tried to sell the notion that ‘if we didn’t act then, millions more would have lost their jobs and thousands of factories would have closed’. Even if this were true, why did they have to pay these counterparties one hundred cents on the dollar? The answer may be because, as President of the New York Fed, the counterparties you paid out on AIG owned your company.

To simply say “we had to” is an oversimplification and a partial story. Those of us who saw the crisis coming and recognized the fragility of the system before the Fed or Treasury disagree with the “we had to act” line, but the story is actually larger than that, and predates the unfolding of the crisis. The full story puts Tim Geithner and Larry Summers dead center in creating the environment that drove us to crisis.

Secretary Geithner can keep repeating his assertion he has worked in public service his whole life. Never mind that this calls into question his tangible market experience, this claim begs the question: How does he define working in the public service?

Geithner’s last job, as the President of the New York Fed highlights that question. The NY Fed’s most important jobs, arguably, are safety and soundness supervision and capital market supervision. Success in carrying out those responsibilities should be the basic litmus test for the measuring how well the NY Fed is serving the public trust. In these roles it is supposed to examine, regulate and oversee the Federal Reserve regulated bank holding companies in the NY Fed’s region, the largest bank holding companies in the country, many of which were AIG’s counterparties.

The New York Fed is not government-owned. Most people fail to recognize this fact. Simply, the Federal Reserve Board (responsible for monetary policy, with a dual mandate of full employment and price stability) is an independent part of the federal government, while the New York Fed is a shareholder-owned or private corporation. In other words, where the Federal Reserve Board is www.frb.gov, the District Bank is www.newyorkfed.org. Historically, the New York Fed has been among the most profitable shareholder-owned corporations in the world. Yet it keeps the details of its shareholders’ ownership information private. What we do know is that its owners include precisely those institutions it is tasked to regulate and supervise and those is has obviously failed to adequately supervise. Unlike the other District Banks of the Federal Reserve system, which have overseen their banks quite well, the New York Fed’s concentration of the largest banks, coupled with its unique role of managing the market operations of the entire Fed system, has built a culture where it sees itself as a market participant and peer to those firms it regulates.

The President of the NY Fed is chosen by, paid by and reports to the private shareholders of that private institution. Only three of the nine Directors of the Board of the New York Fed are chosen by the Federal Reserve Board and, until this year, the NY Fed’s Chair — chosen by the Federal Reserve Board in Washington — was a former Chairman of Goldman Sachs who still sits on Goldman’s Board.

We do not know the full roster of shareholders, but the list of the NY Fed’s Board and management group is particularly interesting, reading like a Who’s Who of sell-side financial corporations that the taxpayer has bailed out and whose systemic riskiness Washington would rather take indirect and half measures to address rather than take a head-on approach of resolving.

In truth, Geithner’s ineffectiveness in his role at NY Fed President and his current political posturing — without any policy substance to directly address too-big-to-fail or the Fed’s flawed powers to bailout firms — seems to have resulted from design rather than accident. After all, in a previous “public service” role, Geithner was the lead negotiator for the WTO’s General Agreement on Tarrifs and Trade for financial services. In this role, Geithner reported to Larry Summers, who in turn reported to Secretary of Treasury Robert Rubin. In 1998, this team won the banks EVERYTHING they requested from that treaty. From open access to new markets to unrestricted growth in equity and credit derivatives, they opened the door to rapid and deregulated growth of the large multinational banks, allowing them to become “too big to fail”. Moreover, the terms of the agreement has made it almost impossible to put the “too big to fail” genie back in the bottle without running afoul of rules of this international agreement. That was the work of Geithner as “public servant”.

It appears that his reward for this work was nomination to run the privately owned NY Fed. The nomination was orchestrated by many of those same banks that own the NY Fed and for whom he delivered on that GATT (General Agreement on Tariffs and Trade) “Understanding on Commitments in Financial Service” (an international agreement, won by arm-twisting, that led to global deregulation of the fnancial services industry and encouraged the largest firms to enter new business lines and new financialmarkets without resistance).

I expect documents to come to light that will show that Geithner and Summers did the WTO negotiations on behalf of the industry and viewed the completion as a ‘deliverable’ to their financial constituents. How can Obama say, while Summers and Geithner are his team, “if the banks want a fight, I am ready to fight them”?

Geithner’s comment from January 1998 demonstrates that he was working on behalf of the industry and not necessarily the public:

Second, we, I think, established — I hope you agree, Bob — very effective cooperation with the U.S. financial community, both in defining priorities, and more importantly in some ways… mobilizing a coordinated approach with other globally active financial institutions in other jurisdictions…Fourth, we worked very closely with the international financial institutions so that they made a very strong, compelling analytical case for the benefits of liberalization, so that they built specific conditions into programs where that was appropriate, and so that they provided technical support and technical assistance to countries who were trying to find the right path of liberalization in an environment of considerable financial stress… the agreement establishes quite substantial new opportunities for access to these rapidly growing markets, with substantial increases in the equity thresholds open to foreign firms… the agreement provides protection for the substantial existing presence of U.S. financial institutions from the threat of future discrimination or future protection. And this is not a static commitment. It means that they can participate fully in the growth of these markets as they evolve further.

I expect more damning statements of Geithner and Summers using the office of the Treasury to work on behalf of the bankers.

So how did this WTO process to liberalize the global financial regulatory structure begin? Well, according to the “Financial Services and the GATS 2000 Round” report:

In 1975 Pan American, which was still there, and American International Group (AIG) took a shot at trade in services. In 1979, I was in New York with the American Express Company and was in charge of strategic planning and acquisitions. We were having problems, which we now call market access problems (we did not have this kind of terminology at that time), in thirty or forty countries. We had no remedy under the trade laws or under the General Agreement on Tariffs and Trade (GATT), which only covered goods.

To make a long story short, we decided that we would have to change that, which meant starting a new round of trade negotiations including services. My boss, Jim Robinson, chief executive officer (CEO) of American Express, asked me to start a new trade round as soon as possible. He asked, ‘How long will it take?’ I said, ‘I don’t know, ten years maybe. I don’t know. I have never done it. I am just reading this book by Ken Dam called the GATT.’ He said, ‘Well, do it as soon as you can.’ I said, ‘I need some money.’ He said, ‘Don’t worry about money. This is so important, you will have an unlimited budget.” If there was one phrase that really pushed trade and services, that was it. We put a person in Brussels, a person in Tokyo, two or three people in Washington, three people in New York, and so forth.

We enlisted the aid, which was really important, of Citicorp and also AIG. John Reed came along a few years later as CEO. We had an alliance in which Jim Robinson of American Express, John Reed, and Hank Greenberg of AIG were working together. I was the go-between. Having those three men with a lot of staff was the key. We went from zero probability of success to having a chance…One of the things that distinguish the American private sector from the rest of the world again is its relationship to the media, which is very good. All kinds of events are held with the U.S. media and sometimes the foreign media in attendance. This is very, very important. We do not see this any- where else in the world.

Finally, in 1998 Geithner and Summers delivered. What did they deliver? What are the realities of the “Understanding on Commitments in Financial Services” in the GATT agreement that were thrust on the global sovereign world? Well, as two small examples from the document:

Notwithstanding Article XIII of the Agreement, each Member shall ensure that financial service suppliers of any other Member established in its territory are accorded most-favoured-nation treatment and national treatment as regards the purchase or acquisition of financial services by public entities of the Member in its territory.

And:

A Member shall permit financial service suppliers of any other Member established in its territory to offer in its territory any new financial service.

If being a public servant is funneling unreasonable amounts of taxpayer capital, without market discipline, to the largest and most poorly managed banks, then Geithner’s selection as Secretary of Treasury makes sense. The same logic that allows senior officers of Lehman, Pepsi, Pfizer, GE, and Loews to be selected as ‘Class B Directors’ of the New York Fed, chosen as “representatives of the public” makes Geithner the perfect “public servant” to oversee those instutions these largest banks have successfully robbed. To be fair, it is also the same twisted logic that seated the last Treasury Secretary, a man who is being publically whitewashed in the media today — even though, as Chairman of Goldman, he single handedly convinced the SEC to allow Goldman and other investment banks to lever-up so wrecklessley that they would need to be bailed out as AIG counterparties.

• It’s Britain’s Fault… And We Want Our Money Back (Investment U, 2/3/10)
• Geithner to make like Kashkari and cash in? (The Mess That Greenspan Made, 1/26/10)
• Damage Control Team Arrives to Save Geithner (Fund my Mutual Fund, 1/7/10)

gruntled:

Rosner’s article is highly revealing. And depressing. There really is an incestuous relationship between the Wall Street and the White House, with the New York Fed serving as a facilitator of sorts.

Josh:

I had to look at the status of the FRB versus the individual regional banks in the last few years, and came away surprised with the result.

There is one thing to add though. There are court decisions out there that construe the individual regional banks as quasi-governmental when they are deemed to act as agents/instruments of the government. Its a bit arcane, and our research was not extensive, but the dichotomy between the governmental FRB and the privately-held individual banks is there as described in Rosner’s article. The article does a great job explaining who Geithner was working for at the time.

[Jan 27, 2010]  Bernanke Part 2 of 2: Leaders Lead, or Just Say No by Ken Houghton

1/26/2010 | Angry Bear

The world would be a much better place if people had listened to Tom last August:
 

Now some elite opinion favors Ben Bernanke's reappointment, but politicians are irritated over Fed stonewalling of bailout oversight and others (e.g. Dean Baker) point out that Ben Bernanke who put the Fed throttles to the firewall to save the world is also the Ben Bernanke who carried over Greenspan policy until it was too late. [links in original]

Not a strong enough source for you? How about the Internet's Chief Bernanke Apologist? Brad DeLong last August:
 

I am surprised that he is being reappointed. I would have thought that the combination of people angry because he has given too much public money to the banks and people angry because he didn't stop the recession would together make him damaged and that Obama would want to bring in a fresh face--never mind that Bernanke had no way to try to lessen the recession save by policy steps that inevitably involve giving money to the banks.

Tom also dealt with that:
 

To which the obvious response is, duh, who says it has to be one or the other? A reality-based critique of the bailouts allows them to be both effective at saving the world and unconscionable screw-jobs that kept an array of bad actors from paying for their greed and incompetence. (The latter clearly feeds a lot of the underlying sentiment of the tea partiers, even if it's ultimately the greedy and incompetent who are marshalling it.) However, considering Team Obama's political tone-deafness, it'll be a pleasant but major surprise if they let Bernanke go back to Princeton for some R&R.

And DeLong himself (today) moves the goalpostsnotes where the problem is centered:
 

[Bernanke] is no longer the academic intellectual who advocates inflation targetting. He is, instead, the voice for the consensus of the Federal Open Market Committee–and a member of that committee who can, by his own internal arguments, move that consensus at the margin. So he is going to reflect that consensus....[A] Fed chair who doesn't reflect the consensus in public has less power to move the consensus in private. From my perspective, I don’t think that there’s anything wrong with Ben Bernanke’s (private, intellectual, academic) analysis of the current situation. What is wrong is that the FOMC consensus is wrong—and Bernanke’s public statements reflect that wrong consensus. So here I tend to blame Obama more than I blame Bernanke for the recent character of Bernanke’s public statements–for the fact that Fed policy and rhetoric right now is not more Gagnonesque, because Obama could have done things over the past year to move the FOMC consensus that he has not done. [emphases mine]

This is a true statement—but it is no less true now than it was in August, and Ben Bernanke has been the ostensible leader of the FRB since then—and, indeed, since 2.5 years before then, as the crisis was unfolding.

In the past four years, Bernanke has "led" the Federal Reserve. And even those who are not sympathetic to Steve Keen's interpretation of Bernanke's flaws (h/t Yves and Naked Capitalism, who printed it themselves as well) would have to agree that the sounds coming from the Fishers* and Hoenigs, not to mention Bernanke himself, are more reminiscent of Morgenthau than Volcker.

Which should have been the death knell for his renomination. To turn Brad DeLong's statement on its side: Ben Bernanke has been unable to lead and change the consensus of the Federal Reserve Board, even marginally, to be more in line with what Ben Bernanke, the skilled economist, knows would be a better policy.

Leaders lead. Ben Bernanke hasn't and doesn't.* For that alone, he should be replaced, and Janet Yellen nominated to replace him.


*This one was reprinted, without several of the cronyism acknowledgements, in the WSJ comics section today. I prefer the original.

**The similarity to the Canadian Liberal Party's selection of Celine Stephane Dion as their leader should not be overlooked. That they had the good sense to replace him after one term is a sign of sanity the Obama Administration would have been wise to consider. (That they compounded the mistake by replacing him with a pro-torture American conservative is a mistake from which one would expect the Obama Administration could and presumably will learn.)

[Jan 27, 2010] Observations On Bernanke by Invictus

"I think there will be much regret over reappointing Gentle Ben when the details of the AIG bailout and other secretive events are pried free"

January 26, 2010 | The Big Picture

Like Paul Krugman, I am torn over the issue of Bernanke’s confirmation.  Certainly, he was instrumental in bringing us back from the brink.  Regrettably, he was also instrumental in getting us there in the first place.  Here are some of my observations about Dr. Bernanke over the past several years.

On August 9, 2005, Bernanke, then chairman of president George W. Bush’s Council of Economic Advisors, met with the president and subsequently fielded questions from the media.  I recall the question below as if it were only yesterday.  (Director Hubbard is Al Hubbard, then Director of the National Economic Council.)

Q Did the housing bubble come up at your meeting? And how concerned are you about it?

DIRECTOR HUBBARD: Let me let Ben answer that question.

CHAIRMAN BERNANKE: We talked some about housing. There’s a lot of good news on housing. The rate of homeownership is at a record level, affordability still pretty good. The issue of the housing bubble is one that people have — whether there is a housing bubble is one that people have raised. Housing prices certainly have come up quite a bit. But I think it’s important to point out that house prices are being supported in very large part by very strong fundamentals.

And particularly, we have a strong economy, we have lots of jobs, employment, high incomes, very low mortgage rates, growing population, and shortages of land and housing in many areas. And those supply-and-demand factors are a big reason for why housing prices have risen as much as they have.

I think over a period of time, the housing prices are likely to stabilize. I don’t expect them to keep rising at this rate indefinitely; I don’t think anybody really does. But, again, I do think that the bulk of the increases are associated with strong economic fundamentals.

Bernanke’s position on housing would soon begin to evolve, and continue to do so over the next couple of years, as economist David Rosenberg — then plying his trade for Merrill Lynch – chronicled beautifully in August 2007:

“Low mortgage rates, together with expanding payrolls and incomes and the need to rebuild after the hurricanes, should continue to support the housing market. Thus, at this point, a leveling out or a modest softening of housing activity seems more likely than a sharp contraction, although significant uncertainty attends the outlook for home prices and construction. In any case, the Federal Reserve will continue to monitor this sector closely.” (15 February 2006).

“At this point, the available data on the housing market, together with ongoing support for housing demand from factors such as strong job creation and still-low mortgage rates, suggest that this sector will most likely experience a gradual cooling rather than a sharp slowdown.” (27 April 2006).

“Home prices, which have climbed at double-digit rates in recent years, still appear to be rising for the nation as a whole, though significantly less rapidly than before. These developments in the housing market are not particularly surprising, as the sustained run-up in housing prices, together with some increase in mortgage rates, has reduced affordability and thus the demand for new homes.” (9 July 2006).

“Although residential construction continues to sag, some indications suggest that the rate of home purchase may be stabilizing, perhaps in response to modest declines in mortgage interest rates over the past few months and lower prices in some markets.” (28 November 2006).

“Some tentative signs of stabilization have recently appeared in the housing market: New and existing home sales have flattened out in recent months, mortgage applications have picked up, and some surveys find that homebuyers’ sentiment has improved. However, even if housing demand falls no further, weakness in residential investment is likely to continue to weigh on economic growth over the next few quarters as homebuilders seek to reduce their inventories of unsold homes to more-comfortable levels … Despite the ongoing adjustments in the housing sector, overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low.” (14 February 2007).

“Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency. We will continue to monitor this situation closely.” (28 March 2007).

“The rise in subprime mortgage lending likely boosted home sales somewhat, and curbs on this lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters. Moreover, we are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets. All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable”. (17 May 2007).

“Of course, the adjustment in the housing sector is still ongoing, and the slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected. Thus far, however, we have not seen major spillovers from housing onto other sectors of the economy … However, fundamental factors–including solid growth in incomes and relatively low mortgage rates–should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.” (5 June 2007).

“Rising delinquencies and foreclosures are creating personal, economic, and social distress for many homeowners and communities — problems that likely will get worse before they get better … even if demand stabilizes as we expect, the pace of construction will probably fall somewhat further as builders work down stocks of unsold new homes. Thus, declines in residential construction will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over time.” (17 July 2007).

Now let’s get back to Bernanke’s August 2005 presser.  The fundamentals were anything but strong, as Rosenberg had pointed out in this prescient piece (a true gem of research) he penned in August of 2004, which I wrote up over at Blah3.com after the bubble had popped.

In response to Bernanke’s affordability comment at the press conference, I dropped him a note through then Chief of Staff Gary Blank:

Dear Mr. Blank:

On August 9, Dr. Bernanke participated in a press briefing during which he fielded questions about his meeting with the president.

Among the questions Dr. Bernanke was asked was this one:

Did the housing bubble come up at your meeting?  And how concerned are you about it?

Dr. Bernanke’s answer, in part, follows [emphasis mine]:

We talked some about housing.  There’s a lot of good news on housing.  The rate of home ownership is at a record level, affordability still pretty good.

I have reproduced below two charts created by brokerage firm Merrill Lynch using data compiled from the National Association of Realtors.

The charts speak for themselves:  First-time buyer affordability has collapsed to a 16-year low, and overall homeowner affordability has plunged to a 14-year low.

So, Mr. Blank, my question is simply this:  Given the hard data, on what basis did Dr. Bernanke make the claim that housing affordability is “still pretty good”?

Below is an updated chart of the National Association of Realtors Monthly Housing Affordability Index, one of two I’d included in my letter.  At the time Dr. Bernanke spoke (solid line), the fact of the matter is that housing affordability was already at about a 14-year low — hardly “still pretty good.”  (The dotted line is where it’s gone since, which actually is “pretty good.”)

[Source: National Association of Realtors]

I never did get a response.  Fancy that.

Regardless, unlike Calculated Risk, I’m not sure we should be looking for a better steward for the Fed at this time.  I believe the economy is still way too fragile and the risks of new Fed leadership at this time are too great.  Personally, I’m with the “Don’t Block Ben” crowd.  If Bernanke’s confirmation is not to be, however, my preference would be to see San Fran Fed president Janet Yellen get the job.

[Jan 26, 2010] Steve Keen: The Economic Case Against Bernanke

By Steve Keen, Associate Professor of Economics & Finance at the University of Western Sydney and author of Debunking Economics: The Naked Emperor of the Social Sciences

The US Senate should not reappoint Ben Bernanke. As Obama’s reaction to the loss of Ted Kennedy’s old seat showed, real change in policy only occurs after political scalps have been taken. An economic scalp of this scale might finally shake America from the unsustainable path that reckless and feckless Federal Reserve behavior set it on over 20 years ago.

Some may think this would be an unfair outcome for Bernanke. It is not. There are solid economic reasons why Bernanke should pay the ultimate political price.

Haste is necessary, since Senator Reid’s proposal to hold a cloture vote could result in a decision as early as this Wednesday, and with only 51 votes being needed for his reappointment rather than 60 as at present. This document will therefore consider only the most fundamental reason not to reappoint him, and leave additional reasons for a later update.

Misunderstanding the Great Depression

Bernanke is popularly portrayed as an expert on the Great Depression—the person whose intimate knowledge of what went wrong in the 1930s saved us from a similar fate in 2009.

In fact, his ignorance of the factors that really caused the Great Depression is a major reason why the Global Financial Crisis occurred in the first place.

The best contemporary explanation of the Great Depression was given by the US economist Irving Fisher in his 1933 paper “The Debt-Deflation Theory of Great Depressions”. Fisher had previously been a cheerleader for the Stock Market bubble of the 1930s, and he is unfortunately famous for the prediction, mere days before the 1929 Crash:

Stock prices have reached what looks like a permanently high plateau. I do not feel that there will soon, if ever, be a fifty or sixty point break below present levels, such as Mr. Babson has predicted. I expect to see the stock market a good deal higher than it is today within a few months. (Irving Fisher, New York Times, October 15 1929)

When events proved this prediction to be spectacularly wrong, Fisher to his credit tried to find an explanation. The analysis he developed completely inverted the economic model on which he had previously relied.

His pre-Great Depression model treated finance as just like any other market, with supply and demand setting an equilibrium price. However, in building his models, he made two assumptions to handle the fact that, unlike the market for say, apples, transactions in finance markets involved receiving something now (a loan) in return for payments made in the future. Fisher assumed

(A) The market must be cleared—and cleared with respect to every interval of time.

(B) The debts must be paid. (Fisher 1930, The Theory of Interest, p. 495)

I don’t need to point out how absurd those assumptions are, and how wrong they proved to be when the Great Depression hit—Fisher himself was one of the many whose fortunes were wiped out by margin calls they were unable to meet. After this experience, he realized that his previous assumption of equilibrium blinded him to the forces that led to the Great Depression. The real action in an economy occurs in disequilibrium:

We may tentatively assume that, ordinarily and within wide limits, all, or almost all, economic variables tend, in a general way, toward a stable equilibrium… But the exact equilibrium thus sought is seldom reached and never long maintained. New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any variable is almost always above or below the ideal equilibrium…

It is as absurd to assume that, for any long period of time, the variables in the economic organization, or any part of them, will “stay put,” in perfect equilibrium, as to assume that the Atlantic Ocean can ever be without a wave. (Fisher 1933, p. 339)

A disequilibrium-based analysis was therefore needed, and that is what Fisher provided. He had to identify the key variables whose disequilibrium levels led to a Depression, and here he argued that the two key factors were “over-indebtedness to start with and deflation following soon after”. He ruled out other factors—such as mere overconfidence—in a very poignant passage, given what ultimately happened to his own highly leveraged personal financial position:

I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt. (p. 341)

Fisher then argued that a starting position of over-indebtedness and low inflation in the 1920s led to a chain reaction that caused the Great Depression:

(1) Debt liquidation leads to distress selling and to

(2) Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes

(3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be

(4) A still greater fall in the net worths of business, precipitating bankruptcies and

(5) A like fall in profits, which in a “capitalistic,” that is, a private-profit society, leads the concerns which are running at a loss to make

(6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to

(7) Pessimism and loss of confidence, which in turn lead to

(8) Hoarding and slowing down still more the velocity of circulation. The above eight changes cause

(9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest. (p. 342)

Fisher confidently and sensibly concluded that “Evidently debt and deflation go far toward explaining a great mass of phenomena in a very simple logical way”.

So what did Ben Bernanke, the alleged modern expert on the Great Depression, make of Fisher’s argument? In a nutshell, he barely even considered it.

Bernanke is a leading member of the “neoclassical” school of economic thought that dominates the academic economics profession, and that school continued Fisher’s pre-Great Depression tradition of analysing the economy as if it is always in equilibrium.

With his neoclassical orientation, Bernanke completely ignored Fisher’s insistence that an equilibrium-oriented analysis was completely useless for analysing the economy. His summary of Fisher’s theory (in his Essays on the Great Depression) is a barely recognisable parody of Fisher’s clear arguments above:

Fisher envisioned a dynamic process in which falling asset and commodity prices created pressure on nominal debtors, forcing them into distress sales of assets, which in turn led to further price declines and financial difficulties. His diagnosis led him to urge President Roosevelt to subordinate exchange-rate considerations to the need for reflation, advice that (ultimately) FDR followed. (Bernanke 2000, Essays on the Great Depression, p. 24)

This “summary” begins with falling prices, not with excessive debt, and though he uses the word “dynamic”, any idea of a disequilibrium process is lost. His very next paragraph explains why. The neoclassical school ignored Fisher’s disequilibrium foundations, and instead considered debt-deflation in an equilibrium framework in which Fisher’s analysis made no sense:

Fisher’ s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects. (p. 24)

If the world were in equilibrium, with debtors carrying the equilibrium level of debt, all markets clearing, and all debts being repaid, this neoclassical conclusion would be true. But in the real world, when debtors have taken on excessive debt, where the market doesn’t clear as it falls, and where numerous debtors default, a debt-deflation isn’t merely “a redistribution from one group (debtors) to another (creditors)”, but a huge shock to aggregate demand.

Crucially, even though Bernanke notes at the beginning of his book that “the premise of this essay is that declines in aggregate demand were the dominant factor in the onset of the Depression” (p. ix), his equilibrium perspective made it impossible for him to see the obvious cause of the decline: the change from rising debt boosting aggregate demand to falling debt reducing it.

In equilibrium, aggregate demand equals aggregate supply (GDP), and deflation simply transfers some demand from debtors to creditors (since the real rate of interest is higher when prices are falling). But in disequilibrium, aggregate demand is the sum of GDP plus the change in debt. Rising debt thus augments demand during a boom; but falling debt substracts from it during a slump.

In the 1920s, private debt reached unprecedented levels, and this rising debt was a large part of the apparent prosperity of the Roaring Twenties: debt was the fuel that made the Stock Market soar. But when the Stock Market Crash hit, debt reduction took the place of debt expansion, and reduction in debt was the source of the fall in aggregate demand that caused the Great Depression.

Figure 1 shows the scale of debt during the 1920s and 1930s, versus the level of nominal GDP.

Figure 1: Debt and GDP 1920-1940

Figure 2 shows the annual change in private debt and GDP, and aggregate demand (which is the sum of the two). Note how much higher aggregate demand was than GDP during the late 1920s, and how aggregate demand fell well below GDP during the worst years of the Great Depression.

Figure 2: Change in Debt and Aggregate Demand 1920-1940

Figure 3 shows how much the change in debt contributed to aggregate demand—which I define as GDP plus the change in debt (the formula behind this graph is “The Change in Debt, divided by the Sum of GDP plus the Change in Debt”).

Figure 3: Debt contribution to Aggregate Demand 1920-1940

So during the 1920s boom, the change in debt was responsible for up to 10 percent of aggregate demand in the 1920s. But when deleveraging began, the change in debt reduced aggregate demand by up to 25 percent. That was the real cause of the Great Depression.

That is not a chart that you will find anywhere in Bernanke’s Essays on the Great Depression. The real cause of the Great Depression lay outside his view, because with his neoclassical eyes, he couldn’t even see the role that debt plays in the real world.

Bernanke’s failure

If this were just about the interpretation of history, then it would be no big deal. But because they ignored the obvious role of debt in causing the Great Depression, neoclassical economists have stood by while debt has risen to far higher levels than even during the Roaring Twenties.

Worse still, Bernanke and his predecessor Alan Greenspan operated as virtual cheerleaders for rising debt levels, justifying every new debt instrument that the finance sector invented, and every new target for lending that it identified, as improving the functioning of markets and democratizing access to credit.

The next three charts show what that dereliction of regulatory duty has led to. Firstly, the level of debt has once again risen to levels far above that of GDP (Figure 4).

Figure 4: Debt and GDP 1990-2010

Secondly the annual change in debt contributed far more to demand during the 1990s and early 2000s than it ever had during the Roaring Twenties. Demand was running well above GDP ever since the early 1990s (Figure 5). The annual increase in debt accounted for 20 percent or more of aggregate demand on various occasions in the last 15 years, twice as much as it had ever contributed during the Roaring Twenties.

Figure 5: Change in Debt and Aggregate Demand 1990-2010

Thirdly, now that the debt party is over, the attempt by the private sector to reduce its gearing has taken a huge slice out of aggregate demand. The reduction in aggregate demand to date hasn’t reached the levels we experienced in the Great Depression—a mere 10% reduction, versus the over 20 percent reduction during the dark days of 1931-33. But since debt today is so much larger (relative to GDP) than it was at the start of the Great Depression, the dangers are either that the fall in demand could be steeper, or that the decline could be much more drawn out than in the 1930s.

Figure 6: Debt contribution to Aggregate Demand 1990-2010

Conclusion

Bernanke, as the neoclassical economist most responsible for burying Fisher’s accurate explanation of why the Great Depression occurred, is therefore an eminently suitable target for the political sacrifice that America today desperately needs. His extreme actions once the crisis hit have helped reduce the immediate impact of the crisis, but without the ignorance he helped spread about the real cause of the Great Depression, there would not have been a crisis in the first place. As I will also document in an update in early February, some of his advice has made America’s recovery less effective than it could have been.

Obama came to office promising change you can believe in. If the Senate votes against Bernanke’s reappointment, that change might finally start to arrive.

Professor Steve Keen

www.debtdeflation.com/blogs

More on Bernanke

Bernanke reappointment would implicitly confirm that Obama administration is in bed with banksters and does not work any real reform.  That can lead to devastating results of November election for Dems, who are now viewed as just another wing of Republican Party. 

1/23/2010 | CalculatedRisk

From Jim Hamilton at Econbrowser: Why Bernanke should be reconfirmed

I asked a senior Fed staff economist in 2008 how Bernanke was holding up personally under all the pressure. He used an expression I hadn't heard before, but seems very apt. He said he was extremely impressed by Bernanke's "intellectual stamina," by which he meant a tireless energy to continually re-evaluate, receive new input, assess the consequences of what has happened so far, and decide what to do next. That is an extremely rare quality. Most of us can be very defensive about the decisions we've made, and our emotional tie to those can prevent us from objectively processing new information. On the recent occasions I've seen Bernanke personally, that's certainly what I observed as well. Even with all he's been through, the man retains a remarkable openness to hear what others may have to say.

Please permit me to suggest that intellectual stamina is the most important quality we need in the Federal Reserve Chair right now.

From Brad DeLong: Don't Block Ben!

I think Bernanke is one of the best in the world for this job--I cannot think of anyone clearly better.

From Paul Krugman: The Bernanke Conundrum

As I see it, the two things that worry me about Bernanke stem from the same cause: to a greater degree than I had hoped, he has been assimilated by the banking Borg. In 2005, respectable central bankers dismissed worries about a housing bubble, ignoring the evidence; in the winter of 2009-2010, respectable central bankers are worried about nonexistent inflation rather than actually existing unemployment. And Bernanke, alas, has become too much of a respectable central banker.

That said, however, what is the alternative? Calculated Risk says we can do better. But can we, really?

It’s not that hard to think of people who have the intellectual chops for the job of Fed chair but aren’t fully part of the Borg. But it’s very hard to think of people with those qualities who have any chance of actually being confirmed, or of carrying the FOMC with them even if named as chairman (which is one reason why this suggestion is crazy). Does it make sense to deny Bernanke reappointment simply in order to appoint someone who would follow the same policies?

And yet, the Fed really needs to be shaken out of its complacency.

As I said, I’m agonizing.

Krugman suggests we need someone with the "intellectual chops for the job", but who hasn't been assimilated by the "banking Borg" - and someone who would also be effective in leading the FOMC. I agree that Bernanke meets the first and last qualifications. And I think he is a far better Fed Chairman than Greenspan.

However I'd also prefer someone who expressed concerns about the asset bubbles fairly early on. Perhaps it is premature to name a specific person, but I think San Francisco Fed President Janet Yellen comes close to meeting all of the criteria.

[Jan 6, 2010] Still No To Bernanke « The Baseline Scenario By Simon Johnson

We first expressed our opposition to the reconfirmation of Ben Bernanke as chairman of the Fed on December 24th and again here on Sunday.  Since then a wide range of smart economists have argued – at the American Economic Association meetings in Atlanta - that Bernanke should be allowed to stay on.

I’ve heard at least six distinct points.  None of them are convincing.

1. Bernanke is a great academic.  True, but not relevant to the question at hand.
2. Bernanke ran an inspired rescue operation for the US financial system from September 2008.  Also true, but this is not now the issue we face.  We’re looking for someone who can clean up and reform the system – not someone to bail it out further.
3. Bernanke was not really responsible for the failures of the Fed under Alan Greenspan.  This is a stretch, as he was at the Fed 2002-05, then chair of the Council of Economic Advisers, June 2005-January 2006.  Bernanke took over as Fed chair in February 2006, when tightening (or even enforcing) regulation could still have made a difference.  He had plenty of time to leave a mark and, in a very real sense, he did.
4. Bernanke understands the folly of the Fed’s old bubble-building ways and is determined to reform them.  This is wishful thinking.  There was nothing in his remarks this weekend (or at any time recently) to support such an assessment.
5. Bernanke will be tough on banks when needed.  Again, there is not a shred of evidence that would support such a view – the markets like him because they see him as a soft touch and that’s great, except that it encourages further reckless risktaking by banks considered Too Big To Fail and leads to another financial meltdown.
6. Dropping Bernanke would disrupt the process of economic recovery.  This is perhaps the strangest assertion – we’re in a global rebound phase, fueled by near zero US short-term interest rates.  Official forecasts will soon go through a set of upward revisions and calls for further worldwide stimulus will start to sound distinctly odd.  Now is the perfect time to change the chair of the Fed.

If Fed Missed That Bubble, How Will It See a New One?  by David Leonhardt

 1/05/2010 |  Calculated Risk

So why did Mr. Greenspan and Mr. Bernanke get it wrong?

The answer seems to be more psychological than economic. They got trapped in an echo chamber of conventional wisdom. Real estate agents, home builders, Wall Street executives, many economists and millions of homeowners were all saying that home prices would not drop, and the typically sober-minded officials at the Fed persuaded themselves that it was true. “We’ve never had a decline in house prices on a nationwide basis,” Mr. Bernanke said on CNBC in 2005.

He and his colleagues fell victim to the same weakness that bedeviled the engineers of the Challenger space shuttle, the planners of the Vietnam and Iraq Wars, and the airline pilots who have made tragic cockpit errors. They didn’t adequately question their own assumptions. It’s an entirely human mistake.

Which is why it is likely to happen again.

What’s missing from the debate over financial re-regulation is a serious discussion of how to reduce the odds that the Fed — however much authority it has — will listen to the echo chamber when the next bubble comes along. A simple first step would be for Mr. Bernanke to discuss the Fed’s recent failures, in detail. If he doesn’t volunteer such an accounting, Congress could request one.

Bernanke continues to dodge the key questions: what went wrong with regulation, and how will the new regulatory structure catch a bubble the next time?

Suggesting “better and smarter" execution just doesn't cut it.

Plantagenet (profile) wrote on Tue, 1/5/2010 - 6:56 pm I dispute every premise of this piece. Bernanke wasn't wrong because some theory went wrong.

Theory is not used at all. The Fed just does was the Oligarchs want. The pseudo-academic conversations are just a front to distract the audience while their pockets are being picked. You could substitute alchemy for the Fed's models, and nothing would change. Or Feng Shui. Or Three's Company.

People who try to read the Fed's tea leaves just fall for their trap.
 

[Jan 4, 2009] Economist's View Paul Krugman That 1937 Feeling

Bruce Wilder:

History repeating?

Bernanke had the interesting destiny of being able to study an historical episode of failed policy, and then to try a different policy, in a similar circumstance.

I wonder how certain Bernanke is, that he succeeded in bringing about a different, and better outcome.

Krugman mis-frames the parallels, I think, and, even though he has repeatedly stressed the powerlessness of the zer0-bound, he fails to properly appreciate the reality, here.

The Fed is no longer the master of its fate. And, the U.S. economy remains in a weak, and possibly fragile state. That's the proximate danger, here; not that officials, who have studied on doing too little, will withdraw the paltry effort, but that they will have neither will of their own, or the confidence of others, when some external shock renews the crisis.

The global economy exhibits many points of potential chaotic failure. The U.S. housing market has another 15% to fall, and no inflation to make the fall graceful. Europe -- especially Eastern Europe -- waits for the great unraveling; China races toward a cliff; oil climbs toward, then past?, $80/barrel.

We are in the midst of the weakest recovery imaginable from the worst Recession in 70 years. And, Krugman fears our leaders will declare jubilant victory? Not exactly a vote of confidence. Reports on the late Xmas shopping season, and the wave of retail and commercial real estate bankruptcies to follow, or renewal of the discouraging tussle over health care (which calls into question whether the U.S. is even capable of self-government), or just faltering growth, may well undermine confidence further.

But, what if some external event, over which our leaders have little control -- the collapse of some Vienna bank (always a classic scenario), or some new-fangled Chinese debacle, or some disruption in the Mideast, Russia or Brazil? -- jars assessments of risk. What resources does either the Fed or the Obama Administration have left? What reserves of political confidence and trust, let alone reserves of currency?

Bernanke and Obama have backed into a corner, where they have little room, monetary or political, to respond to a major crisis. The fiscal stimulus was very mildly meliorative on unemployment, but it was completely inadequate with regard to restoring monetary policy to a range of potency. In that sense, in size and design, it was a failure.

The U.S. must re-structure, re-calculate, whatever you wish to call it, and we procratinate. Recovery to the status quo ante is simply not an option -- the status quo ante simply failed to work! -- yet our leaders appear unable to conceive of any alternative.

I seriously doubt that this will end well, any time soon.

[Jan 04, 2010] Ben Bernanke Looks In Mirror, Sees Barney Frank

"No one directly responsible for this mess (Frank, Dodd and Benny among them) have been jailed. "

Fed chairman Ben Bernanke is back at it again, pointing the crisis finger at everyone but himself. To be sure there are plenty of congressional clowns deserving of a Babe Ruth style "big point", but the biggest point belongs straight at himself.

brad:

Hmmm, I wonder if Ben left Princeton to work for the Fed because it was an opportunity that he just couldn't turn down. Or perhaps was it because Princeton was almost ready to ride him out of town on a rail (tar and feathers being gathered)?

JustSomeDude:

Mish predicted before that when a crisis occurs the Fed will fingerpoint and attempt a power grab. Does Bernanke think the Fed needs more power? Yes. So what is the best way to get more power? If there is a crisis. Who caused the crisis? The Fed. Why? Because they were all stupid or is it because they wanted more power? Bernanke isn't stupid. People like Bernanke don't get into places of such high power because they are stupid.

This tactic of causing a problem and blaming it on someone else to get more power is a tactic that has been used throughout history. Now, are we going to be stupid ourselves and believe that it is out of stupidity that those in power caused this problem? Or are we smart enough to recognize that some of them, maybe not all of them, and maybe not even a majority of them, but some of them knew what was happening?

Mark in SF:

Bear in mind it is absolutely impossible to have too much savings."

Hmmm.... Savings are just the flip side of debt, since all savings are backed by debt. So it's impossible to have too much debt? That seems to fly in the face of your earlier posts.

Borgonomics:

No ... because there is not just one dollar of debt for one dollar of savings but multiple dollars of debt for a dollar of savings. If it were linked 1:1 then you´d be right. ;-)

civil-disobedience:

Why is Karl Denninger ranting about the possibility of taxpayers having to pay for mortgages that are underwater and have to be crammed down?

Doesn't Karl realize that the Fed has already purchased $1.25 Trillion of MBS, and $175 Billion of agency debt? Fannie, Freddie, & the Fed own this problem. Taxpayers now own this problem. The act has already been done. Fannie/Freddie have unlimited support from "taxpayers". The Fed is now working overtime to figure out how to hide this. The whole mess is going to be monetized. The banks are totally off the hook. Amazing. The only thing left for them to do is explain it to the taxpayers, who do not seem to be concerned until they see their taxes go up, and their purchasing power collapse.

Civil knows Karl is very well aware of this. He has written brilliantly & repeatedly about it. The evil deed has already been done. And few people are aware or upset about it. Except Karl.

"Yes, I'm well-aware that the "unlimited" credit line for Fannie and Freddie that was passed in the dead of night on Christmas Eve could, indeed, be used to allow banks to dump all their principal forgiveness into the government AND FORCE YOU TO PAY FOR IT without an appropriation of Congress."

"IF that happens the proper response is for the people of this nation to rise up and demand that Obama and Geithner be immediately IMPEACHED."

"No, the correct solution to this mess is the same as it was in 2007, when I began writing on the topic. It is in fact to withdraw all of this support and allow housing prices to collapse back to reasonable and affordable levels. "

http://market-ticker.denninger.net/authors/2-Karl-Denninger

Dr Evil:

Mish it's not a matter of Frank or Benny learning anything...............all is going to a pre-planned script. All the regulations against fraud has existed for eons. The deliberate failuer to enforce basic law should tell you that the whole system has been comprimised. No one directly responsible for this mess (Frank, Dodd and Benny among them) have been jailed. This fact should concern all of us more than the cause of the economic collapse currently under way

[Jan 04, 2010] What Bernanke Didn't Say

Jan 03, 2010 CalculatedRisk

Note: Here is weekly summary and a look ahead.

From Fed Chairman Ben Bernanke: Monetary Policy and the Housing Bubble

And reports on the speech:
From the WSJ: Bernanke Says Rate Increases Must Be an Option
From the NY Times: Bernanke Blames Weak Regulation for Financial Crisis

Dr. Bernanke said that monetary policy (a low Fed Funds rate) was probably not to blame for the housing bubble, and he used data from other countries to make this argument: "the relationship between the stance of monetary policy and house price appreciation across countries is quite weak".

He suggested the primary cause was the lack of effective regulation associated with non-traditional mortgage products.

I noted earlier that the most important source of lower initial monthly payments, which allowed more people to enter the housing market and bid for properties, was not the general level of short-term interest rates, but the increasing use of more exotic types of mortgages and the associated decline of underwriting standards. That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary. Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates. Moreover, regulators, supervisors, and the private sector could have more effectively addressed building risk concentrations and inadequate risk-management practices without necessarily having had to make a judgment about the sustainability of house price increases.
emphasis added

Here are his two slides about exotic mortgages:

Click on graph for larger image in new window.

Slide 7 also shows initial monthly payments for some alternative types of variable-rate mortgages, including interest-only ARMs, long-amortization ARMs, negative amortization ARMs (in which the initial payment does not even cover interest costs), and pay-option ARMs (which give the borrower considerable flexibility regarding the size of monthly payments in the early stages of the contract). These more exotic mortgages show much more significant reductions in the initial monthly payment than could be obtained through a standard ARM. Clearly, for lenders and borrowers focused on minimizing the initial payment, the choice of mortgage type was far more important than the level of short-term interest rates.

The availability of these alternative mortgage products proved to be quite important and, as many have recognized, is likely a key explanation of the housing bubble. Slide 8 shows the percentage of variable-rate mortgages originated with various exotic features, beginning in 2000. As you can see, the use of these nonstandard features increased rapidly from early in the decade through 2005 or 2006. Because such features are presumably not appropriate for many borrowers, Slide 8 is evidence of a protracted deterioration in mortgage underwriting standards, which was further exacerbated by practices such as the use of no-documentation loans. The picture that emerges is consistent with many accounts of the period: At some point, both lenders and borrowers became convinced that house prices would only go up. Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term. They were provided these loans on the expectation that accumulating home equity would soon allow refinancing into more sustainable mortgages.

But it seems Bernanke left out a couple key points.

 

Bernanke used data from other countries to suggest monetary policy was not a huge contributor to the bubble ... however, Bernanke didn't discuss if non-traditional mortgage products contributed to housing bubbles in other countries. This would seem like a key missing part of the speech.

 

Bernanke didn't discuss how the current regulatory structure missed this "protracted deterioration in mortgage underwriting standards" (even though many people were pointing it out in real time). And Bernanke didn't discuss specifically how the new regulatory structure would catch this deterioration in standards. How about some specific example of how the previous regulatory structure missed underwriting problems, and how the new structure would have caught the problem?

I'm more interested in what Dr. Bernanke didn't say.

 

Economist's View Bernanke Monetary Policy and the Housing Bubble

Ben Bernanke says Federal Reserve interest rate policy after the dot.com bubble burst did not cause the housing bubble, and he delivers a strong rebuttal to John Taylor on that point. He argues the problem was with the regulation of these markets, not the low interest rates after the dot.com crash, and based upon this reading of the causes of the crisis, he believes regulation is the key to preventing bubbles. But he also acknowledges that if regulation fails to get the job done, then the Fed must step in and pop bubbles before they get too large by raising interest rates (though doubts are expressed about whether increasing interest rates would have done much to stop the bubble, hence the strong preference for regulatory solutions).

This is a big step forward relative to the Greenspan years. Greenspan argued that the Fed could not identify bubbles as they are inflating with sufficient clarity to allow policy to do much about them, he thought the Fed was as likely to do harm from raising interest rates based upon false bubble alarms as it was to prevent problems. And in any case, he believed that cleaning up after bubbles popped would be enough to avoid large downturns like we are experiencing. The best that the Fed could do given the difficulty in identifying bubbles ex-ante is to clean up after they self-identify by popping, but that would be more than enough to keep the economy from experiencing big crashes.

Greenspan's view that cleaning up ex-post would be sufficient to insulate the economy from large shocks turned out to be incorrect. He also resisted and actively dismissed regulatory interventions intended to keep the financial sector stable and keep bubbles from inflating in the first place, and this, too, was a mistake. In the past, Bernanke and other members of the Fed have also been resistant to using interest rate policy (as opposed to regulation) to prevent bubbles, so this is an evolution in the Fed's view of its role in preventing asset price bubbles from threatening the stability of the broader economy.

The Fed still strongly prefers regulatory solutions, the main problem with interest solutions are that bubbles are hard to identify, and even if you do identify them, interest rate increases affect all industries, not just the one experiencing the bubble, so the policy inflicts collateral damage (though perhaps less collateral damage than if the bubble actually pops). In this regard, I wish Bernanke would have talked about how the Fed might find better measures of growing financial market imbalances, measures that would allow it to better identify bubbles a priori. We can use interest rate and regulatory policy to fight bubbles much better and target policy more precisely if we have more certainty about the existence of bubbles as they are inflating, but that will require the Fed to develop much better measures of financial market fragility than it now has. (This is an alternative to incorporating asset prices into the index the Fed targets through its implicit Taylor rule, something that automatically raises interest rates when asset prices increase substantially and something that I've advocated in the past. Incorporating asset prices into the inflation index the Fed stabilizes is a very broad-brushed approach to the problem of fighting bubbles, so more targeted approaches are preferable). I realize that we have models saying it isn't possible to identify bubbles as they are inflating, but models aren't reality - they aren't always correct - and we won't really know until we try:

Monetary Policy and the Housing Bubble, Ben S. Bernanke, Chair, FRB: The financial crisis that began in August 2007 has been the most severe of the post-World War II era and, very possibly--once one takes into account the global scope of the crisis, its broad effects on a range of markets and institutions, and the number of systemically critical financial institutions that failed or came close to failure--the worst in modern history. Although forceful responses by policymakers around the world avoided an utter collapse of the global financial system in the fall of 2008, the crisis was nevertheless sufficiently intense to spark a deep global recession from which we are only now beginning to recover.

Even as we continue working to stabilize our financial system and reinvigorate our economy, it is essential that we learn the lessons of the crisis so that we can prevent it from happening again. Because the crisis was so complex, its lessons are many, and they are not always straightforward. Surely, both the private sector and financial regulators must improve their ability to monitor and control risk-taking. The crisis revealed not only weaknesses in regulators' oversight of financial institutions, but also, more fundamentally, important gaps in the architecture of financial regulation around the world. For our part, the Federal Reserve has been working hard to identify problems and to improve and strengthen our supervisory policies and practices, and we have advocated substantial legislative and regulatory reforms to address problems exposed by the crisis.

As with regulatory policy, we must discern the lessons of the crisis for monetary policy. However, the nature of those lessons is controversial. Some observers have assigned monetary policy a central role in the crisis. Specifically, they claim that excessively easy monetary policy by the Federal Reserve in the first half of the decade helped cause a bubble in house prices in the United States, a bubble whose inevitable collapse proved a major source of the financial and economic stresses of the past two years. Proponents of this view typically argue for a substantially greater role for monetary policy in preventing and controlling bubbles in the prices of housing and other assets. In contrast, others have taken the position that policy was appropriate for the macroeconomic conditions that prevailed, and that it was neither a principal cause of the housing bubble nor the right tool for controlling the increase in house prices. Obviously, in light of the economic damage inflicted by the collapses of two asset price bubbles over the past decade, a great deal more than historical accuracy rides on the resolution of this debate.

The goal of my remarks today is to shed some light on these questions. I will first review U.S. monetary policy in the aftermath of the 2001 recession and assess whether the policy was appropriate, given the state of the economy at that time and the information that was available to policymakers. I will then discuss some evidence on the sources of the U.S. housing bubble, including the role of monetary policy. Finally, I will draw some lessons for future monetary and regulatory policies.¹

 

[Dec 24, 2009] Should Ben Bernanke Be Reconfirmed  by Simon Johnson

December 24, 2009 | Baseline Scenario

with 31 comments

Ben Bernanke’s nomination to be reconfirmed as chairman of the Federal Reserve Board passed out of the Senate Banking Committee and will next be taken up by the full Senate.

But, despite being named Time’s Person of the Year for his efforts during the financial crisis, the Bernanke nomination has run into strong pushback – both in terms of tough questions from the committee and in the form of a “hold” on the nomination, placed by Senator Bernie Sanders of Vermont.

The conventional wisdom among economists is that political control over an independent central bank is regrettable and should be resisted.  We like to think of the Federal Reserve as a bastion of technocracy, with monetary policy steering a course between recession and inflation just on the basis of “objective evidence” regarding the relative balance of risks (i.e., if monetary policy stays too loose for too long, we’ll get inflation, but if interest rates are tightened prematurely, the economic recovery will stall.)

But the fact of the matter is that, in any well-functioning democracy, independence is earned based on credible and ultimately successful actions — not granted for all time and without conditions.  The questions raised about Mr. Bernanke’s performance in office and his likely future actions are almost entirely appropriate – and focus attention on a major weakness in the case for his reappointment.

The issue is what economists like to call “time inconsistency,” but which everyone else just regards as common sense: If I swear up and down that I won’t bail out your firm in a future crisis, will I really keep this promise when the crisis hits and the consequences of “no bailout” look absolutely awful?  And if you know that, most likely, the bailout will be there irrespective of how you behave, for example because your firm is so big relative to the economy – why should you be more careful or take less risk?

Bernanke’s problem is that he says he won’t help big banks when they next get into trouble.  But is this plausible?

To be fair, Bernanke does not refuse to talk about the problem that is widely known now as “Too Big To Fail” or the repeated boom-bust-bailout cycle that is increasingly referred to in official circles as the “doom loop.”  But, when asked what will break this loop, his answer is weak:

“A new regulatory structure should address this problem. In particular, a stronger financial regulatory structure would include: a consolidated supervisory framework for all financial institutions that may pose significant risk to the financial system; consideration in this framework of the risks that an entity may pose, either through its own actions or through interactions with other firms or markets, to the broader financial system; a systemic risk oversight council to identify, and coordinate responses to, emerging risks to financial stability; and a new special resolution process that would allow the government to wind down in an orderly way a failing systemically important nonbank financial institution (the disorderly failure of which would otherwise threaten the entire financial system), while also imposing losses on the firm’s shareholders and creditors. The imposition of losses would reduce the costs to taxpayers should a failure occur.”

In other words, “if big banks should fail in the future, we’ll take them over and impose meaningful losses on creditors.”

But this is simply not plausible – and don’t take our word for it, look at the probability of default implied by the Credit Default Swap (CDS) spreads for Bank of America.  The market view is that Bank of America, despite all its problems and a risky balance sheet, is only slightly more likely to default than is the United States government (which, despite recent rhetoric, is still one of the most reliable borrowers in the world).  The market view for all other major US banks is essentially the same.

In other words, Mr. Bernanke’s key audiences – in financial markets – do not find him credible on the central issue of the day, presumably because he is unwilling to condone measures that would ensure today’s massive banks become “small enough to fail.”  If potential creditors do not fear losses, they will provide funds on easy terms to our big banks and we will re-run some version of our previous bubble.  This is how our financial system works.

The Senate will decide soon, but Mr. Bernanke has made his case and the market has already voted.

Given his testimony, his written response to Senators’ questions, and the market reaction, we recommend that Mr. Bernanke not be reconfirmed.

By Peter Boone and Simon Johnson

A slightly edited version of this material appeared on NYT.com’s Economix this morning; it is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

Posted in Commentary
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Uncle Billy Cunctator

Simple answer: it doesn’t matter.

Further reading, pgs 5-13, here:

http://ia341238.us.archive.org/0/items/TragedyAndHope/TH.pdf

monday1929

Why doesn’t Congress simply ask Ben what he is doing about JPM’s 80 Trillion in notional derivatives?

Steve

As I asked the people at Core Economics when they gave their reasons for replacing Mr. Bernanke, whom would you like to see in his place?

RueTheDay

“I would like to see it be someone who can tell me how the current crisis could have been avoided by early detection.”

The answer is that it could not have been. The notion, that during a boom, somehow a regulator can detect when the economy has departed from sustainable growth and entered into bubble territory, and then somehow turn a few knobs to tighten the reigns and lead the economy back into the sustainable growth range, is patently absurd.

The ONLY answer is STRUCTURAL reform. Re-instate an updated version of Glass-Steagall to build a firewall between banks proper and everything else. Place explicit size restrictions on financial institutions, either directly by force of law or indirectly through steeply increasing capital regulations tied to size. Change compensation practices to tie compensation to long term performance. Finally, as Bernanke notes, create a permanent resolution mechanism for large financial firms that do fail. But dispense with the nonsensical idea that regulators can somehow see it coming, and through better discretionary action, can prevent it.

SDProg

It is unlikely, but not all that absurd. It would certainly take a brave Fed Chairman, but Greenspan probably could have prevented or at least curtailed the crisis if he had listened to some of those who directly warned him. Over the long term, yes, structural reform is the answer, but there were economists and financial analysts who did spot the bubble and they likely would have done a better job than Bernanke.

Beth

Here is the roll call vote out of the Committee:

Democrats:

Christopher J. Dodd Chairman (D-CT) Aye
Tim Johnson (D-SD) Aye
Jack Reed (D-RI) Aye
Charles E. Schumer (D-NY) Aye
Evan Bayh (D-IN) Aye
Robert Menendez (D-NJ) Aye
Daniel K. Akaka (D-HI) Aye
Sherrod Brown (D-OH) Aye
Jon Tester (D-MT) Aye
Herb Kohl (D-WI) Aye
Mark Warner (D-VA) Aye
Jeff Merkley (D-OR) No
Michael Bennet (D-CO) Aye

Republicans:
Richard C. Shelby Ranking Member (R-AL) No
Robert F. Bennett (R-UT) No
Jim Bunning (R-KY) No
Mike Crapo (R-ID) No
Bob Corker (R-TN) Aye
Jim DeMint (R-SC) No
David Vitter (R-LA) No
Mike Johanns (R-NE) Aye
Kay Bailey Hutchison (R-TX) No
Judd Gregg (R-NH) Aye

I don’t believe Mr. Bernanke is totally oblivious to the issues you have raised in your various writings but it seems as though his preference is to error on the side of caution and conservative management. Mr. Bernanke’s continued argument for the Fed’s independence (from Congressional oversight) really means—–less transparency and accountability.

What about auditing the Reserve as often suggested by Ron Paul? If President Obama, as well, would only apply some of the wisdom you (guys) have dispensed in numerous economic writings and media appearances…and (sorry to ask) but Simon, is that only yellow neck tie there is….?

Mark G.

“Mr. Bernanke, an academic who has never worked a single day in his life. He will take anything off a cliff: a business, a McDonald’s stand, the Federal Reserve. And I have to say I have a certain sympathy for him as a character. He’s ok, but completely useless. I would not even hire him as my butler…Mr Bernanke is a madman, a destroyer of the value of money. And he is a wealth destroyer and an economic criminal. It is the duty of a central bank to keep the value of money. I believe today for ninety percent of Americans life is harder than it was in 1999. Basically I think they are a bunch of crooks.”

Marc Faber on King World News

DCB

I barely know where to begin with this one, but I will tell you that in the next election cycle my entire focus will be About getting out every single person who voted for this traitor. I know the words are harsh, but I only state the truth by analysis.

Strangely, the republicans are working against the man but I’m sure it’s theater because industry wants him in there.

Of course the markets have voted. What a surprise. I’d vote for someone who gave me everything and anythig I wanted, who didn’t distrupt the puch bowl, etc. In fact I’d argue that the markets are much better served by a Fed that doesn’t telegraph what it does. That way the risk of sudden tail events should be priced in.

I want an independent Fed, the problem is that the Fed isn’t independent enough. Everyone screams about political influence, but the overwhelming amount of industry influence is what has destroyed the institution. It no longer functions.

Hello, don’t people realize they are poorer than 25 years ago and more in debt. While the super wealthy are the only folks whose wages keep up with inflation. That this effect is a direct outgrowth of our credit driven society where real people get paid based on ROA and the wealthy get paid based on ROE (meaning the wealthy make get paid based on the effects of leverage, real people don’t). That the overleveraging of society is a dorect resulf of Fed policy and that it is unstable. You can’t have credit growth beyond gdp growth and maintain stability. Real incomes then can’t support the growth of credit. Even worse is the Fed has allowed those who make bad credit decisions to off load the risk to sociery (securitization)while they keep the bonus money. Not to see it can only be a policy of deliberate ignorance. Only a traitor would have allowed something so clearly destblizing to happen. These people have great minds and a high schooler could figure this one out it’s so simple

As I go though the crisis the past 10 years the only thing that keeps going through my brain is 1984. Meaning that the state/media/oligarchy creates a truth narative that has no basis in reality to maintain control. From Bush WMD in Iraq, to the venertion of Bernanke (the man who has done more damage to this country that Osama). I see the media reporting something from officials that have no basis in reality like it is news because an official person says it. Honestly I see very little difference between what is going on and what the old soviet union did.

I feel like I’m in North Korea and the media keeps telling me the dear leader is god and we live in a workers paradise yet people are starving of hunger. Strangely many believe it. Is something being put in the water.

Just like in 1984 where the TV had devices to watch the populace the government is monitoring internet content and social networking sites. Peaceful protestors get gassed sitting in a park during the G20. The right wing screams crazy stuff that gets many people to vote agains their own economic interests, and the left wing is happy to water down any reform and keep the oney flowing. At the same time they can claim victory agains the “hardliners” when they have given corporate interests eveyrthing they could ask for. It has become a scripted theater that keeps happening over and over again. HELP I AM IN THE TWILIGHT ZONE

Econ

Brilliant ! We are in the twilight of democracy. Just as Glen Grunwald’s blog of today on U.S. torture as described by NY Times and other media. This is truly 1984.

Michael M Thomas

Bernanke needs to have looked away from his charts and graphs and read more history: to wit, I was looking up something in Chernow’s big book on Morgan and found on pp.354-55 this great exchange in the summer of 1932 (before the election) between Leffingwell of Morgan and FDR:

“…You and I know,” (wrote Leffingwell,) “that we cannot we cannot cure the present deflation and depression by punishing the villains, real or imaginary, of the first post war decade, and that when it comes down to the day of reckoning nobody gets very far with all this prohibition and regulation stuff.” To which FDR replied: “I wish we could get from the bankers themselves an admission that in the 1927 to 1929 period there were grave abuses and that the bankers themselves now support wholeheartedly methods to prevent recurrence there of. Can’t bankers see their own advantage in such a course?” And then Leffingwell again: “The bankers were not in fact responsible for 1927-29 and the politicians were. Why then should the bankers make a false confession?”

John

So the obvious problem is that the special interests of the finance industry captured the regulator, The Fed. To some degree, it does not matter who the chairperson is.

What is more important is regulatory reform and transparency. The regulatory reforms that Elizabeth Warren, Sheila Bair, Paul Volcker, BaselineSenario.com, and others have proposed is correct and would be in society’s best interest. Transparency is extremely necessary as Johnson stated, “independence is earned based on credible and ultimately successful actions.” Auditing the FED is not a fringe movement. True Ron Paul brought fourth this regulation, but it has turned into a well-supported bi-partisan bill. The Fed has acted questionable at best and has a ballooning balance sheet of $2 trillion + it is entirely appropriate to audit them.

Still a great post by Johnson, Ben Bernanke’s reconfirmation should not be a forgone conclusion. In a well functioning democracy, there should be an open debate on Bernanke’s reconfirmation. True Bernanke got us out of the crisis without another great depression, but he is also one of the policy makers who got us into the crisis.

Should we put the gambling regulators in charge of our economy? With Dean Baker ~ http://www.youtube.com/watch?v=-XgV5lam-Bw

Seasons Greetings!

Patrice Ayme

The very notion that money creation should be “independent” of democracy is far fetched.

Demo-cracy is People-rule. Now, for millennia, the State has ruled over the money used in the State. But now money creation is “independent” of the State, it is not ruled by the State anymore? So, what, or whom, is ruling money creation? If People is not ruling, who is? Money? Is it then Money-rule? That is, is it Pluto-cracy?

The Demos has to regain the rule of money. Money creation has to be ruled by the People again. Time to get going. auditing the central banks ought to be a good start.

lambert strether

The Fed is “political” now, and has been since its inception. It’s only a question of on whose behalf.

Tom Hickey

Reasons for not confirming Bernanke:

1. Presided over the crisis and not only missed the causal buildup but dismissed it when warned.

2. Doesn’t understand how the monetary system works. Thinks that banks lend reserves. They do not. Thinks there is a money multiplier. There is not.

3. Botched the rescue and did nothing to tie bailout funds to reform. The oligarchs have emerged more powerful than ever.

4. Remains under the illusion of inflation expectations theory while disregarding unemployment as a relevant parameter.

Ergo, Ben Bernanke is not fit to be Fed chair.

Lavrenti Beria

Marshall Auerbach summarizes:

http://neweconomicperspectives.blogspot.com/2009/12/why-bernanke-must-go.html

Hugh MD

Thank you Simon for another of your reasoned persuasive posts and thanks to some good comments esp DCB who hit the center of the nail. And if any of you missed Geithner’s interview on NPR, go to the site for the transcript. Shockingly clueless would be my polite and conservative assessment.

JerryJ

Tom Hickey summarizes the essentials against the system. BB could hardly argue the facts about Reserves, particularly the enormous demand deposits of the banks held by the Federal Reserve Banks where virtually none in comparison existed before September 2008.

Under the circumstances of a crisis, a panic, what else might BB have done to stop the panic except prevaricate? What happened was by nature a total surprise . What really set off the panic? I mean what was the specific causal event?

I have my own suspicions about some stupid reactions to Bush foreign policy moves in the two months or so preceding September 2008. A move or moves that backfired beyond possibilities considered. What caused the bank runs immediately before the Lehman bankruptcy? There was an initiating event that snowballed after a couple years of great uncertainties.

Then, why on Earth would Ben Bernanke even want to continue to be Fed chairman? Is he being altruistic? Getting on with Hank Paulson must have been vexing in the extreme. Getting on with President Obama and Rahm Emanuel in particular must also be quite vexing. Why would he need the grief? This is a nation long in political crisis with a Congress that simply has and deserves little respect. Congress wants to run things , so let them.

BB made his Bones long ago and could easily settle in at his university again. In government he answers to a moribund governmental state system with a broken commonwealth of factions. So broken in fact that differences are irreconcilable.

I doubt any Fed Chairman will ever be effective again. Perhaps , this is Ben Bernanke’s greatest blindness?

Viking

BB was appointed by a republican and confirmed by a republican congress. He frequently speaks in coherent sentences and does not pander to Congress like the last guy.

Everyone in the lynch mob was hiding under the bed praying to Jesus when the banks ground to a halt. Not one of them provided a solution or a press release suggesting they had a solution. The lynch mob is pandering to the Tea Party crowd so they can provide a convenient villain and re-direct the attention from their own crooked deals.

As to the destruction of the US wealth and US currency, that was going on long before BB got in. He just got left holding the burning bag of dog pooh on the front porch.

Bottom line: Saudia Arabia takes US dollars for a barrel of oil and they take less than they did 18 months ago. China loves our currency so much they refuse to devalue it by floating their exchange rate. He ain’t perfect but the banks are still open 6 days a week unlike 1932.

Observer

Is Mr. Bernanke helping Mr. Blankfein to do God’s work?

Interesting article in the NYTimes.

http://www.nytimes.com/2009/12/24/business/24trading.html?_r=1&hp

“But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.”

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

Uncle Billy Cunctator

Once again we are reminded of Jamie Dimon’s smirking comment that you get a much better deal when the house is on fire.

JKH

Why on earth would you conclude from current CDS spreads that the market believes Bernanke won’t institute a revised resolution process for the future? That’s completely illogical. Obviously, the future resolution process will apply to next cycle; not this one. He’s already made it clear nobody big is going down in this cycle, precisely because no feasible resolution process is currently in place

PatR

The essential point made here by Simon Johnson and Peter Boone is that Mr Bernanke has not broken the US TBTF model for banking.

This is an important point, and perhaps enough to disqualify a person from leading the US’s monetary policy for another 4 years.

Even more disturbing to me is Mr Bernanke’s behavior prior to the crisis. He was repeatedly shown evidence of a bubble, and waved it all off with flippant or vapid comments, as in the colloquy with Dekaser of National City in 2005. “They have been saying that about California since I bought my first house in 1979.” In his personal life, he purchased a very expensive home with a very low 10% downpayment, using an ARM. This is not a criminal act, or negligence or anything, but it is yet more evidence that Mr Bernanke had no idea that house prices were in a debt-induced bubble. A man this unaware of basic economic and monetary trends and forces should be following, not leading.

Bayard

After watching the 60 Minutes piece on Bernanke a few months ago, I was enchanted and felt a great deal of faith in his capabilities AND his integrity. I actually still like him on a personal level. I, however, don’t believe that he is the right man for the job on a continuing basis. It has partly to do with his natural fear of the potential consequences of making a hard choice to break up our financial oligarchs, the behemoths of our present economy. He is afraid that things could go very wrong, but at this point the risk is low relative to the future gains in economic stability. Interestingly, my favorite Senator, Bernie Sanders, has stepped in to put a hold on his nomination (http://sanders.senate.gov/newsroom/media/view/?id=14ca1a8c-752c-4f41-87bc-7900785ec9f5)
with the understanding that his continued engineering of the financial community truly threatens our long term national prosperity.

Thus far, the messages, as indicated in your post, which BB has sent to the world at large and the financial community specifically can be read to mean that he will continue to support them as necessary ad infinitum. There seems to be little question, and, his obfuscation is related directly to the enactment of financial reform geared to taking him and the FED of the hook relating to the control of these TBTF institutions.

It is odd that the Republicans on the committee all voted to remove him, considering that he is a Republican appointee and that he supports their economic view.

[Dec 22, 2009] Fed's approach to regulation left banks exposed to crisis By Binyamin Appelbaum and David Cho

Dec 21, 2009 | washingtonpost.com

In January 2005, National City's chief economist had delivered a prescient warning to the Fed's board of governors: An increasingly overvalued housing market posed a threat to the broader economy, not to mention his own bank and others deeply involved in writing mortgages.

The message wasn't well received. One board member expressed particular skepticism -- Ben Bernanke.

"Where do you think it will be the worst?" Bernanke asked, according to people who attended the meeting, one in a series of sessions the Fed holds with economists.

"I would have to say California," said the economist, Richard Dekaser.

"They have been saying that about California since I bought my first house in 1979," Bernanke replied.

This time the warnings were correct, and the collapse of the California real estate market would bring down the nation's fourth-largest bank, the largest casualty of the financial crisis.

Dekaser and Bernanke declined to comment on the exchange.

[Dec 17, 2009] No change at the Fed, or is there? By Tim Iacono

December 16, 2009  | The Big Picture

This has got to be one of those “Bizarro World” days for Fed chief Ben Bernanke, what with the Time Magazine “Person of the Year” award, word of growing distrust among the general population, and, just in the last hour or so, a major twist in his Senate confirmation process where Senator Jeff Merkley (D-OR) said he will vote against Bernanke when the Senate Banking Committee meets tomorrow.

This latest news is significant because Merkley is the first Democrat on the committee to announce his opposition to Bernanke and, while it is all but certain that the group will forward his nomination to the full Senate for a vote in January, a lot can happen over the next month.

In a statement, Merkley’s objections were squarely based on Bernanke’s failure as a regulator, noting,

“For too many years, federal regulators turned a blind eye to signs of an impending financial crisis. Dr. Bernanke supported each of these decisions, failing to take the necessary precautionary steps that could have averted or mitigated financial collapse.”

[Dec 17, 2009] Bernanke's Saving's Glut Hypothesis. Contradiction Number One.

EconoSpeak

In March 2005 the Governor of the Federal Reserve in the US, Ben Bernanke, gave a talk on the reasons for the emergence of a global savings glut during the period beginning from the mid 1990s.[1]

He made specific note of the increasing value of the US dollar in the period from 1996 to early 2000. He ascribed this change to “The development and adoption of new technologies and rising productivity in the United States together with the country's long-standing advantages such as low political risk, strong property rights, and a good regulatory environment. These factors, he said, made the U.S. economy exceptionally attractive to international investors during that period.

"Consequently, capital flowed rapidly into the United States, helping to fuel large appreciations in stock prices and in the value of the dollar."

However, economist Robert Brenner, draws attention to the G-3 economies' deliberate manipulations of global currency markets in 1995.

"With the so-called Reverse Plaza Accord of spring-summer 1995, the G-3 economies did a complete about face. By way of the Plaza Accord of 1985, the leading capitalist powers had agreed to drive up the mark and the yen to reverse the devastation of a US manufacturing sector ravaged by the high dollar. Ten years later, they did the opposite, agreeing to push down the mark and yen to revive German and Japanese manufacturing sectors that had been driven into crisis by the low dollar." [2]

So the US dollar was set artificially lower (relative to the Yen and the German mark) in 1985 in order to aid the ailing US domestic manufacturers, according to Robert Brenner. US producers were suffering (with low global demand for their products) as a result of an equally artificial high value of the US dollar that prevailed in the years before 1985.

[Some history: Between 1972 and 1981 the global price of oil increased nine-fold; fueling stagflation. In 1979 Paul Volker from the US Federal Reserve increased global interest rates in order to prop up a resultant ailing US dollar. That's also when the US-dominated World Bank moved to a commitment to global trade liberalization and abandoned its support for public enterprises.]

In summary, Bernanke's rationale for the strong US dollar from the years 1996 - 2000 doesn't appear to stand up to historical evidence. If the US benefited from such a profitable investment environment then why didn't that result in a boom in US manufacturing and a resolution of that nation's trade deficit in those years? The opposite, in fact, occurred.

===

[1] Remarks by Governor Ben S. Bernanke at the Sandridge Lecture, Virginia Association of Economics, Richmond, Virginia

Governor Bernanke presented similar remarks with updated data at the Homer Jones Lecture, St. Louis, Missouri, on April 14, 2005.

March 10, 2005

The Global Saving Glut and the U.S. Current Account Deficit
http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/

[2] STOCK MARKET KEYNESIANISM ….

WHAT IS GOOD FOR GOLDMAN SACHS IS GOOD FOR AMERICA - THE ORIGINS OF THE CURRENT CRISIS. Robert Brenner, Center for Social Theory and Comparative History, UCLA
18 April 2009
This text appears as the Prologue to the Spanish translation of the author’s Economics of Global Turbulence (Verso, 2006) which was published by Akal in May 2009.

Starving Economist:

I am not sure why you think the trade deficit would decrease if the U.S. enjoyed a good investment environment.

In fact, we should expect the opposite.

Suppose that the rest of the world suddenly realized in 1995 that the U.S. was a great place to invest in. In order to invest in U.S. businesses, foreign citizens would want to purchase U.S. stocks and bonds. To do that, they need dollars, so they purchase them on the foreign exchange market. This bids the dollar up relative to other currencies, which makes foreign goods less expensive to U.S. consumers.

As a result, we will see the current account move further into deficit (as U.S. imports increase) and the capital account moves further into surplus (as the rest of world purchases U.S. stocks and bonds instead of U.S. goods).

Bernanke's story fits all the facts your presented. If you really believe Bernanke is incorrect, you will have to do much much more to demonstrate your point.
 

[Dec 16, 2009] “Wake Up, Gentlemen”

with 105 comments

The guiding myth underpinning the reconstruction of our dangerous banking system is: Financial innovation as-we-know-it is valuable and must be preserved.  Anyone opposed to this approach is a populist, with or without a pitchfork.

Single-handedly, Paul Volcker has exploded this myth.  Responding to a Wall Street insiders‘ Future of Finance “report“, he was quoted in the WSJ yesterday as saying: “Wake up gentlemen.  I can only say that your response is inadequate.”

Volcker has three  main points, with which we whole-heartedly agree:

1. “[Financial engineering] moves around the rents in the financial system, but not only this, as it seems to have vastly increased them.”
2. “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy”

and most important:

     3. “I am probably going to win in the end”.

Volcker wants tough constraints on banks and their activities, separating the payments system – which must be protected and therefore tightly regulated – from other “extraneous” functions, which includes trading and managing money.

This is entirely reasonable – although we can surely argue about details, including whethreduced, yesterday, to asking the banks nicely to lend more to small business – against which Jamie Dimon will presumably respond that such firms either (a) are not creditworthy (so give us a subsidy if you want such loans) or (b) don’t want to borrow (so give them a subsidy).  (Some of the bankers, it seems, didn’t even try hard to attend – they just called it in.)

The reason for Volcker’s confidence in his victory is simple - he is moving the consensus.  It’s not radicals against reasonable bankers.  It’s the dean of American banking, with a bigger and better reputation than any other economic policymaker alive – and with a lot of people at his back – saying, very simply: Enough.

He says it plainly, he increasingly says it publicly, and he now says it often.  He waited, on the sidelines, for his moment.  And this is it.

Paul Volcker wants to stop the financial system before it blows up again.  And when he persuades you – and people like you – he will win.  You can help – tell everyone you know to read what Paul Volcker is saying and to pass it on.

By Simon Johnson

[Dec 16, 2009] Bernanke Named Time’s ‘Person of the Year’

George W. Bush made it twice… Was not George Bush an economic suicide bomber ?

The Big Picture

seneca:

Note that the 1938 Time’s then “Man of the Year” was, you’ll pardon the expression, Adolf Hitler. Time’s “Person of the Year” isn’t an honorific. It’s the person who most influenced events that year, for good or ill. Bernake certainly fills the bill, although Bernie Madoff I’m sure gave him a run for the money, so to speak.

wally:

I guess you could argue that he was the most prominent figure in government this year. The FED has arguably become the fourth branch of government (if that is allowed to stand) and the one that most clearly represents money rather than people or territory.

flipspiceland:

... Who else do we recall was feted as a magnificando financial guru? I believe it was Greenspan, he of the low interest rate mentality that he and Rubin ‘thought’ was such a fabulous idea. (Greensan has since made some kind of puny apoogy for being an idiot).

Person of Year? Maybe. We should have some idea if he deserves that award some time down the road.

Meanwhile, those who know what he did in giving his friends and neighbors and Goldman Sucks a temporary window to rip off even more money from the people will await the final tally.

Giving him an award for what is essentially a game that is only partially played is more a ploy by well-connected partisans, a CNBC babal, of positive thinkers that attended one too many Anthony Robbins lectures.

km4

Nassim Taleb: Not at all. Central bankers have no clue. In the first place, the financial crisis was not a black swan. It was perfectly predictable. They ignored the phenomenal buildup in leverage since 1980. We still have too much debt, too many big banks, too much state sponsorship of risk-taking. And now we have six million more Americans who are unemployed – a lot more than that if you count hidden unemployment. Ben Bernanke saved nothing. He shouldn’t be allowed in Washington. He’s like a doctor who misses the metastatic tumour and says the patient is doing very well.

[Dec 15, 2009] Final Thoughts on the Bernanke Nomination and AIG By Chris Whalen

December 14, 2009

We posted a new item today that contains our final thoughts on the nomination of Ben Bernanke for another terms as Fed governor. We also feature an interview with Mike Krimminger of the FDIC on that agency’s impending draft rule regarding bank securitizations. The text of the Fed rant is below and you can read the Krimminger interview on our web site: http://us1.institutionalriskanalytics.com/pub/IRAMain.asp

The Institutional Risk Analyst
Final Thoughts on the Bernanke Nomination and AIG
December 14, 2009

Last week after we published his comment on auditing the Fed, our friend Martin Mayer reminded us of a couple of more reasons for the Senate to oppose the Bernanke confirmation. Top among them, according to Mayer, is Bernanke’s appointment of Patrick Parkinson to be head of the Fed’s division of supervision & regulation, a post Parkinson comes to by way of the central bank’s division of research & statistics. Says Mayer:

“An even bigger reason to resist the reappointment of Bernanke is his appointment of Pat Parkinson to be the new head of supervision. Parkinson was Greenspan’s guru on derivatives. Of course, the great benefit of customization of derivatives is the elimination of margin, which is safe enough as long as the Fed will contribute taxpayer money whenever anything goes wrong. The Fed does not protect customers, or the safety and soundness of the institutions, or the taxpayer. Nothing MUST be protected except permission for the institutions the Fed allegedly supervises to keep their freedom to avoid the standardization that might make possible the creation of an honest market from the ruins of what Parkinson defends.”

Suffice to say that many of Parkison’s views on OTC derivatives, which you may see for youself on the Fed’s web site, are seemingly identical to the views of the lobbyists for the large OTC dealer banks. Perhaps we are missing something, but to us Parkinson seems to typify the term “regulatory capture” and specifically the tendency of the Fed’s Washington staff to serve as advocates for the large NY dealer banks, rather than serving the broad public interest. For this reason alone, we think Bernanke deserves to go back to Princeton.

Of note, on Saturday the Wall Street Journal’s Serena Ng and Carrick Mollenkamp published an important contribution to the bailout knowledge base, reporting how Goldman Sachs (GS) used OTC credit default swaps to cause the failure of American International Group (AIG). Entitled “Goldman Fueled AIG Gambles.” the article confirms our long held view that AIG could not have come up with the trading strategies that caused its failure without a little help from GS and several other dealers. Customers just don’t come up with stupid ideas like this on their own. And interesting that the Murdoch-owned WSJ published the revealing piece on a Saturday...

Phill Swagel contacted us last week and said that we were wrong in our characterization of how Fed personnel viewed his Brookings Institution paper, wherein he described the events at Treasury around the time of the AIG bailout. “I can assure you that folks at FRB are not mad about what I wrote. After all, my paper is 50+ pages of defending Fed and Treasury,” says Swagel. True enough, but we stand by our comment.

We think Swagel is too modest. His paper suggests to us at least that Treasury repeatedly abdicated its responsibility to the financial system and the country as it sought to avoid or postpone difficult political battles with the Congress. Swagel concludes that the Treasury and authorities were always behind market developments and were “reactive.” This admission of the Treasury being behind the curve is ironic when juxtaposed with Swagel’s opening revelation that a year before the crisis in the Summer of 2006 Paulson told Treasury staff that it was time to prepare for a financial system challenge.

Did the former GS CEO Hank Paulson already perceive the political issues involving a rescue of a non-bank firm before the failure of Bear, Lehman and AIG? Swagel notes in his paper the narrow role the Paulson Treasury envisioned for itself prior to Bear:

“Treasury had urged institutions to raise capital to provide a buffer against possible losses, but had not contemplated fiscal actions aimed directly at the financial sector. Instead, the main policy levers were seen as being the purview of the Fed, which had cut rates and developed new lending facilities in the face of events.”

We think all observers of the crumbling US financial system owe Phill Swagel a debt of gratitude for describing the events which occurred during his tenure at the Treasury. Too much of the history of Washington is unwritten, just as agencies like the Fed do not seem to be able to follow the law even when it is written down for them. We think every member of the Senate should read Phill Swagel’s paper before voting on the Bernanke nomination.

To us, the Swagel paper illustrates just how badly the Fed mishandled its legal responsibilities during the crisis, a key oversight issue for Congress. The bone of contention we have with Chairman Bernanke, former FRBNY President Tim Geithner, members of the FRBNY board and the Board of Governors in Washington, is governance. When the markets started to come undone in 2008, officials at the Fed did not know their place, legally or politically, and the central bank as well as American democracy suffered as a result. Like we said last week, so much for central bank independence.

Using Bernanke’s own version of events, when the decision was made by Treasury Secretary Paulson to rescue AIG (and his former colleagues and clients at Goldman Sachs and other large bank derivatives dealers), Bernanke and Geithner should have expressed their support – but then only to offer to lend Treasury the cash to accomplish the AIG rescue by the Treasury. Of note, we are working with several media organizations to get a hold of the minutes of the Federal Financing Bank (FFB) for this period. The FFB is the Treasury’s vehicle in all fiscal operations involving private counterparties.

From the perspective of Fed independence, the first failure of Bernanke, Geithner et al in dealing with Treasury Secretary Paulson was not forcing the Secretary to take political responsibility for the bailouts of AIG and even Bear, Stearns. As Martin Mayer reminded us last week, the Fed is subservient to the Congress, not the Executive Branch. The Chairman of the Fed is not supposed to be a “team player,” in the parlance of the political economists who populate the Obama Administration. Saying no to the White House is what central bank independence is really about.

The proper thing for the Fed to have done in the circumstances was to offer financial support to the Treasury to rescue AIG, even without Paulson seeking enabling legislation by the Congress, but force Paulson and President George Bush to take political responsibility for this extraordinary fiscal operation. The Fed, by stepping in front of the Treasury, committed an act of political intervention as well as intervening in the financial markets. Bernanke neatly allowed President Bush and Secretary Paulson to escape political responsibility for the AIG takeover — and left the problem for President Obama. Senate Democrats should think about that when they vote on Bernanke.

Since the rescue of AIG, the Fed under Bernanke has compounded the problem, using the central bank’s balance sheet to absorb $2 trillion in MBS, Treasuries and other toxic detritus that Wall Street cannot finance. Bernake even suggested last week that the Fed does not intend to sell its hoard, meaning that he is now using Open Market operations to directly subsidize the banks and the public markets generally. Who cares about executive bonuses when such sums of money are involved in direct corporate subsidies? As we noted in the IRA Advisory Service last week:

“First, zero interest rate policy and Fed purchases of all sorts of collateral have essentially taken the risk and duration out of the fixed income markets, forcing investors into equities of all stripes. Not only have Fed purchases so far of $1.8 trillion in Treasury, agency and MBS obligations taken duration out of the markets, according to several colleagues in the Herbert Gold Society, but by not sterilizing this duration in the options markets (as the GSEs do routinely with their purchases of collateral and MBS), the central bank has greatly reduced visible market volatility.”

Marcus Aurelius:

“. . . he is now using Open Market operations to directly subsidize the banks and the public markets generally.”
______________

The Fed has taken over the economy, and with it, the Federal Government. Congress no longer controls the purse strings. Does anyone need more proof than this?

Marc P:

Quote from the article: “Parkinson seems to typify the term “regulatory capture” and specifically the tendency of the Fed’s Washington staff to serve as advocates for the large NY dealer banks, rather than serving the broad public interest.”

Wait…who owns the Fed? Why is it shocking that a private company would serve its shareholders?

The journalism community should create an informal rule that all articles about the Fed should point out that the Fed is a private company owned and wholly controlled by its bank shareholders.

PatR:

Saying that the Fed legally answers to Congress, not the Administration, and should act accordingly, completely misses the mark. Congress pursues populist monetary policies. That means maximum monetary expansion, until the consequences are too dire to continue. Hardly a prescription for good stewardship of our money supply.

Also, complaining about what was done in the depths of the crisis because of who will take the most political blame for what goes wrong betrays an inside baseball view. Those who see the management of our economy mostly as an opportunity to score political points have already had too much influence.

Should the govt have rescued AIG? If you think it should, then the Fed got the big decision right, and whether the Fed should have executed the rescue directly or indirectly is of secondary importance. If you think it shouldn’t have rescued AIG, then the Fed committed a grave error of judgment. But base your criticism on the poor judgment that led to that very important decision to bailing AIG, not on the (perhaps) poor judgment that led to the less important decision on how exactly the bailout was going to be executed.

Moss:

“Nothing MUST be protected except permission for the institutions the Fed allegedly supervises to keep their freedom to avoid the standardization that might make possible the creation of an honest market from the ruins of what Parkinson defends.”

Pretty much sums it up. Unfortunately this statement can be applied to numerous entities that allegedly ’supervise’.

[Dec 12, 2009] Economist's View Paul Krugman Bernanke’s Unfinished Mission

bakho:

There are some policies that come in between monetary and fiscal policy, It matters HOW money is loaned, who and how much rent is collected.

Ways to stimulate the economy by taking more money out of the hands of the wealthy bankers and into the hands of those who spend every dime.

1. Take the banksters out of the student loan business. Set up a program to loan direct to students at lower interest rates and government quits paying the subsidy to the loan sharks.

2. More money for direct SBA loans. The banksters are not lending anyway, so let the government make the higher risk loans necessary to float small business in the short run. These loans can be unwound at a future date by selling bonds.

3. Mortgage cram downs. Put more money into FreddieFannie for houses purchased at non-bubble prices. Replace mortgages at unaffordable interest rates with lower rates of interest. Pay for part of the program by making some or all of the interest non-tax deductible.

4. If the Feds cannot "give" money to the states, create a fund to purchase state bonds to be paid back from future state revenue. Have the Federal government cover a greater percentage of Medicaid and unemployment compensation.

5. Set up an office to loan money to high tech startups. The loans could be paid back in the future once the startups make money. This is the same way college student loans are supposed to work.

Just dumping a lot more cash onto an already dysfunctional system is a bad idea and will not do anything for employment. Unless and until the unemployment rate drops substantially, the economy will continue to be at risk.

kharris said in reply to bakho...

bakho,

Not to disagree, but just to think through the likely consequences and objections...

If banks aren't lending, then directing government lending programs around them would improve the chances of getting credit where we want to do, without hurting current bank operations. However, to the extent that the outlook for bank profitability affects current equity values and bank balance sheets, the health of banks is hurt to the extent that directing federal lending operations outside the banking system hurts banks' prospects.

Much of the government's short-term effort has been aimed at preventing further trouble for banks and then getting them on a path to health. A policy which is likely to hurt banks current stance has little chance of adoption. What that means is that, in the face of an obvious need to subordinate finance to the rest of the economy in the medium and long term, we are instead dealing only with the scary prospect that harming banks in the short term could also harm the economy. The logic of this choice can become really costly in very short order. The notion that we should make the most of a crisis has been spouted from the beginning, but it is a notion that is well on its way to being ignored in practice. We ought to be imposing a very large cost on the finance sector for all the assistance it has received. Instead, it looks like we are on our way to window dress regulation, and little more.

PCLE:

Isn't it time for the government to act as employer of last resort ? There have been some proposals for a job guarantee scheme for example by Minsky and Randall Wray. We need something along the lines of the works schemes of the Great Depression. Minsky felt it was immoral to pay people to do nothing...far better to get them working again. Money is not an issue here. The US is a sovereign issuer of its own currency and can never run out of funds. There is certainly not a problem of inflation in an economy with such a massive surplus of labor.

julio said in reply to Lafayette...

Lafayette,

The wikipedia article also says this:

"Some European countries have abandoned this kind of tax in the recent years: Austria, Denmark, Germany (1997), Sweden (2007), and Spain (2008). On January 2006, wealth tax was abolished in Finland, Iceland and Luxembourg."

Do you know why?

As for a referendum on for a wealth tax, the closest I've seen is California voting just the opposite with Prop. 13.

You may be right that by now, having seen the effects, people would vote differently; but no one thinks there is enough support for a repeal of 13.

It may be a case of Mencken's dictum, "No one ever went broke underestimating the intelligence of the American public", especially when it comes to politics.

anne:

http://krugman.blogs.nytimes.com/2008/11/28/was-the-great-depression-a-monetary-phenomenon/

November 28, 2008

Was the Great Depression a Monetary Phenomenon?
By Paul Krugman

[Depression chart] Sins of omission?

Has anyone else noticed that the current crisis sheds light on one of the great controversies of economic history?

A central theme of Keynes's "General Theory" was the impotence of monetary policy in depression-type conditions. But Milton Friedman and Anna Schwartz, in their magisterial monetary history of the United States, * claimed that the Fed could have prevented the Great Depression — a claim that in later, popular writings, including those of Friedman himself, was transmuted into the claim that the Fed caused the Depression.

Now, what the Fed really controlled was the monetary base — currency plus bank reserves. As the figure shows, the base actually rose during the great slump, which is why it's hard to make the case that the Fed caused the Depression. But arguably the Depression could have been prevented if the Fed had done more — if it had expanded the monetary base faster and done more to rescue banks in trouble.

So here we are, facing a new crisis reminiscent of the 1930s. And this time the Fed has been spectacularly aggressive about expanding the monetary base:

[Contemporary chart] Ben goes for broke.

And guess what — it doesn't seem to be working.

I think the thesis of the "Monetary History" has just taken a hit.

* 1963

A Monetary History of the United States, 1867-1960
By Milton Friedman and Anna J. Schwartz

Mark A. Sadowski said in reply to anne...

The Fed's hands were largely tied by Eichengreen's "golden fetters" during the Great Depression. It's not really a surprise that the economy started to recover almost to the day that FDR started to debase the dollar. I'd have to go research this but I believe that even Friedman acknowledged this at some point.

The huge current expansion of the monetary base is very deceptive for the following reason: the Fed has been paying interest on reserves since October 6th 2008. This is a deflationary policy that for some mystery no one seems to be talking about.

Monetary policy has not been exhausted. The Fed is just strangely passive.

paine said in reply to Mark A. Sadowski...

"This is a deflationary policy that for some mystery no one seems to be talking about"

it indeed would be if the free reserves would otherwise be loaned out. i doubt even much would at the margin

i see tis as just more money to rebalance the bank books

Mark A. Sadowski said in reply to paine...

"i see tis as just more money to rebalance the bank books"

I agree but whereas the fed apparently thinks what is good for Citi is good for America I actually happen to think that what is good for America is good for America. But what do I know.

kharris said in reply to anne...

The Friedman/Schwartz view that stabilizing growth in monetary aggregates will stabilize growth in economic activity relies on stable monetary velocity. Friedman, after seeing velocity destabilize over a significant period, recognized that his view was not workable. If Friedman can see that, when others in his position (Mundell?) might just defend their early work till the end, perhaps Friedman's followers need to get a clue.

Euton said...

We need to start with the understanding that things are they way they are for a reason. Bernanke/Geithner(Summers) are just relief pitchers for the starting team of Greenspan/Rubin. These Wall Street tools have had their way for a couple of decades now. We now see the results of their "brilliance".

I'm not impressed, but I can understand why economists are.

RW said...

Indirectly Krugman limns what I have considered a core problem since Nixon and Burns: A poisoned political environment that prevents rational fiscal decisions forces monetary technocrats to compensate and eventually overreach.

Analyzed on that level, Greenspan's low interest-rate policy was an entirely rational response to funding the programs of a series of government regimes* who refused to support their policies with taxes.

If you have to borrow then keep costs low; this has the added benefit of distracting elites with bright, shiny bubbles.

*That many members of these regimes continue to act and talk as if increased public debt were 'a bad thing' rather than an inevitable outcome of their own philosophy, such as it is, suggests at least one of the toxins involved in poisoning national politics may have had hallucinogenic properties.

Reno Dino said...

They are forcing the young into the military. Part of the plan needed to drive the war machine.

psychohistorian said...

The economic cabal in power has no intention of creating more jobs in the US. They are aiming us for a shock doctrine moment when they will kill all entitlements to keep our war machine going.

Lafayette said in reply to psychohistorian...

If voters ever get wind of what's going on, "they" will stand this tidy little world of plutocrats on its end.

Regrettably, by dumbing down Americans with meaningless platitudes, that National Epiphany will not occur in my lifetime.

Terry said...

The fact that the Fed has not yet BEGUN to address employment per Krugman above is sufficient condemnation of Ben Bernanke that he should not be reconfirmed by the US Senate.

I'm ready to bring back Paul Volcker in a heartbeat, if he'd have the job.

kharris said in reply to Terry...

Monetary policy is asymmetrical because of the zero bound. Volcker knew that he could kill inflation with higher rates, because there was no upper bound. I don't know that he would be more effective than Bernanke, facing the same limit on the effectiveness of policy. Bernanke's inclination to leave monetary accommodation in place for a long time is just about the best we can hope for from any central banker in this situation. That is more or less Krugman's point. Fed officials would be fools to admit it, but they are out of ammo.

 

[Dec 11, 2009] Three Strikes on Ben Bernanke: AIG, Goldman Sachs & BAC/TARP

December 7, 2009 | Institutional Risk Analytics Coming together with the friends of Mark Pittman ended a grim week. Many of us in the financial community were wading hip-deep through barnyard debris as we watched Federal Reserve Chairman Bernanke dodge and weave in front of the television cameras during his Senate confirmation hearing. We have to believe that Mark would have been pleased as Senators on both sides of the aisle asked questions that came directly from some of his reporting -- and a few of our own suggestions. To us, the confirmation hearings last week before the Senate Banking Committee only reaffirm in our minds that Benjamin Shalom Bernanke does not deserve a second term as Chairman of the Board of Governors of the Federal Reserve System. Including our comments on Bank of America (BAC) featured by Alan Abelson this week in Barron's, we have three reasons for this view: First is the law. The bailout of American International Group (AIG) was clearly a violation of the Federal Reserve Act, both in terms of the "loans" made to the insolvent insurer and the hideous process whereby the loans were approved, after the fact, by Chairman Bernanke and the Fed Board. The loans were not adequately collateralized. This is publicly evidenced by the fact that the Fed of New York (FRBNY) exchanged debt claims on AIG itself for equity stakes in two insolvent insurance underwriting units. What more need be said? As we've noted in The IRA previously, we think the AIG insurance operations are more problematic than the infamous financial products unit where the credit default swaps pyramid scheme resided. And we doubt that any diligence was performed by Geither and/or the FRBNY staff on AIG prior to the decision taken by Tim Geithner to make the loan. We'll be talking further about AIG in a future comment. Of interest, members of the Senate Banking Committee who want more background on the AIG fiasco, particularly who did what and when, need to read the paper by Phillip Swagel, "The Financial Crisis: An Inside View," Brookings Papers on Economic Activity, Spring 2009, The Brookings Institution. We hear in the channel that Fed officials were furious when Swagel, who served at the US Treasury with former Secretary Hank Paulson, published his all-to-detailed apology. We understand that several prominent members of the trial bar also are interested in the Swagel document. Last week the Senate Banking Committee spent a lot of time talking with Chairman Bernanke about why payouts were made to AIG counterparties like Goldman Sachs (GS) and Deutsche Bank (DB), but the real issue is why Tim Geithner and the GS-controlled board of directors of the FRBNY were permitted to make the supposed "loans" to AIG in the first place. The primary legal duty of the Fed Board is to supervise the activities of the Reserve Banks. In this case, Chairman Bernanke and the rest of the Board seemingly got rolled by Tim Geithner and GS, to the detriment of the Fed's reputation, the financial interests of all taxpayers and due process of law. Martin Mayer reminded us last week that the Fed is meant to be "independent" from the White House, not the Congress from which its legal authority comes by way of the Constitution. Nor does Fed independence mean that the officers of the Federal Reserve Banks or the Board are allowed to make laws. None of the officials of the Fed are officers of the United States. No Fed official has any power to make commitments on behalf of the Treasury, unless and except when directed by the Secretary. Given the losses to the Treasury due to the Fed's own losses, this is an important point that members of the Senate need to investigate further. The FRBNY not only used but abused the Fed's power's under Section 13(3) of the Federal Reserve Act. In AIG, the FRBNY under Tim Geithner invoked the "unusual and exigent" clause again and again, but there is a serious legal question whether the then-FRBNY President and the FRBNY's board had the right to commit trillions without any due diligence process or deliberate, prior approval of the Fed Board in Washington, as required by law. The financial commitments to GS and other dealers regarding AIG were made always on a weekend with Geithner "negotiating" alone in New York, while Chairman Bernanke, Vice Chairman Donald Kohn and the rest of the BOG were sitting in DC without any real financial understanding of the substance of the transactions or the relationships between the people involved in the negotiations. Was Tim Geithner technically qualified or legally empowered to "make deals' without the prior consent of the Fed Board? We don't think so. Shouldn't there have been financial fairness opinions re: the transactions? Yes. We understand that the first order of business in any Fed audit sought by members of the Senate opposed to Chairman Bernanke's re-appointment is to review the internal Fed legal memoranda and FRBNY board minutes supporting the AIG bailout. These documents, if they exist at all, should be provided to the Senate before a vote on the Bernanke nomination. Indeed, if the panel established to review the AIG bailout and related events investigates the issue of how and when certain commitments were made by the FRBNY, we wouldn't be surprised if they find that Geithner acted illegally and that Bernanke and the Fed Board were negligent in not stopping this looting of the national patrimony by Geithjner, acting as de facto agent for the largest dealer banks in New York and London. The second strike against Chairman Bernanke is leadership. In an exchange with SBC Chairman Christopher Dodd (D-CT), Bernanke said that he could not force the counterparties of AIG to take a haircuts on their CDS positions because he had "no leverage." Again, this goes back to the issue of why the loan to AIG was made at all. Having made the first error, Bernanke and other Fed officials seek to use it as justification for further acts of idiocy. Chairman Dodd look incredulous and replied "you are the Chairman of the Federal Reserve," to which Bernanke replied that he did not want to abuse his "supervisory powers." Dodd replied "apparently not" in seeming disgust. We have been privileged to know Fed chairmen going back to Arthur Burns. Regardless of their politics or views on economic policies, Fed Chairmen like Burns, Paul Volcker and even Alan Greenspan all knew that the Fed's power is as much about moral suasion as explicit legal authority. After all, the Chairman of the Fed is essentially the Treasury's investment banker. In the financial markets, there are times when Fed Chairmen have to exercise leadership and, yes, occasionally raise their voices and intimidate bank executives in the name of the greater public good. AIG was such as test and Chairman Bernanke failed, in our view. Chairman Bernanke does not seem to understand that leadership is a basic part of the Fed Chairman's job description and the wellspring from which independence comes. The handling of AIG by Chairman Bernanke and the Fed Board seems to us proof, again, that Washington needs to stop populating the Fed's board with academic economists who have no real world leadership skills, nor operational or financial experience. Just as we need to end the de facto political control of the banksters over America's central bank, we need also to end the institutional tyranny of the academic economists at the Federal Reserve Board. The third reason that the Senate should vote no on Chairman Bernanke's second four-year term as Fed Chairman is independence. While Bernanke publicly frets about the Fed losing its political independence as a result of greater congressional scrutiny of its operations, the central bank shows no independence or ability to supervise the largest banks for which it has legal responsibility. And Chairman Bernanke has the unmitigated gall to ask the Congress to increase the Fed's supervisory responsibilities. As we wrote in The IRA Advisory Service last week: "Indeed, if you want a very tangible example of why the Fed should be taken out of the business of bank supervision, it is precisely the TARP repayment by Bank of America (BAC). The responsible position for the Fed and OCC to take in this transaction is to make BAC raise more capital now, when the equity markets are receptive, but wait on TARP repayment until we are through Q2 2010 and have a better idea on loss severity for on balance sheet and OBS exposures, HELOCs and second lien mortgages, to name a few issues. Apparently allowing outgoing CEO Ken Lewis to take a victory lap via TARP repayment is more important to the Fed than ensuring the safety and soundness of BAC." One close observer of the mortgage channel, who we hope to interview soon in The IRA, says that given the recent deterioration of mortgage credit, it is impossible that BAC has not gotten its pari passu portion of the losses which are hitting the FHA. The same source says that using conservative math, FHA has another $75 billion in losses to take, with zero left in the FHA insurance fund. Worst case for FHA is double that number, we're told. How could the Fed believe that BAC, which is the biggest owner of mortgages and HELOCs, is immune from this approaching storm? Because the Fed is cooking the books of the largest banks. The observer confirms our view that trading gains on the books of banks such as BAC are due to the Fed's open market purchases, which drove up prices for MBS and other types of toxic waste. In effect, the Fed's manipulation of the prices of various toxic securities is giving the largest US banks and their auditors a "pass" on accounting write-downs in Q4 2009 and for the full year - assuming that MBS prices do not drop sharply before the end of the month. Question: Is not the Fed's manipulation of securities prices and the window-dressing of bank financial statements not a vioatlion of securities laws and SEC regulations? Of note, in her column on Sunday about the widely overlooked issue of second lien mortgages, "Why Treasury Needs a Plan B for Mortgages," Gretchen Morgenson of The New York Times writes that "Unfortunately, there is a $442 billion reason that wiping out second liens is not high on the government's agenda: that is the amount of second mortgages and home equity lines of credit on the balance sheets of Bank of America, Wells Fargo, JPMorgan Chase and Citigroup. These banks - the very same companies the Treasury is urging to modify loans that they service - have zero interest in writing down second liens they hold because it would mean further damage to their balance sheets." Thus the Fed is not only allowing insolvent zombie banks to repay TARP funds before the worst of the credit crisis is past, but the "independent" central bank is engaged in a massive act of accounting fraud to prop up prices for illiquid securities and thereby help banks avoid another round of year-end write downs, the banks the Fed supposedly regulates. This act of deliberate market manipulation suggests that the Fed's bank stress tests were a complete fabrication. Only by artificially propping up prices for illiquid securities can the Fed make the banks look good enough to close their books in 2009 and, most important, attract private equity investors back to the table. Of note, the perversion of accounting rules in the name of helping the largest global banks is also well-underway in the EU. Our friends at CFO Zone published a comment on same last week that deserves your attention: "International Accounting Standards Board has 'disgraced itself,' says critic" What is really funny, to us at least, is that we hear in the channel that BAC is ultimately going to give the CEO slot to a BAC insider, consumer banking head Brian Moynihan, who testified before Congress on the Merrill Lynch transaction in November. Just imagine how the Fed Board, Chairman Bernanke and the Fed's Division of Supervision & Regulation are going to look when, after all the hand wringing about aiding BAC's CEO search by allowing the TARP repayment, the post is finally given to an insider! Former colleagues describe Moynihan as a close associate of Ken Lewis. If the objective of forcing Lewis' departure was change in the culture in the CSUITE at BAC, installing one of his trusted henchmen, in this case left over from the Fleet Bank acquisition, seems a retrograde step. All we can say about the treatment of the BAC TARP repayment issue and the Fed's handling of the supervision of large banks generally is that it is high time for the Congress to revisit the McFadden Act of 1927. In particular, we need to look again at making further changes to the Fed to ensure that it is entirely subordinate to the public interest and that never again will private financial institutions such as GS or BAC be in a position to dictate terms to the central bank. Whether you are talking about the loans to AIG or the mishandling of BAC's TARP repayments, the Fed under Chairman Bernanke seems to have acted irresponsibly and contrary to the law. For all of the above reasons, we think that the Senate should reject the re-nomination of Ben Bernanke and ask the President to nominate a new candidate as Chairman and also nominate two additional candidates for Fed governor to fill the other two long vacant seats.

[Dec 10, 2009 Money Supply A windfall tax in the US#comments

December 10, 2009 | FT.com

Michael Pomerleano:

that the leadership that was part of the problem now wants to be part of the s solution. The first step toward credible solutions is credible leadership. Leadership untainted and with a clean slate.
I believe that a compelling case was made by Institutional risk analytics

Three Strikes on Ben Bernanke: AIG, Goldman Sachs & BAC/TARP

http://us1.institu...om/pub/IRAMain.asp"
 

[Dec 10, 2009] ec121009

As I have written previously, Bernanke’s haFed, not his prior service as one of Greenspan’s lieutenants. Should we not judge a Fed chairman’s performance only on the things over which he has authority? It seemed to me that some of the criticism being directed at Bernanke should have more properly been directed at his predecessor. Moreover, some of the criticism would more appropriately been directed at his very inquisitors.

It was interesting that the senator I saw grilling Bernanke on the Fed’s lack of regulatory discipline was also a senator who voted for the Gramm-Leach-Bliley Act of 1999, legislation that, among other things, repealed the Glass-Steagall Act of 1933. You remember the rationale of Gramm-Leach-Bliley, don’t you? Innovation in our financial system was being stifled by too much regulation, such as Glass-Steagall. Senator, he who has not "sinned," shall cast the first stone.

Another senator harangued Bernanke about federal government entitlement spending. Admittedly, I have not read the Federal Reserve Act, but my suspicion is that nowhere in it does the Fed have any authority with regard to entitlement spending. So, why use a hearing for the confirmation of a Fed chairman to read him the riot act over runaway entitlement spending. I was curious to see if the senator who was so worked about entitlement spending had voted in favor of the last big increase in such spending – Medicare Part D. You guessed it – he had. Senator, heal thy own entitlement profligacy!

[Dec 7, 2009] Bernanke Rethinks Bubbles But Still Gets It Wrong; Sign The Petition To Dump Him

Dec 6, 2009 | Mish's Global Economic Trend Analysis

Bernanke keeps piling on proof of how inept he really is. After arguing for years that it is best to leave bubbles alone then take care of them after they pop, he now thinks that "maybe" he was wrong. He was then and still is because he does not even know what causes bubbles.

Please consider Fed Debates New Role: Bubble Fighter

Fed officials used to think there was little they could or should do to prevent bubbles from inflating. For one thing, identifying bubbles with any certainty was deemed to be too difficult. And even if they could be accurately pinpointed, pricking them might do more harm than good. Raising interest rates to stop a bubble, for instance, could slow growth in other parts of the economy that were otherwise healthy.

The Fed's main strategy instead was to mop up after a bubble burst with lower interest rates to cushion the blow to the economy and restart growth. That strategy was a key conclusion of Mr. Bernanke's writings on the subject of bubbles when he was a Princeton professor, and again when he first came to the Fed as a governor in 2002. It was an approach embraced by his predecessor Alan Greenspan.

Now, Fed officials admit the stance didn't work. They're groping for alternatives. Of the two methods to prevent bubbles -- using regulations to protect the financial system from excess and changing monetary policy by raising interest rates -- Mr. Bernanke falls on the side of greater regulation, an idea he has advocated in the past.

"The best approach here if at all possible is to use supervisory and regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset price bubble bursts in the future," Mr. Bernanke said in answer to a question after a speech in New York last month.

Playing the interest-rate card, in contrast, is considered by many to be a more aggressive and risky move. On Tuesday, Philadelphia Fed President Charles Plosser said interest rates were "a very blunt instrument" to thwart a possible bubble. He said raising rates could "affect all other asset prices at the same time."

Bernanke Amazingly Inept

Bernanke keeps proving over and over again how inept he is. The only source of bubbles is the Fed in conjunction with fractional reserve lending.

Logic would dictate that it is only possible to stop bubbles with regulation if regulation is the source of the bubble. Pray tell exactly what regulation (other than getting rid of the Fed and FRL) would have stopped the dot-com bubble?

I suppose in theory enough regulation might have stopped a housing bubble (I doubt it in practice), but even if it did, the excess credit stemming from too loose monetary policy would simply have found another home and another bubble.

Bernanke is trapped in academic wonderland. He is immune to both logic and real world practical experience and instead relies on beliefs and formulas already proven to have failed at every chance.

The problem then is the same as the problem now: monetary printing and too cheap money. The only regulation that makes any sense as a cure is to get rid of the Fed and its bubble blowing tactics.

The Inept Want More Power

Instead, like all failed regulators, and in strict accord with the Fed Uncertainty Principle the Fed is angling for more power to cleanup the mess it made

Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Sign the Petition.

This is unlikely to help, but it sure cannot hurt. Bernie Sanders says We Need a Change at the Federal Reserve

Mr. Bernanke did not prevent the buildup of as massive speculative bubble which dragged this nation, and the world, into the deepest recession since the 1930s. Since Mr. Bernanke took over as Fed chairman in 2006, unemployment has more than doubled and, today, 17.5 percent of the American workforce is either unemployed or underemployed.

Not since the Great Depression has the financial system been as unsafe, unsound, and unstable as it has been during Mr. Bernanke's tenure.

We believe it is time for a new Chair at the Federal Reserve Bank. Mr. Bernanke should not be appointed to another term as Chair.

Please click on the previous link and sign the petition to get rid of Bernanke.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

 

[Dec 7, 2009] Bernie v. Bernanke - Laurie Essig - Class Warfare - True-Slant

In this week’s Bernie Unfiltered, Senator Sanders explains his reasons for trying to block Bernanke’s reappointment:

1.  Where was Bernanke when Wall Street was making all these risky investments and extracting wealth from working and middle-class Americans resulting in the worst financial meltdown since the Great Depression?  Why wasn’t he regulating the banking industry and looking out for ordinary Americans?

2.  Where’s the money that the government gave to banks?  Senator Sanders asked Chairman Bernanke which institutions received these zero interest loans for billions and billions of dollars and Bernanke refused to tell him.  This lack of transparency is ridiculous.  It’s OUR money.  It didn’t come out of Bernanke’s pockets, but US taxpayers’.  We deserve to know which institutions got the money.

3.  Where’s the regulation since the collapse of the banking system?  Why didn’t Bernanke limit the amount of interest banks could charge ordinary Americans at say 15% (which is what credit unions charge) instead of still letting them charge 30%?  Why weren’t executive compensation packages regulated?  Why were the interests of large financial institutions put before the interests of ordinary Americans?

4.  Why are these “too big to fail” institutions still around? Why hasn’t Bernanke broken them up?  If a financial institution is so big it can bring down the economy, then it shouldn’t exist.

Most importantly, Bernanke has been wrong over and over again: he predicted there would be no collapse of the housing bubble, that the subprime mortgage crisis would not have a huge effect on the rest of the economy and that employment would expand.  Okay, okay, we cannot expect anyone to predict the future, but he made these statements fairly late in the game, when many economists were already talking about the housing bubble and the subprime mortgages as creating a crisis.  This is not a person who thinks outside of the box of Neoliberal economic theory- give money to the banks and the rich and prosperity will follow for all

[Dec 7, 2009] Three Strikes on Ben Bernanke: AIG, Goldman Sachs & BAC/TARP

December 7, 2009 | Institutional Risk Analytics

First is the law. The bailout of American International Group (AIG) was clearly a violation of the Federal Reserve Act, both in terms of the "loans" made to the insolvent insurer and the hideous process whereby the loans were approved, after the fact, by Chairman Bernanke and the Fed Board. The loans were not adequately collateralized. This is publicly evidenced by the fact that the Fed of New York (FRBNY) exchanged debt claims on AIG itself for equity stakes in two insolvent insurance underwriting units. What more need be said? As we've noted in The IRA previously, we think the AIG insurance operations are more problematic than the infamous financial products unit where the credit default swaps pyramid scheme resided. And we doubt that any diligence was performed by Geither and/or the FRBNY staff on AIG prior to the decision taken by Tim Geithner to make the loan. We'll be talking further about AIG in a future comment. Of interest, members of the Senate Banking Committee who want more background on the AIG fiasco, particularly who did what and when, need to read the paper by Phillip Swagel, "The Financial Crisis: An Inside View," Brookings Papers on Economic Activity, Spring 2009, The Brookings Institution. We hear in the channel that Fed officials were furious when Swagel, who served at the US Treasury with former Secretary Hank Paulson, published his all-to-detailed apology. We understand that several prominent members of the trial bar also are interested in the Swagel document. Last week the Senate Banking Committee spent a lot of time talking with Chairman Bernanke about why payouts were made to AIG counterparties like Goldman Sachs (GS) and Deutsche Bank (DB), but the real issue is why Tim Geithner and the GS-controlled board of directors of the FRBNY were permitted to make the supposed "loans" to AIG in the first place. The primary legal duty of the Fed Board is to supervise the activities of the Reserve Banks. In this case, Chairman Bernanke and the rest of the Board seemingly got rolled by Tim Geithner and GS, to the detriment of the Fed's reputation, the financial interests of all taxpayers and due process of law. Martin Mayer reminded us last week that the Fed is meant to be "independent" from the White House, not the Congress from which its legal authority comes by way of the Constitution. Nor does Fed independence mean that the officers of the Federal Reserve Banks or the Board are allowed to make laws. None of the officials of the Fed are officers of the United States. No Fed official has any power to make commitments on behalf of the Treasury, unless and except when directed by the Secretary. Given the losses to the Treasury due to the Fed's own losses, this is an important point that members of the Senate need to investigate further. The FRBNY not only used but abused the Fed's power's under Section 13(3) of the Federal Reserve Act. In AIG, the FRBNY under Tim Geithner invoked the "unusual and exigent" clause again and again, but there is a serious legal question whether the then-FRBNY President and the FRBNY's board had the right to commit trillions without any due diligence process or deliberate, prior approval of the Fed Board in Washington, as required by law. The financial commitments to GS and other dealers regarding AIG were made always on a weekend with Geithner "negotiating" alone in New York, while Chairman Bernanke, Vice Chairman Donald Kohn and the rest of the BOG were sitting in DC without any real financial understanding of the substance of the transactions or the relationships between the people involved in the negotiations. Was Tim Geithner technically qualified or legally empowered to "make deals' without the prior consent of the Fed Board? We don't think so. Shouldn't there have been financial fairness opinions re: the transactions? Yes. We understand that the first order of business in any Fed audit sought by members of the Senate opposed to Chairman Bernanke's re-appointment is to review the internal Fed legal memoranda and FRBNY board minutes supporting the AIG bailout. These documents, if they exist at all, should be provided to the Senate before a vote on the Bernanke nomination. Indeed, if the panel established to review the AIG bailout and related events investigates the issue of how and when certain commitments were made by the FRBNY, we wouldn't be surprised if they find that Geithner acted illegally and that Bernanke and the Fed Board were negligent in not stopping this looting of the national patrimony by Geithjner, acting as de facto agent for the largest dealer banks in New York and London. The second strike against Chairman Bernanke is leadership. In an exchange with SBC Chairman Christopher Dodd (D-CT), Bernanke said that he could not force the counterparties of AIG to take a haircuts on their CDS positions because he had "no leverage." Again, this goes back to the issue of why the loan to AIG was made at all. Having made the first error,Bernanke and other Fed officials seek to use it as justification for further acts of idiocy. Chairman Dodd look incredulous and replied "you are the Chairman of the Federal Reserve," to which Bernanke replied that he did not want to abuse his "supervisory powers." Dodd replied "apparently not" in seeming disgust. We have been privileged to know Fed chairmen going back to Arthur Burns. Regardless of their politics or views on economic policies, Fed Chairmen like Burns, Paul Volcker and even Alan Greenspan all knew that the Fed's power is as much about moral suasion as explicit legal authority. After all, the Chairman of the Fed is essentially the Treasury's investment banker. In the financial markets, there are times when Fed Chairmen have to exercise leadership and, yes, occasionally raise their voices and intimidate bank executives in the name of the greater public good. AIG was such as test and Chairman Bernanke failed, in our view.   Chairman Bernanke does not seem to understand that leadership is a basic part of the Fed Chairman's job description and the wellspring from which independence comes. The handling of AIG by Chairman Bernanke and the Fed Board seems to us proof, again, that Washington needs to stop populating the Fed's board with academic economists who have no real world leadership skills, nor operational or financial experience. Just as we need to end the de facto political control of the banksters over America's central bank, we need also to end the institutional tyranny of the academic economists at the Federal Reserve Board. The third reason that the Senate should vote no on Chairman Bernanke's second four-year term as Fed Chairman is independence. While Bernanke publicly frets about the Fed losing its political independence as a result of greater congressional scrutiny of its operations, the central bank shows no independence or ability to supervise the largest banks for which it has legal responsibility. And Chairman Bernanke has the unmitigated gall to ask the Congress to increase the Fed's supervisory responsibilities. As we wrote in The IRA Advisory Service last week: "Indeed, if you want a very tangible example of why the Fed should be taken out of the business of bank supervision, it is precisely the TARP repayment by Bank of America (BAC). The responsible position for the Fed and OCC to take in this transaction is to make BAC raise more capital now, when the equity markets are receptive, but wait on TARP repayment until we are through Q2 2010 and have a better idea on loss severity for on balance sheet and OBS exposures, HELOCs and second lien mortgages, to name a few issues. Apparently allowing outgoing CEO Ken Lewis to take a victory lap via TARP repayment is more important to the Fed than ensuring the safety and soundness of BAC." One close observer of the mortgage channel, who we hope to interview soon in The IRA, says that given the recent deterioration of mortgage credit, it is impossible that BAC has not gotten its pari passu portion of the losses which are hitting the FHA. The same source says that using conservative math, FHA has another $75 billion in losses to take, with zero left in the FHA insurance fund. Worst case for FHA is double that number, we're told. How could the Fed believe that BAC, which is the biggest owner of mortgages and HELOCs, is immune from this approaching storm? Because the Fed is cooking the books of the largest banks. The observer confirms our view that trading gains on the books of banks such as BAC are due to the Fed's open market purchases, which drove up prices for MBS and other types of toxic waste. In effect, the Fed's manipulation of the prices of various toxic securities is giving the largest US banks and their auditors a "pass" on accounting write-downs in Q4 2009 and for the full year - asf The New York Times writes that "Unfortunately, there is a $442 billion reason that wiping out second liens is not high on the government's agenda: that is the amount of second mortgages and home equity lines of credit on the balance sheets of Bank of America, Wells Fargo, JPMorgan Chase and Citigroup. These banks - the very same companies the Treasury is urging to modify loans that they service - have zero interest in writing down second liens they hold because it would mean further damage to their balance sheets." Thus the Fed is not only allowing insolvent zombie banks to repay TARP funds before the worst of the credit crisis is past, but the "independent" central bank is engaged in a massive act of accounting fraud to prop up prices for illiquid securities and thereby help banks avoid another round of year-end write downs, the banks the Fed supposedly regulates. This act of deliberate market manipulation suggests that the Fed's bank stress tests were a complete fabrication. Only by artificially propping up prices for illiquid securities can the Fed make the banks look good enough to close their books in 2009 and, most important, attract private equity investors back to the table. Of note, the perversion of accounting rules in the name of helping the largest global banks is also well-underway in the EU. Our friends at CFO Zone published a comment on same last week that deserves your attention: "International Accounting Standards Board has 'disgraced itself,' says critic" What is really funny, to us at least, is that we hear in the channel that BAC is ultimately going to give the CEO slot to a BAC insider, consumer banking head Brian Moynihan, who testified before Congress on the Merrill Lynch transaction in November. Just imagine how the Fed Board, Chairman Bernanke and the Fed's Division of Supervision & Regulation are going to look when, after all the hand wringing about aiding BAC's CEO search by allowing the TARP repayment, the post is finally given to an insider! Former colleagues describe Moynihan as a close associate of Ken Lewis. If the objective of forcing Lewis' departure was change in the culture in the CSUITE at BAC, installing one of his trusted henchmen, in this case left over from the Fleet Bank acquisition, seems a retrograde step. All we can say about the treatment of the BAC TARP repayment issue and the Fed's handling of the supervision of large banks generally is that it is high time for the Congress to revisit the McFadden Act of 1927. In particular, we need to look again at making further changes to the Fed to ensure that it is entirely subordinate to the public interest and that never again will private financial institutions such as GS or BAC be in a position to dictate terms to the central bank. Whether you are talking about the loans to AIG or the mishandling of BAC's TARP repayments, the Fed under Chairman Bernanke seems to have acted irresponsibly and contrary to the law. For all of the above reasons, we think that the Senate should reject the re-nomination of Ben Bernanke and ask the President to nominate a new candidate as Chairman and also nominate two additional candidates for Fed governor to fill the other two long vacant seats.

[Dec 6, 2009] An impressive "Greenspan mess" sighting

Dec 5, 2009 | The Mess That Greenspan Made

Following on the heels of yesterday's stellar performance by Sen. Jim Bunning (R-KY) who mentioned the former Fed chairman's name 12 times in his prepared remarks during current Fed chairman Ben Bernanke's confirmation hearing (and not in a good way) comes the spotting of this op-ed in the Wall Street Journal that qualifies as one of the most impressive "Greenspan mess" sightings I've come across.


He supplied ample liquidity when it was most needed last autumn, and he has certainly been willing to pull out every last page of the central banker playbook. If some of those decisions were mistakes, the conditions the Fed faced were extraordinary. Anyone at the helm would have made calls that in hindsight he'd regret.

The real problem is Mr. Bernanke's record before the panic, with its troubling implications for a second four years. When George W. Bush nominated the Princeton economist four years ago, we offered the backhanded compliment that at least he'd have to clean up the mess that the Alan Greenspan Fed had made. That mess turned out to be bigger than even we thought, but we also didn't know then how complicit Mr. Bernanke was in Mr. Greenspan's monetary decisions.

Now we do, thanks to the release of the Federal Open Market Committee transcripts from 2003. They show (see "Bernanke at the Creation," June 23, 2009) that Mr. Bernanke was the intellectual architect of the decision to keep monetary policy exceptionally easy for far too long as the economy grew rapidly from 2003-2005. He imagined a "deflation" that never occurred, ignored the asset bubbles in commodities and housing, dismissed concerns about dollar weakness, and in the process stoked the credit mania that led to the financial panic.

Obviously, the Journal is not in favor of another Bernanke term, recommending instead a "hard money" chairman to clean up what will, in the fullness of time, most likely be referred to someday as "The Mess That Bernanke Made".

Progress on “No on Bernanke,” Including Sanders Putting Hold on Confirmation

The efforts to block Bernanke’s confirmation are getting some traction.

First, Bernie Sanders of Vermont said he is putting a hold on Bernanke’s confirmation. A hold (in lay terms) is a threat to filibuster. This is actually pretty serious and seldom done. It takes 60 votes to beat one back, and there are enough procedural roadblocks that a filibustering Senator can throw so that it holds up Senate business for a few days, even if it is ultimately unsuccessful. And by current tallies, there are a few Senators on the right who are also vehemently opposed to Bernanke and would support this move.

Now so far, this is merely an obstacle to reappointment, but this is still much more serious opposition than anyone would have expected even a week ago.

Second, a Rasmussen poll (hat tip reader Andrew) released today found that only 21% of Americans favor Bernanke’s reappointment. This is significant not simply due to the lousy results, but that Rasmussen bothered to run the poll at all. This was not a client sponsored poll; Rasmussen thought this was newsworthy enough to run this on its own. Admittedly, a large proportion are undecided, but twice as many oppose a Bernanke reappointment as support it.

This says that the calls to Senators are making a difference. Remember, hardly anyone ever bothers voice opposition to this sort of confirmation. And it’s important to recognize that the symbolism extends beyond the question of Bernanke’s continued tenure. This is a shot across the bow as far as Wall Street friendly policies are concerned. It puts the Congress and Administration on notice that the public is aware of how badly they have been had and are continuing to be bled on the financial front and sees the conduct of economic policy as important.

call me ahab:

I think the poll may clue a few Senators in that a vote against BB is the wise choice-

why renominate the very person “in charge” who did not see the financial crisis coming-

you know- “sub-prime is contained”

from what i read Taleb is going into seclusion if BB is renominated-

how that helps I don’t know- but it sure shows there is a bit of revulsion to a BB renomination

AnonymousMonetarist:

That’ll be all, Senator Sanders

SANDERS
You had Geithner sign a phony asset transfer
order–

GREGG
Senator–

SANDERS
You doctored the repos.

JOHNSON
Damnit Sanders!!

SANDERS
I’ll ask for the fourth time. You ordered–

BERNANKE
You want answers?

SANDERS
I think I’m entitled to them.

BERNANKE
You want answers?!

SANDERS
I want the truth.

BERNANKE
You can’t handle the truth!

(And nobody moves.)

BERNANKE
(continuing)
Son, we live in a world that has markets.
And those markets have to be guarded by banksters
with money. Who’s gonna do it? You? You,
Senator Bunning? I have a greater
responsibility than you can possibly
fathom. You weep for capitalism and you
curse the banksters. You have that luxury.
You have the luxury of not knowing what I
know: That capitalism’s death, while tragic,
probably saved jobs. And my existence,
while grotesque and incomprehensible to
you, saves jobs.

You don’t want the truth. Because deep
down, in places you don’t talk about at
parties, you want me at the wheel.
You need me there …
We use words like ‘growth’,’stability’,
‘profits’…we use these words as the
backbone to a life spent defending
something. You use ‘em as a punchline.

I have neither the time nor the
inclination to audit myself for a man who
rises and sleeps under the blanket of the
very guarantees I provide, then questions the
manner in which I provide it. I’d prefer
you just said thank you and went on your
way. Otherwise, I suggest you pick up a
private sector job and stand a post. Either way, I
don’t give a damn what you think you’re
entitled to.

SANDERS
(quietly)
Did you doctor the repos?

BERNANKE
I did the job you sent me to do.

SANDERS
Did you doctor the repos?

BERNANKE
(pause)
You’re goddamn right I did.

nowhereman:

That’s a movie that needs to be made.

alex:

Yay! I’m sure that after reading my email Sen. Schumer decided he definitely won’t vote to re-confirm.

All kidding aside, this is good news. Yves deserves credit for her part in stirring up grass roots opposition.

Now I gotta move to Vermont so I can vote for Bernie (hey, he started out as a New Yorker too).

psychohistorian:

I both emailed and called Senator Jeff Merkely of Oregon. After doing that I remembered his and the rest of congress’s response to the TARP bailout request which the public wholeheartedly was against. It is not like they really listen to and uphold the ethics of the public at large.

I am already against the next war on what or whomever it is focused on…..

Someday the evolution is going to come.

Doug Terpstra:

Excellent news. It makes no sense at all to renew the license of a guy who ran the bus into a ditch and won’t submit to an exam (audit). Sentor Sanders is a champion of the people. Here’s a link to send thanks and support.

http://sanders.senate.gov/contact/

Justicia:

Three cheers for the Socialist! At least someone inside the beltway is looking out for the taxpayers.

alex:

I know Sanders calls himself a socialist, but in reality he’s being more of a capitalist than the supposed capitalists. Times are strange, but thank heavens for Bernie (regardless of what he calls himself).

Srini:

I have written to Both of my senator Kay Hagan and Richar Burr of North Carolina. I also wrote to Senator Sanders thanking him for putting a hold. Hopefully, this all makes some difference.

Lilguy:

Wonder if Congress can recall ALL the Fed governors? That would send a message.

FWIW–I sent an email to Sen. Warner, VA, who is my Senator on the Senate Banking & Financial Services Committee opposing Ben Bernanke’s reconfirmation.

jdmckay:

Wonder if Congress can recall ALL the Fed governors?

T’heehee…

I read last week, for 1st time (can’t find link @ the moment), just how these guys are selected… which I didn’t know. (from memory) There are supposed to be 3 categories of regional feds on each board. 1 of those is supposed to represent the taxpayers (or general public?).

This category, as well as other 2 (1 represents banks, the other I don’t recall) are appointed by… BANKERS!!!

Read to me like having ACLU lawyers staffed by Federalist Society.

Just saying…

bob:

Dimon is waiting in the wings.

Amit Chokshi:

What does this accomplish at any rate. Bernanke is just a figure head at this point for the broader ideology. If he gets turned down, the next head of the Fed would be brought up by Obama and would likely be Larry Summers. Seriously, is there a difference between Summers or Bernanke? And since Larry is a “genius” to most and would be relatively new and unknown to the broad public, the Senate and Congress who are largely bought and paid for by the financial industry will back him and we’ll be back to square one. We’re screwed as it is, doesn’t matter who is doing it to us if they’re doing it just the same.

jdmckay:

What does this accomplish at any rate. (…) If he gets turned down, the next head of the Fed would be brought up by Obama and would likely be Larry Summers.

BO’s approval ratings way down. Certainly he knows this, and certainly (particulary given his econ advisers he’s ignored… SIC Volker) certainly he knows why there’s pushback now.

And certainly he knows that, if they’re rejecting Bernacke then it’s unlikely a clone will get the votes.

It’s way late, but better late then never.

I think this accomplishes a lot. I only lament fact that our lawmakers did not have the where-with-all to see this coming earlier this year.

Moopheus:

Really, are we being played? Is Ben being thrown under the bus so someone even worse can get the job? Is Congress so stupid to think that if people are mad enough to object to Bernanke, they’ll be okay with real Wall Street insiders like Dimon or Summers? Well, yes, obviously.

I think I’m going to feel ill now.

Yves Smith:

Dimon is not a candidate, they’d want a Real Economist. He’s being noised about as Treasury Sec if Geithner gets the heave-ho. I have not heard anyone suggest him as a possible Fed secretary.

I don’t see Larry as a candidate either. Larry really wanted the job, Really really really really badly too. The fact that Obama decided to nominate Bernanke (a Bush appointee, remember) says he thought Larry had too much baggage (Andrei Shleiffer, DE Shaw, all those speeches and fees from Wall Street firms). That was before the scrutiny of Bernanke, which is part of a backlash against Wall Street friendly policies. If the Senate gives Bernanke, who is clean on a personal level, a hard time, they’d rake Summers over the coals.

And some very bad press came out in the last week re Summers and how he was responsible for the huge losses at Harvard. He basically overrode the loud objections of two heads of Harvard Fund Management and took way too much risk.

Amit Chokshi:

I don’t see that there are many others that Obama and others would consider. His inner circle is Summers and his lackey Geithner. He marginalized Volcker, the best of his finance crew and one that questions the current system the most, so he’s more likely to go with what Summers and Tim tell him. I don’t see Congress and the Senate raelly caring about who is next, they just want a head on a pike and Bernanke is convenient.

Summers is teflon, despite the HFM issues and ignoring the warnings on the risk of HFM and deep sixing his critic, despite the problems he had with the African American studies prof at Harvard, and various comments he’s made re women/science/math, this guy gets puff (puke) pieces in big magazines. Think you even linked to one a month or so ago.

Would Obama go with any Fed govs, like say Janet Yellen? I don’t see that because it’s not just Bernanke but the Fed “brand” as being radioactive. Then with markets a little more buoyant and the economy experiencing an anemic recovery, those for status quo would say we can’t have change, what will happen to the recovery.

also, politic dynamics make it hard to find anyone that would be a legit replacement that represented a change from the ideology followed by Bernanke and Summers.

The Repukes only want to can Bernanke for political reasons to hammer Obama and stir up their tea bagging constituents but these guys are so idiotic and think inflation is a real risk. They would be confusing monetary policy with budget issues and be crowing for a guy that shows “fiscal discipline” and would raise rates now.

The Dems are bought and paid for (as of course the right is) by the fins and only want Bernake’s head for the same political good will but they want to keep their funding source happy so that means can Bernanke but get a Bernanke clone – as in Summers. Even with all of the Summers baggage, Summers would probably sleepwalk through a hearing. I don’t see this guy getting rattled anywhere near Geithner seems to. In fact, I can see summers drinking his diet coke, throwing a few jokes out and “charming” most people.

You’ll get the occasional Sanders or Grayson or Kucinich or Feingolds or Franken to complain and as awesome as they are, they can’t change anything.

Yves Smith:

I read this differently than you do.

Obama did not marginalize Volcker. Timmy and Larry did. They are in DC, Volcker is not, Timmy is a Cabinet member and has ready access. Timmy and Larry work fist in glove and Larry is a bully to boot. Obama has never been interested in economics, he delegated it and this is how the dogfight came out.

But Volcker is too old, meethinks.

But Geithner is already getting heat, which redounds to Larry, the two are identified with each other. Team Obama assumed Bernanke was safe (he’s an academic, no personal dirty laundry, unlike Timmy and Larry, big time, comes off well on camera). The fact that he is getting any pushback is a huge wake-up call for the Obama camp, it means their economic policies are backfiring politically in a much bigger way than they thought. If the dump Bernanke movement gets any traction, Timmy and Larry are weakened.

Amit Chokshi:

Yeah I agree with all of that in terms of Timmy being Larry’s “protege” or errand boy and the two being looked at together. I don;t think Volcker should be a replacement either, it was more to stress that one of the guys that made the most sense and didn’t buy in with the wall st crowd didn’t seem to get a lot of traction/respect overall. Same with Warren, she’s awesome but is more of the populist heroine where she gets her dylan ratigan appearances and that’s about it. I agree with Marinus in the comments, doesn’t seem like there are any “right people” for the job and if they are, Obama won’t find or appoint them.

Get rid of Bernanke, the short list includes William Dudley or something like that. Oh well, we’ll see what unfolds.

jdmckay:

Obama did not marginalize Volcker. Timmy and Larry did.

I respectfully disagree. BO’s the decider. Volcker was advising him prior to election, as were others from Volcker’s schools.

Timmy is a Cabinet member and has ready access.

He wasn’t a cabinet member before BO made him one… just another face in Barack’s pool of advisers.

Obama has never been interested in economics,

sheesh… now you tell me.

(…) he delegated it and this is how the dogfight came out.

he delegated being the operative phrase. What top dog anywhere gets a pass for delegating matters of this significance to folks identifiable by their ideology (and in this case track record under Shrubbie)… particularly when their ideology played out as expected?

No… I disagree completely. I think you’re making excuses for BO. And as I’ve said elsewhere, I took months off work to work around the clock here to get BO elected.

I think he deceived me, frankly…

But Volcker is too old, meethinks.

I think he’s made good sense in what I’ve heard from him since election. Based on that, I’ll take risk of his age over the rest of BO’s econ crew.

Fair Economist:

There are always people to appoint with the desired political/economic views. They’ll just appoint some Fed governor without a pro-bubble track record – or a Republican economist for “bipartisanship”.

jdmckay:

(…) so he’s more likely to go with what Summers and Tim tell him.

Maybe, maybe not. AFAIC depends on whether ‘da prez grows a spine. Tim is getting congressional pushback similar to big Ben.

nowhereman:

I sent an email to Sanders thanking him. I really don’t believe that Dimon has a chance should Bernanke be refused. I believe the Admin is running scared. If Ben goes, so does Geitner and Summers and we will see Volker and Warren take prominence, else the faith of the electorate is completely lost.

DownSouth:

Thank you for your optimism, nowhereman.

The amount of defeatism and nihilism expressed on this thread boggles the mind.

Reinhold Niebuhr wrote an essay on this sort of thing. He called it “The children of light and the children of darkness.” The defeatism and nihilism he believed emanated from either the children of darkness or from confused children of light.

Martin Luther King also wrote and spoke extensively on this subject.

And for a secular version of the dangers of defeatism there’s Hannah Arendt.

Kyo Gisors:

Bernanke is a nice helpless scapegoat, but his immolation is not necessary for reform, and not sufficient. During the crisis, Bernanke was the lipstick on Paulson’s Senor-Wences fist. Now he’s got Goldman Sachs’ hand up his shirt. He’s so far over his head in that snakepit, so infinitely malleable, politically and organizationally, that with a strong Treasury Secretary you could make anything out of him. He’s putty in competent hands. But instead of competent hands you’ve got Geithner, brought up to be the banker’s perfect butler. So whether or not Bernanke is spared, you just move on to Geithner. The GOP would love to help destroy him, anything to weaken their enemies. Draw Geithner’s replacement from the ranks of hedge fund stars, they hate the banks they came from just like everybody else. Let them have regulatory forbearance in return for hardnosed resolution of zombie banks and sector structure rules that let them grow a little more.

bob:

BB is the perfect central banker. He is exactly what you want, someone who will never Balk. The same reason for which Yves claims he is medicated is the reason for his sucess. He does not blink.

In this reguard, he is a prefect banker. There are never any problems, just things to be worked on. Panic prone and banker don’t mix.

In his capactity as a regulator he is a complete failure.

This brings us back to the same problem, we still don’t have any fucking cops. Replacing BB will not change this.

I really have to go with the devil I (and the rest of the world) know, then to have to get another candidate qualified. I can only imagine the choices, and the process, with the markets being tossed from side to side in the process.

I assume the majority of the senate are in the same place.

Bernie rocks. For those not familiar with VT politics, it borders on schizophrenia. None of them want to be seen or associated with anyone else. They are independent to the extreme, which will probably in the end, prove to be Bernie’s downfall.

If Phil Gramm were still around he would hijack the campaign from Bernie to kill it. The new bank bagman may make himself known now, pay attention. There may be a fight to see who gets golden chair.

The banks just bought the regulatory reform process. Do you really want to see how much more of our money they are willing to spend to buy the fed chair?

jdmckay:

This brings us back to the same problem, we still don’t have any fucking cops.

BINGO!!!

spectator:

Many here seem ignorant of recent Fed history. Bernanke, even more than Greenspan, was the architect of the Great Moderation, savings glut, and other cheerleading of the credit bubble that led to this crisis. There’s a reason he was called Helicopter Ben.

Bernanke’s hand in this disaster cannot be overstated. Greenspan may have been at the helm, but Bernanke is the intellectual architect of the financial crisis.

How can anyone justify keeping him in charge of anything?

MarinusWA:

I have to say, even if Bernake bites the dusts, who’s to say that his replacement won’t be more of the same? It should be clear by now that getting the right people on these positions is all but impossible for Obama’s team.

Are there even right people for this job?

Amit Chokshi:

Grassley is a lying piece of scum, a guy that complains aobut big gov’t while big gov’t supported his pathetic farms. had to have an 80 y/o lady correct him on his death panels, etc comments. and obviously, if there’s one thing you can be right about is if beck and grassley are both concerned about it (hyperinflation), it’s of zero concern to the real players. listen to a guy like gross that barreled into treasuries or these scumbags?

andrew:

Senator Grassley on bloomberg: hasn’t masde up his mind. Main concern is return of 70’s style “hyperinflation” (his use of the term, not mine). Won’t vote for Bernanke unless he clearly explains how he will mop up the liquidity).

Sasher:

Just sent this letter to Senator Sanders:

Dear Senator Sanders:

I want to send you my heartiest congratulations for your bold threat to vote against Mr. Bernanke in his reconfirmation as Chairman. I can’t think of a more courageous stand by a public official throughout this crisis. Please know that I stand by your decision and will do whatever I can to help out in your re-election. Though I am from New Jersey, I already feel a kind of kinship with the people of Vermont and the fresh breath of freedom that you all breathe there vs. the putrid stench of corruption that I smell here in Midtown. Three Cheers to you and keep doing the good work. Mr. Bernanke should not be re-appointed and if he had any sense of shame he would withdraw his nomination. We need you to explore all options to make this eventuality a reality.

Thanks again,
Sasher

Ina Pickle:

Actually, Yves, they put holds on nominations/reappointments at all levels very often. The question is whether they PUBLICIZE that fact. It is a frequent maneuver, and is used to make the administration return your phone calls on issues related to the appointment (or unrelated if you are feeling really nasty/put out). Procedurally, there are a tremendous number of tools at a Senator’s disposal.

Publicizing it, on the other hand, is a different matter. I’m glad that Bernie decided to stand up and behave like a socialist! It’s about time. He’s at his best lobbing bombs from the back bench, and has been a little slow adjusting to the Senate’s different atmosphere. I’m thrilled that he’s getting the hang of it, and hope that he will be increasingly vocal and effective.

alex:

“I’m glad that Bernie decided to stand up and behave like a socialist!”

Act like a socialist? You could make just as good an argument that he’s acting like a capitalist. Whatever “ist” you want to call it by though, I commend him.

The Bernanke school is crony capitalism, which is more like feudalism than true capitalism. The secret to success is to curry favor with the Court and get a Royal Monopoly. Lord Blankfein and Lord Dimon have succeeded. And like any responsible feudal lord, they spread some of the wealth to their lesser vassals.

EmilianoZ:

The Atlantic Wire on that subject:

http://www.theatlanticwire.com/opinions/view/opinion/Senators-Gambit-Jeopardizes-Bernanke-Reappointment-1783

Fred Beloit:

I really didn’t have a position on BB until I read that a Communist Senator from Communist Vermont was against BB. Now I’m for BB, this must be the correct answer. BB for life term.

DownSouth:

Wow!

I’m watching the confirmation hearings on CNN.com

Sen. Jim Bunning, Republican Kentucky, lambasted Bernanke!

“You are the definition of moral hazard!” he fired.

After listening to Bernanke’s comments there remains little doubt what the agenda is, and that is to curtail entitlements. He is complicit in painting a big, red target on social security and medicare.

It Is Actually More Amazing That 21% Of Americans Know Who Ben Bernanke Is « Around The Sphere:

[...] Naked Capitalism: Second, a Rasmussen poll (hat tip reader Andrew) released today found that only 21% of Americans favor Bernanke’s reappointment. This is significant not simply due to the lousy results, but that Rasmussen bothered to run the poll at all. This was not a client sponsored poll; Rasmussen thought this was newsworthy enough to run this on its own. Admittedly, a large proportion are undecided, but twice as many oppose a Bernanke reappointment as support it. [...]

andrew:

I haven’t seen this publicly anywhere, but a staffer at te Dallas office of Senator Hutchinson said she would be voting against Bernanke.

[Dec 2, 2009] The Institutional Risk Analyst Martin Mayer Audit the Fed! Ben Bernanke Beneath the Banksters

Economists like to brag about their study of the Great Depression, as though merely going through the mainstream descriptions of the economic meltdown of the 1930s is sufficient qualification to be, say, Chairman of the Federal Reserve Board or head the Council of Economic Advisers. But judging by the performance of the current cast of characters in Washington, one wonders if our public servants so much studied the Depression years as they are merely imitating it, following a well worn political path of duplicity and stupidity all too typical in American financial history.

In those days, as today, JPMorgan and the other New York banks mostly called the shots in Washington and caused members of Congress to jump through hoops of fire like trained dogs. Alan Greenspan finds a close political analog in Dick Crissinger, a banker and home town friend of former newspaper publisher Warren Harding who thought, like former Fed Chairman Greenspan and now Chairman Bernanke, that bankers were the perfect mechanisms to carry our public policy.

Paul Warburg, the partner of Kuhn, Loeb & Co who was the crucial member of the small group of Americans which crafted the political compromise that was the Federal Reserve System, was replaced by Crissinger on the Fed's Board. He and other Republican appointees then proceeded to move away from merely discounting bank notes and to the use of open market operations to feed the banks liquidity, as today. Crissinger and his cohorts delivered the Fed and the nation's financial policy entirely into the hands of Wall Street, turning the decentralized central bank into a tool of the big banks and, today, of their political cronies in Washington. So much for central bank independence!

In his classic 1933 book, The Mirrors of Wall Street, Clinton Gilbert noted that while the first Board of Governors of the Fed was comprised of people "distinguished by ability and character," by the time that Harding succeeded Wilson in the White House, the New York bankers led by the House of Morgan had captured the Federal Reserve Board.

Benjamin Strong left the Bankers Trust Company in 1914 to preside as Governor of the Federal Reserve Bank of New York and dominated the Fed's decentralized, "independent" Board. By the time WW I ended, the slogan "Return to Normalcy" succeeded the cries of war and the nation was, once again, more interested in ways to "turn the wheels of commerce and accelerate the movements of trade," wrote Gilbert, an apt parallel to the housing bubble of the past decade.

When members of Congress such as Rep. Barney Frank (D-MA) and Senator Chris Dodd (D-CT) kowtow to JPMorgan Chairman Jamie Dimon, and they do grovel so shamelessly, they are merely repeating the political dance performed by members of both parties for more than a century. When the public reacts in anger at the spectacle of the Congress bailing out the banksters, with the Treasury buying bank stock with public funds, and borrowed money at that, the initial reaction of Washington's criminal class is indifference.

It is only when the public mind is sufficiently focused on the comfortable and corrupt relationship between Washington and the banksters who run Wall Street, events like Enron and WorldCom, that change becomes possible. Such an opportunity presents itself with the nomination of Fed Chairman Ben Bernanke, whose rejection by the Senate would send a strong message to the White House and the electorate. But the single party state that is Washington would convulse with horror at such a deviation from the prepared script. We now are all "team players," you understand...

... ... ...

The policy of extend and pretend championed by Ben Bernanke is a recipe for a lost decade a la the 1990s, only far worse. Whether you talk about bank loans or trade credit or vendor finance, there is none and the real economy is starving to death as a result. Chairman Bernanke and the banksters say that the way out of the crisis is slow healing, muddle along and let time salve the wounds that the large banks inflicted on us all. Using the tough medicine of restructuring and management change would help revive lending and the real economy sooner, but that would be inconvenient for the captains of the New York banks, who plan of playing record bonuses this winter as millions of Americans are without work.

There are a combination of internal and external factors working against a US economic recovery, but none are more pressing than the fact that most sources of credit for the real economy are sharply curtailed. Far from needing the help of the Congress to make the big banks get smaller, as some legislation now proposes, next year the question will be how to keep the US banking system from shrinking further in terms of assets and revenue. That is why we need a replacement for Ben Bernanke at the Fed.

But if we let the large banks continue to call the shots at the Fed and in Washington more generally, the only thing that is sure is that the US economy will at best stagnate in 2010 and beyond, and at worst continue to contract in terms of bank balance sheets, credit and employment. We need credible leadership at the Fed to lead the restructuring of the US banking system. Congress should reject the confirmation of Ben Bernanke and ask President Obama for a new candidate, a candidate with financial accumen rather than credentials as an economist. If the President fails this test of character and political judgment, then come 2012, Barrack Obama may be looking for work as well.

[Dec 2, 2009] WHAT IS GOOD FOR GOLDMAN SACHS IS GOOD FOR AMERICA THE ORIGINS OF THE CURRENT CRISIS by Robert Brenner

October 2009

STOCK MARKET KEYNESIANISM

From the start of 1995, US equity prices exploded upwards, with the S&P500 index rising 62 per cent by the end of 1996. By the end of 1994, the stock market had already experienced a remarkable twelve year ascent, during which equities had surged by 200 per cent, despite the plunge of 1987 and the mini-crash of 1989. But that spectacular climb in asset values had been more or less justified, and indeed driven, by a corresponding rise in corporate profits, the same revival of the rate of return that had brought the US economy by this juncture to the brink of a new take off. There can be no doubt that the long bull run of the stock market predisposed investors to continue to buy shares. But what actually drove equities to take flight was, almost certainly, a sudden sharp fall in the cost of borrowing, both short and long term. To help insure stability in the wake of the Mexican Peso and Southern American Tequila crises, the Fed abruptly discontinued its campaign to raise short term interest rates of the previous year and reduced the cost of short term borrowing, from 6.05 per cent in April 1995 to 5.2 per cent in January 1996, not to increase it again until 1999 (except for a lone quarter point increase in 1999). Meanwhile, to implement the Reverse Plaza Accord and bring down the yen, Japan cut its discount rate and, along with other governments in East Asia aiming to keep down their own currencies, unleashed a huge wave of purchases of dollar denominated assets, especially treasury bonds. The reduction in the cost of borrowing in Japan had the effect of pumping up the global supply of credit, as international financiers fabricated a very profitable carry trade, borrowing yen at low rates of interest, converting them into dollars, and using the proceeds to invest around the world, not least in the US stock market. The buying up of US government debt by the East Asians appears to have been the main factor in bringing about a stunning twenty-three per cent decline in the long term cost of borrowing over the course of 1995. As is usually the case with asset price run-ups, it was the sudden major easing of credit that catalyzed the new rise of the stock market. But, by now, with the dollar ascending, the material foundations of the long term profitability recovery and associated rise in equity prices were crumbling. The stock market was climbing skyward without a ladder.

This is where Alan Greenspan and the Fed enter the picture.

At the 24 September 1996 meeting of the Federal Open Market Committee, the body that sets short term interest rates for the US economy, Federal Reserve Governor Lawrence Lindsey expressed his worry that runaway increases in share prices were far exceeding the potential growth of corporate profits, and that a distorting bubble, which could not but make for a vast misallocation of capital and eventually a destructive bust, was in the offing. Fed Chair Greenspan did not for a moment deny Lindsay’s observation. “I recognize that there is a stock market bubble problem at this point, and I agree with Governor Lindsey that this is a problem that we should keep an eye on.” Greenspan acknowledged, moreover, that the Fed had ample means at its disposal to deflate the bubble, if it so chose. “We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it. My concern is that I am not sure what else it will do.”7 In fact, as 7 FOMC Minutes, 24 September 1996, pp.23-25, 30-31 Fed Reserve web site; William A. Fleckenstein, Greenspan’s Bubbles. The Age of Ignorance at the Federal Reserve, New York, 2008, p.135. Greenspan made crystal clear at this meeting and subsequently, he had no interest in combating the bubble by any method whatsoever. The economy did seem to be gathering steam, but he was not sure that the expansion had fully taken hold, and he was reluctant to consider raising interest rates, let alone risk directly undermining the equity markets by raising margin requirements, unless and until he was certain it had.8

At the next FOMC meeting, on 13 November 1996, Governor Lindsey, supported by several others, re-stated his concern about over-valued share prices, as well as the threat of inflation, and recommended a significant interest rate increase. But Greenspan preferred standing pat and, as always, he won the day.9 A few weeks later, on December 1996, Greenspan did give his famous warning about “irrational exuberance” in the equity markets. Yet not only did share vpes continue to rocket into the heavens, but the Fed did absolutely nothing about it. Greenspan not only failed to raise interest rates in the normal way as the economic expansion extended itself, increasing the Federal Funds rate on just one solitary occasion in the years 1995-1999, and that by just onequarter of a percentage point. He also brought down the cost of borrowing at every point at which the stock market experienced the slightest tremor of fear, a fact not lost on equity investors, who soon came to take for granted the infamous “Greenspan put.”

Still, there was a method to Greenspan’s madness. The Fed chair well understood the downward pressure on the economy that was resulting from the rise of the dollar, the disappearance of the Federal deficit, and the declining capacity of the rest of the world to power its own expansion, let alone pull the US economy forward. With traditional Keynesianism off the agenda, he had to find an alternative way to insure that the growth of demand would be sustained. Although Greenspan did not explicitly refer to this, he was well aware that, during the previous decade, the Japanese had implemented a novel form of economic stimulus. In 1985-1986, following the Plaza Accord, Japan had faced a situation rather similar to that of the US in 1995-1996. A fast rising yen had put a sudden end to Japan’s manufacturing-centered, export-led expansion of the previous half decade, was placing harsh downward pressure on prices and profits, and was driving the economy into recession. To counter the incipient cyclical downturn, the Bank of Japan radically reduced interest rates, and saw to it that banks and brokerages channeled the resulting flood of easy credit to stock and land markets. The historic run-ups of equity and land prices that ensued during the second half of the decade provided the increase in paper wealth that was required to enable both corporations and households to step up their borrowing, raise investment and consumption, and keep the economy expanding. The great Japanese boom—and accompanying bubbles--of the second half of the 1980s was the outcome.

Greenspan followed the Japanese example. By nursing instead of limiting the ascent of equity prices, he created the conditions under which firms and households could borrow easily, invest in the stock market, and push up share values. As companies’ stock market valuations rose, their net worth increased and they were enabled to raise money with consummate ease--either by borrowing against the increased collateral represented by their enhanced capital market valuations or by selling their overvalued equities--and, on that basis, to step up investment. As wealthy households’ net worth inflated, they could reduce saving, borrow more, and increase consumption. Instead of supporting growth by increasing its own borrowing and deficit spending--as with traditional Keynesianism--the government would thus stimulate expansion by enabling corporations and rich households to increase their borrowing and deficit spending by making them wealthier (at least on paper) by encouraging speculation in equities—what might be called “asset price Keynesianism”.

The “wealth effect” of rising asset prices would, in this way, underwrite a boom for which the underlying fundamentals were lacking -- notably, the prospect of sufficient rate of return on investment. Greenspan’s stimulus program was a dream come true for corporations and the wealthy, as well as for banks and other financiers, who could hardly fail to profit on lending, by way of the Fed’s unspoken commitment to moderate short term interest rates and to reduce them whenever this was necessary to prevent equity prices from plunging. Its implementation is incomprehensible apart from an accelerating shift to the right in the polity as a whole and ushered in what has been rightly termed the New Gilded Age. Nevertheless, it invited not only the blowing up, but also the bursting, of momentous asset price bubbles.

Much as in Japan, the Fed’s buttressing of the stock market called forth a share price ascent of historic proportions, and one witnessed still another re-enactment of the classic drama of asset price run-ups familiar throughout history. The basic enabling condition was, as usual, low-cost access to credit, both long term—initially bequeathed by the Japanese and East Asians by way of their massive purchases of US treasury bonds in connection with the reverse Plaza Accord -- and short term — provided, and seemingly assured, by the Fed. With credit made so cheap, and profit-making on lending rendered so easy, banks and non-bank financial institutions could not resist opening the floodgates and advancing funds without limit. Stepped up borrowing made possible jumped up investment in stocks, which drove up share values, thus households’ wealth and firms’ market capitalization. The resulting decrease in the ratio of debt to equity for stock market investors, as well as for corporations, made those investors and corporations more credit worthy, at least in appearance. Financiers could therefore justify to themselves, as they have always tended to do in such situations, further increases in lending for further purchases of financial assets, as well as for plant and equipment, paving the way for more speculation, higher asset prices, and of course still more lending -- a self-perpetuating upward spiral.

Bernanke’s Bad Teachers By Gerald Friedman

"If insanity consists of doing the same thing over and over again and expecting different results, then the Federal Reserve went insane after the summer of 2007... Guided by Friedman and Schwartz, Bernanke has provided nearly unlimited aid to the Wall Street bankers and financiers responsible for our current economic collapse. And he has starved the real economy—businesses, workers, and homeowners—to avoid interfering in free markets. "

Dollars & Sense

This article is from the July/August 2009 issue of Dollars & Sense: Real World Economics available at http://www.dollarsandsense.org/archives/2009/0709friedman.html

This article is from the July/August 2009 issue of Dollars & Sense magazine.

Addressing a conference honoring Milton Friedman on his 90th birthday in 2002, the future chairman of the Federal Reserve Board, Ben Bernanke, praised Friedman’s 1963 book, written with Anna J. Schwartz, The Monetary History of the United States. Before Friedman and Schwartz, most economists saw the Great Depression of the 1930s as proof that capitalist economies do not tend towards full-employment equilibrium. But Friedman and Schwartz restored the prior orthodoxy by blaming the Great Depression on bad monetary policy by the Federal Reserve while exonerating American capitalism. The Great Depression was “the product of the nation’s monetary mechanism gone wrong.”

It is significant that Friedman and Schwartz never use the phrase “the Great Depression”; instead, they speak of “the Great Contraction” of the 1930s, addressing the reduction in the money supply while treating the fall in employment and output as a secondary matter, the consequence of bad government policy that caused “the Great Contraction.” By flattering the prejudices of economists who want to believe in the natural stability of free markets, Friedman and Schwartz’s story has become the accepted explanation of America’s worst economic disaster.

Bernanke, for one, confesses that he was inspired by their work; “hooked” in graduate school, “I have been a student of monetary economics and economic history ever since.” Pushing on an open door, Friedman and Schwartz persuaded most orthodox economists, and that part of the political elite that listens to economists, that the economic collapse that began in 1929 was an accident that would have been avoided by reliance on free markets and competent Federal Reserve monetary policy.

Bernanke closed his 2002 remarks with a promise. “Let me end my talk,” he said, “by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

Bernanke had five years to ponder this promise before he faced a worthy challenge; and then he acted with the vigor of a Friedman/Schwartz acolyte. When this decade’s housing bubble began to deflate in early 2007, major financial firms like New Century Finan-cial and Bear Stearns reported major losses, and confidence in the U.S. financial system began to collapse as swiftly as in 1929–33. In early August, the rising tide reached tsunami dimensions when the International Monetary Fund warned of a trillion dollars in bank losses from bad mortgages. This was Bernanke’s moment. Channeling Friedman and Schwartz, careful to avoid the mistakes of 1929–33, the Federal Reserve moved quickly in early August 2007 to provide liquidity to financial markets. It acted again on August 17 by cutting mortgage rates. More cuts came on September 18, on October 31, and on December 11. Then, on December 12, the Fed announced the creation of a new facility formed with the Europeans (Term Auction Facility, or TAF) to provide $24 billion in additional liquidity to financial markets. After still more interest rate cuts in January 2008, a new special lending facility, with $100 billion, was established on March 2, along with another $75 billion for the TAF. Then, on March 11, another new facility was created, the Term Securities Lending Facility, with $200 billion. And all this was long before the bailouts of Fannie Mae, Freddie Mac, AIG, or the federal government’s trillion-dollar Toxic Assets Relief Program (TARP).

If insanity consists of doing the same thing over and over again and expecting different results, then the Federal Reserve went insane after the summer of 2007. Never before has it acted this aggressively in trying to get ahead of a financial market meltdown. Under Bernanke, the Fed has increased the money supply by over 16% in less than two years, nearly mirroring the 18% drop in the money supply in the same period after the stock market collapse of 1929. Had he lived, Milton Friedman would have been proud.

The one thing that has not changed between the crisis of 1929+ and the crisis of 2007+ has been the behavior of the real economy. Bernanke has avoided his predecessors’ monetary policy mistakes, but he has not prevented a sharp economic downturn. Since 2007, the economy has lost nearly 6 million jobs, including over half a million in the last month. At 8.9%, the April 2009 unemployment rate unnervingly equals the 1930 figure. We have a long way to go before we hit Great Depression level unemployment; but we are only in the second year of this collapse. And monetary policy is not helping.

Here, then, we see the legacy of Friedman and Schwartz. Confident that capitalist free markets naturally move towards a full-employment equilibrium, Bernanke and his allies saw the need for only one type of government action: providing liquidity to the banks in order to strengthen confidence in the financial markets. Guided by Friedman and Schwartz, Bernanke has provided nearly unlimited aid to the Wall Street bankers and financiers responsible for our current economic collapse. And he has starved the real economy—businesses, workers, and homeowners—to avoid interfering in free markets.

Bernanke has conducted an economic policy as cruel as it has been ineffective. But the blame here goes beyond Milton Friedman and Anna Schwartz. It lies squarely on the economics profession.

Gerald Friedman is a professor of economics at the University of Massachusetts at Amherst.

Sources: Remarks by Governor Ben S. Bernanke at the Conference to Honor Milton Friedman, University of Chicago, November 8, 2002, available here; Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960 (Princeton U. Press, 1963).

[Nov 6, 2009] Allen L Roland's Radio Weblog

Bernanke or no Bernanke, the US is faced with a series of very unpleasant, if not downright bad choices. In chess this is called zugzwang.  You cannot avoid a loss and the choice is limited which loss you would prefer and how much pain one should take.

John Bolton was the stooge for the Cheney/ Bush administration ~ the guy they could count on to ruffle the UN's feathers and remind them who ran the world. Ben Bernanke is the inherited stooge for the Obama administration ~ the guy the oligarchy can count on to remind the world who controls the still unaudited money supply: Allen L Roland

It was Ben Bernanke who said last week ~ " From a technical perspective, the recession is very likely over at this point " but Bernanke is speaking for the Wall Street Corporate Oligarchy who feel they dodged a bullet while Main Street has been run over by a deepening Recession/Depression.  

It was George Orwell who wrote (1984 ) ~ "The essence of oligarchical rule is not father-to-son inheritance, but the persistence of a certain world-view and a certain way of life ... A ruling group is a ruling group so long as it can nominate its successors... Who wields power is not important, provided that the hierarchical structure remains always the same."

Ben Bernanke is a stooge for the powerful few ~ which is the definition of an Oligarchy ( the tyranny of the Elites ). Wall Street owes the survival of it's recent near death experience to Bernanke who poured trillions of dollars into its rotting black hole of toxic debt to keep it afloat ~ in order to maintain a certain way of life for the financial elite of the Oligarchy.

In a discussion of the Fed and bank bailouts on MSNBC’s Morning Meeting in late July, host Dylan Ratigan described the process by which the Federal Reserve exchanged $13.9 trillion of bad bank debt ( TRASH ) for cash which it then gave to the struggling banks ~ and he used a simple game to illustrate this Ponzi scheme.

[Oct 17, 2009] Bernanke works on as jobless tally mounts by By Hossein Askari and Noureddine Krichene

Oct 8, 2009 | Asia Times

Bernanke works on as jobless tally mounts
By Hossein Askari and Noureddine Krichene

The doubling to 15.1 million from 7.6 million in the number of officially jobless people in the United States since 2007, with the unemployment rate reaching 9.8% in September from 4% two years ago, excludes those who have given up looking for work altogether and those working part time. Add those to the numbers and the rate is a whopping 17.2%.

This rapidly worsening unemployment picture has taken place in the context of the most expansionary fiscal and monetary policy in US history. Since the outbreak of the financial crisis in August 2007, interest rates have been cut to near-zero bound, massive dollar liquidity has been injected into the economy, extensive stimulus programs have been adopted, and the fiscal deficit pushed to 13% of gross domestic product (GDP) in 2009.

A chief architect of these policies, Ben Bernanke, nevertheless has earned the confidence of President Barack Obama, who lavished praise on the Federal Reserve chairman when reappointing him for another term: "I want to congratulate Ben on the work he's done this far, and wish him continued success in the hard work ahead."

While the Fed chairman has been congratulated and the bonuses of bankers restored, the plight of the unemployed continues to deteriorate, and while unemployment is a lagging economic indicator, the expectations are that their numbers will continue to rise for some time and then decline only slowly.

The main policy prescription of the Obama administration can be summed up as follows: record fiscal deficits would boost spending, and through the multiplier, real GDP would rise, and full employment automatically re-established. The main tenet underlying Bernanke's theory is that near-zero interest rates and ample liquidity would push credit to high levels, boost consumer spending and real GDP, and restore full employment.

Convinced of the infallibility of their respective theories, the president and the Fed chairman have been running their expansionary policies, despite huge external current account deficits ranging between 5% and 7% of GDP; both Obama and Bernanke had concluded that US economy was suffering from deficient demand and hence full employment would be automatically restored through gigantic fiscal and monetary expansion.

It is discomforting to see unemployment worsening at a fast pace in the context of record fiscal deficits and the most expansionary monetary policy. We are saddling future generations with debt that does not even alleviate the misery of the current generation. Most disturbing is the increasing ranks of the unemployed, whose numbers are expected to continue increasing for many more months and then to decline ever so slowly. Early on, after embarking on his program in August 2007, Bernanke often promised a quick return to full employment. Not only have his policies failed to contain unemployment at, or near, its 2007 rate, that is 4%, they have kept pushing unemployment to higher levels.

It would appear that proponents of Keynesian economics assume that government deficits and monetary expansion work their effects instantaneously in re-establishing full employment. They reject classical theory of price-wage mechanism in the belief that price-wage adjustment process is too lengthy and deflationary and, therefore, not desirable in view of the social cost of unemployment.

The view for blocking price adjustment was forcefully espoused by the Fed in August 2007. To prevent a bursting of a housing bubble and collapse of bank assets, the Fed has mounted a dramatic re-inflation policy, injecting mountainous liquidity and cutting interest rates significantly.

Obviously, monetary expansion has missed its goal for re-inflating the housing bubble. Instead, liquidity and very low interest rates immediately fueled an ongoing commodity bubble. Left unchecked, rampant oil and food price inflation disrupted vital sectors and triggered a vicious circle of contraction and unemployment. Imprudence with monetary policy led to perverse effects that were either deliberately ignored by policymakers or simply underestimated.

Unemployment could have many causes. For instance, frictional unemployment is attributed to real causes. A bad crop could cause some unemployment. Technical progress can displace labor in favor of machinery. Some firms may fail and their employees loose their jobs. Labor may be in transition between occupations and locations.

However, mass unemployment following a long period of full employment cannot be attributed to these and is more likely accounted for by monetary factors. Irving Fisher and Friedrich August von Hayek held such a view during 1932-33, the height of the Great Depression (although contested by Joseph Schumpeter). Central banks failed to apply the monetary brake early on and allowed inflation or bubbles to escalate to a tipping point that triggered a financial crisis.

More specifically, mass unemployment has been a dramatic consequence of financial crises in the 19th century, the 1907 Panic, the Great Depression, and stagflation in the 1970s. In each crisis, the economy swung from a long period of prosperity and full employment to a protracted period of mass unemployment with millions of jobless workers. Monetary factors triggered a vicious downward spiral of contraction and unemployment. In these circumstances, wrong policies can aggravate the situation and prevent the crisis from running its course.

Although during previous financial crises, unemployment rarely exceeded 10% or extended beyond a two-year period, during the Great Depression unemployment rose to 25% and extended over a 10-year period, spanning 1929-1939. It was only the onset of the war economy that re-established full employment.

In contrast to a Keynesian model of instantaneous full-employment, Hayek argued that attempts to block the market mechanism could unnecessarily extend a recession or even make it worse. He contended that stock market crash in 1929 was turned into a Great Depression by loose monetary policy designed to prevent adjustment of inflated prices following the 1926-1929 economic boom.

If loose monetary policy has been one factor leading to the financial crisis and consequent unemployment, then a genuine approach, based on causes and effects, should aim at remedying monetary policy. It has long been debated that central banks cannot control the rate of unemployment, nor the rate of interest. Attempts by the central bank to control unemployment can degenerate into perverse effects and large distortions that can only worsen unemployment. Central banks can only control money and credit aggregates. They have been exhorted to keep these aggregates in balance to avoid expansion, contraction, bank failures, and exchange rate instabilities.

It would appear that there has been little attempt to understand the nature of the current US employment problem, or its causes, and to chart accordingly the right policies that would re-establish full employment. The Fed has not yet recognized the limitations of its monetary policy, despite its impact on the US banking system - the loss in trillions of dollars in capital, the general bankruptcies and the mountain of toxic assets sitting on bank balance sheets.

Nor has the Fed incorporated the fact that the monetary channel was completely clogged and unorthodox policies to further inject liquidity into the economy carried risks. These monetary experiments could have been the trigger for the worst financial crisis in the post-World War II era and the deteriorating unemployment picture since August 2007.

The monetary base has doubled during September 2008-September 2009. Most strikingly, the US banks have been overloaded with excess reserves that rose from nothing a year ago to US$855 billion in September 2009. There has been no public analysis of excess reserves, their origins, and their bearing on unemployment.

Why have banks not been able to place these excess reserves? Or why have depositors piled up deposits at banks and not used their money on real investments? If these enormous excess reserves were released into the economy, they could turn into a bomb of mass-destruction; hyperinflation might be unavoidable with still more devastating effects on unemployment, and capital losses from unsafe lending would result in a new generalized round of bankruptcies.

Similarly, little attention seems to have been paid to the sectoral composition of unemployment. The hardest hit sector has been construction, followed by manufacturing, leisure and hospitality. The composition of unemployment would indicate that unorthodox monetary policy does not help resolve unemployment and may instead delay it.

There is a significant misalignment of housing prices relative to household incomes, and an oversupply of residential and commercial real estate. Thousands of houses have simply been abandoned. Preventing a re-adjustment will indefinitely delay the resolution of unemployment in this sector. Near-zero interest rates will encourage builders to maintain high prices and delay the sales of their housing inventories.

Similarly, demand for leisure cannot expand when more than 36 million people in the United States live on food stamps and others struggle with high food and energy prices. Households would certainly reallocate their budgets away from durable goods and leisure toward pressing vital needs. To the extent monetary policy has led to very high food and energy prices, its further expansion will aggravate this inflation, squeeze non-essential spending, and aggravate unemployment.

Why have the gigantic stimuli and record fiscal deficits not prevented deterioration of the unemployment picture? It would be unfair to say that US fiscal deficits have had no growth effects. They have certainly stimulated growth and employment in countries exporting to the US, including China, and oil producers.

Contrary to Keynesian assumption of demand deficiency, the US has had excessive aggregate demand in relation to its national income that has translated into widening external deficits. Hence, most of the stimulus money has been spent on imported goods such as oil and other goods, with a much smaller effect on local production than advertised.

Moreover, fiscal deficits reduce national savings and, therefore, real private investment. Private investment is a major determinant of employment. The more fiscal deficits replace private investment, the less employment is created. Pushing fiscal deficits to a record 13% could turn out to be devastating for the US economy if real private investment is severely reduced.

Finally, a fallacy underlying proponents of demand policy is that the more you consume, the higher production will be. It may turn out that demand can be expanded without limit; production, however, is constrained by time, natural resources, and other fixed factors. Hence, fiscal deficits will only increase consumption with possibly negligible effect on production and employment.

The impact of misguided US Fed policies has so far been significant in terms of financial losses, unemployment, and social pressures. Unemployment represents a loss of output. Yet, policymakers have become even more determined to chart an unorthodox monetary policy in order to reverse the severe consequences of already failed monetary policies. They have not accepted the words "deflation" or "price adjustment".

To avoid deflation, the central bank should have avoided the inflation that led to the crisis. The extent of deflation is influenced by the extent of the preceding inflation and distortions created by loose monetary policy. As during the Great Depression, policymakers have kept interest rates very low and charted a course of prolonged cheap monetary policy in order to finance the fiscal deficits and force economic recovery. This can create a deadlocked policy stance that perpetuates unemployment.

Loose monetary policy is a powerful form of taxation and causes huge distortions in the economy, disrupting growth and employment. It has undermined the banking system and was very favorable for speculation in assets and commodities. Fiscal deficits at 13% of GDP will crowd out the real private investment that promotes growth and employment.

With gold crossing the $1,000 per ounce mark, commodity prices on a rising spree, the US dollar depreciating, and the conventional measure of unemployment nearing 10%, a possible scenario resulting from the current policy mix could be inflationary stagnation.

An employment policy has to extricate inflationary pressures, allow for price adjustment, and stimulate real private investment. This would promote a sound environment for growth, and reduced risks of speculation and instability. Employment requires supply-oriented strategies that emphasize competitiveness, support of private investment and the removal of all distortions. Unfortunately, experts of the Great Depression appear to be applying some of the same policies that made it worse by increasing and prolonging unemployment.

Hossein Askari is professor of international business and international affairs at George Washington University. Noureddine Krichene is an economist at the International Monetary Fund and a former advisor, Islamic Development Bank, Jeddah.

Ben “Chauncey” Bernanke - Paul Krugman Blog -

NYTimes.com

1. You’re scaring me.

   As one of the few people who understood at the time that “Being There” was a cultural signpost that the era of “Chauncey Gardiner” politics had arrived and soon confirmed with our first “Chauncey Gardiner” President named Reagan I was hoping that the era had ended with our “Idiot Son of Chauncey Gardiner” President Bush.

   So please don’t kid about Bernanke -- he’s doesn’t seem to be the sharpest pencil in the box, as proven by the Lehman debacle that setoff a worldwide crisis and triggered the collpase that has put America into decline.

   Not to mention his slavish adherence to the Greenspan school of thought until just very recently.

   Just the thought that remnants of the “Chauncey Gardiner” era may still hold some power is enough of a nightmare to keep me from sleeping.

   And for 8 long years I never once had a good nights sleep under Bush-that’s a true statement. So please don’t kid around.

   P.S. you can understand why Sellers went all out to get the part-it’s a prescient movie.
    

2. Psittakos

   Chauncey Gardiner is spot on. If the roots are severed? No amount of watering (liquidity from accommodative monetary policy) or fertilizer (fiscal stimulus) will help.

3. Jan Baer

Statements by the Fed Chair have for years been comically unintelligible. I always considered Greenspan’s comments worth a fortune simply for their complete lack of substance. I admire convoluted and meaningless oratory, and have often thought that dear old Professor Irwin Corey, a *Tonight Show* regular from way back, would have been an excellent candidate for this position.

The US recession more unemployment and a sinking dollar By Gerard Jackson

28 September 2009 | WikiGold/BrookesNews.Com

...A particularly worrying aspect of current situation is Ben “Helicopter” Bernanke’s utterly irresponsible attitude toward monetary policy. He considers himself to be something of an expert on the Great Depression. He is anything but. By focusing entirely on money — as did Friedman and Schwartz — he completely overlooked ‘real factors’. As one economist astutely observed:

…monetary factors cause the [business] cycle but real phenomena constitute it. (Fritz Machlup, Essays on Hayek, Routledge, Kegan Paul 1977, p. 23).

Because his starting premise was the neutrality of money Friedman just could not accommodate the idea of monetary-induced malinvestments despite the massive amount of statistical evidence that supported it. Bernanke — whether he knows it or not — is starting from the same premise. This certainly helps explain his cavalier attitude toward the money supply as illustrated by the two charts below. The first chart show AMS (Austrian money supply*) as rising steeply from September 2008 to June 2009. This was an increase of 25 per cent. A slight contraction brought the increase down to about 21 per cent in the following August.

The situation for the monetary base is even worse. From September 2008 to May 2009 it rocketed by 99 per cent. A slight fall had reduced the increase to nearly 92 per cent in August 2009. This expansion is truly unprecedented and extremely dangerous. Moreover, the Fed is still buying ‘assets’ with crispy new notes. Calling this state of affairs highly inflationary would be greatly understating the situation.

Source: Federal Reserve Statistical Release

Bernanke’s monetary policy strongly suggests that he is not only indifferent to the detrimental effect it will have on the exchange rate but that he is probably hoping for a significant dollar depreciation in the belief that it will stimulate exports and raise the demand for labour. (In the 1930s this was called exporting your unemployment). But a devaluation is only justified where the currency was overvalued. In all other circumstances it is a destructive and self-defeating policy.

The monetary figures are bound to have some economic commentators predicting another boom followed by the inevitable crash. I am not so sure. What America could get is a rapid reduction in idle capacity leading an increase in GDP as Bernanke’s dollars work their magic. But I cannot help but be reminded of Germany’s 1927-29 boom that was also accompanied by a high level of unemployment. In Germany’s case the unions kept wage rates above their market clearing levels. In the US today the uncertainty created by Obama’s policies could have a similar effect.

There is also the possibility that even Bernanke will be forced to apply the monetary brakes before his inflationary policy has time to bring unemployment down to a politically acceptable level. Whichever way one looks at it, any recovery based on these monetary foundations is doomed to be a short-lived one, thereby ultimately frustrating his policy of using inflation to lower unemployment for the long-term by cutting real wage rates and driving down the dollar.

---

*There are some differences among Austrians as to what ought to be included in a definition of the money supply. My own approach follows in the steps of Walter Boyd who in his open letter to Prime Minister Pitt in 1801 defined in the following terms:

By the words ‘Means of Circulation’, ‘Circulating Medium’, and ‘Currency’, which are used almost as synonymous terms in this letter, I understand always ready money, whether consisting of Bank Notes or specie, in contradistinction to Bills of Exchange, Navy Bills, Exchequer Bills, or any other negotiable paper, which form no part of the circulating medium, as I have always understood that term. The latter is the Circulator; the former are merely objects of circulation. (Walter Boyd, A Letter to the Right Honourable William Pitt on the Influence of the Stoppage of Issues in Specie at the Bank of England, on the Prices of Provisions, and other Commodities, 2nd edition, T. Gillet, London, 1801, p. 2).

In simple terms, money is the medium of exchange.

Gerard Jackson is Brookesnews’ economics editor

[Sep 17, 2009] POWER WITHOUT CREDIBILITY, Part 3 Politics of the financial crisis by Henry CK Liu

Asia Times

Part 1: Bogged down at the Fed

United States Federal Reserve chairman Ben Bernanke is visibly frustrated that many in Congress do not give the Fed what he believes is enough credit for what it has accomplished in responding to the economic crisis, even as Wall Street heaps praise on his bold actions and steady hand in pulling the financial system out of an impending meltdown.

Bernanke, whom President Barack Obama this month appointed for a second term as Fed chairman, faces a far from smooth passage through calmer seas over his next four years in the post. All the structural weaknesses that caused the economy to implode two years ago are still in the financial system, albeit swept under the rug into the Fed's balance sheet and masked by massive amount of new money and public debt not backed by any new wealth creation.

Even if all goes according to the seemingly chaotic plan, the prognosis is that recovery will be anemic and stretch out in several years if not decades. Eroded by events, Bernanke's falling popular approval and low credibility could in themselves add to further loss of confidence in the market at a time when the Fed is trying its utmost to restore confidence.

On the employment front, the Fed's dogmatic monetarism renders it operationally impotent in reducing unemployment except through trickling down from corporate profit, which cannot recovery without consumer demand, which in turn cannot recover without full employment.

On the financial front, the Fed faces a dilemma of deciding when to implement an exit strategy. Fed exit strategy is dependent on an economic recovery, but recovery will be aborted by a Fed exit. Yet the future of the dollar requires the Fed to implement an exit at the earlier possible time. The Fed has a Hobson's choice between a robust recovery, low interest rate, low inflation, or a strong dollar, but not all. Unfortunately, Bernanke, by trying to balance on a high wire, may end up losing all and fall flat on his caution.

On the political front, Bernanke is trying to protect the Fed's regulatory power and independence as the White House and Congress debate plans to overhaul the financial regulatory regime. Critics of the Fed assert that making the Fed or any other unit of government a super regulator will lead to bank consolidation and monopoly that will increase systemic risk.

Democrats such as Senate Banking Committee chairman Christopher Dodd of Connecticut and House Financial Services Committee chairman Barney Frank of Massachusetts contend that the Fed's incestuous relationship with big banks and Wall Street firms was a systemic cause of the mortgage crisis, and that the Fed already has too much power to merit getting more.

Bernanke and his predecessor, Alan Greenspan, now concede that the Fed failed to anticipate the full danger posed by the explosion of subprime mortgage lending made possible by their loose monetary policy. As recently as the spring of 2007, Bernanke still insisted that the problems of the housing market were largely "contained" to subprime mortgages. Even when panic over mortgage-backed securities began spreading through the broader credit markets in late July 2007, the Bernanke Fed still refused to cut interest rates to ward off an impending systemic collapse.

Even as late as the end of 2007, five months after the credit crunch first began, the Fed was still unable to reach a consensus internally on a decisive policy response and decided to leave interest rates unchanged. Bernanke as captain of the monetary ship, was ordering steady as she goes directly into a perfect financial storm.

Only in the January 21, 2008, FMOC meeting did the Fed belatedly slashed the benchmark federal funds rate by 75 basis points to 3.5%, the biggest one-time reduction in decades. Nine days later, The Fed cut the rate again down to 3%. By then the panic was spreading full speed to all markets.

As the credit crisis paralyzed the financial markets, Bernanke led the Fed to devise unprecedented but controversial bailout measures without fully understanding or at least show concern for long-range implications. Underneath all the complex technicality of financial ballistics, Bernanke's gunpower was an old-fashion creation of massive amounts of money by expanding the Fed's balance sheet to $2 trillion from $900 billion a year ago.

The hard half of the game

But that was only half the game. The other half, the end game, is how to withdraw all the public money from the financial system without throwing the economy into a protracted depression.

The Fed's "exit strategy" as outlined by Bernanke is based on a groundless hope that financial recovery will bail the Fed out of its oversized balance sheet, reversing the logic that the Fed is supposed to bail out the economy out with an engineered sustainable financial recovery. The Fed has bailed out the debt-infested financial system by transferring its toxic debt to the Fed balance sheet and the Fed's exit strategy is to unload the same toxic debt back on the financial system as it recovers without causing its collapse again.

The game is for the Fed to give more money to the banks to buy back the toxic debt from the Fed's balance sheet and call it a recovery. Throughout this circular exercise, the economy is left to rot with rising unemployment and a damaged dollar.

The Treasury Department's $700 billion Troubled Asset Relief Program (TARP) bailout has stabilized a handful of banks deemed too big to fail, but it has not saved the critically impaired banking system as a whole. Small banks continue to fail, burdening the Federal Deposit Insurance Corporation with having to ask the Treasury for more money, for which the Treasury in turn has to ask the Fed to provide by buying more Treasury bills to add to its balance sheet. That critical observation is the essence of the Congressional Oversight Panel (COP) report in August. (See A lost decade ahead, Asia Times Online, September 14, 2009).

TARP was initially designed to buy troubled and illiquid mortgage-backed securities from banks. But by accepting the public recommendation of Nobel economics prizewinner Paul Krugman via the New York Times, the Treasury never actually used the appropriated funds to buy troubled assets, in part because it was simpler to invest money directly into the nation's banks and in part because banks were reluctant to sell their toxic loans at a loss.

"The nation's banks continue to hold on their books billions of dollars in assets about whose proper valuation there is a dispute and that are very difficult to sell," the COP report said. As a result, the COP report warned, many banks could find themselves short of capital if the economy suffered another market downturn and their losses on troubled loans soared. What the report did not say was that the prospect of further bank crisis itself will bring about another market meltdown.

While recommending further stress tests for the too-big-to-fail banks, the COP report warned that thousands of small and medium-size banks, which it defines as those with assets of $600 million to $100 billion, might find themselves short a total of $21 billion in capital if the conditions match its worst-case assumptions.

The report noted that other institutions had already estimated the amount of troubled assets on bank balance sheets that had yet to be written down. The Federal Reserve estimated in May that banks in the United States still had about $599 billion in assets to write down. Goldman Sachs and the International Monetary Fund (IMF) estimated the total at about $1 trillion. And RGE Economics, headed by doom guru Nouriel Roubini, has estimated the total at $1.27 trillion.

The COP report urged the Treasury to either expand its Public Private Investment Program (PPIP) to soak up troubled assets "or consider a different strategy", without identifying one.

Seizing on a report of existing home sales rising 7.2% in July, the biggest jump this decade, albeit from very low base, Bernanke declared what may become another set of famous last words: "The prospects for a return to growth in the near term appear good." He did not mention at what distressed prices the sales were make.

Meanwhile, Meredith Whitney, who commands more credibility in the market than Bernanke based on her accurate analyses of the precarious position of Citigroup as the credit crisis was building up, observed: "There will be over 300 bank closures." European Central Bank (ECB) president Jean-Claude Trichet cautioned against assuming that the world was back to normal.

Some critics think the August 2009 COP report makes the false assumption that when a bank is insolvent that it automatically ceases operations, which of course is not necessarily what happens. Receivership is the way that a bank's liabilities are restructured when that institution is insolvent. The restructured bank's debts are reduced but depositors can still access 100% of their deposits without interruption up to the $250,000 limit insured by the FDIC.

In most cases, the failed bank's management will be replaced, some liabilities to creditors are reduced, and one of the healthy competitors of the failed bank takes over the branches of the failed bank to continue operations. Much of the time, receivership means that bank shareholder equity is wiped out, but the branches remain open for business, making loans the very next business day.

It is not clear that the Fed buying toxic assets from small banks would be a good idea. In two papers: "The Put Problem with Toxic Assets" and "A Binomial Model of [Treasury Secretary Timothy] Geithner's Toxic Asset Plan", University of Louisiana Professor Linus Wilson shows that the government must overpay for toxic assets to get banks that have not entered receivership to part with these trash loans and securities.

Wilson's research shows that troubled banks that are not yet in receivership will be most reluctant to part with their toxic loans. That is because most of their stock price is derived from the volatility of the market value of toxic assets. FDIC receivership allows the FDIC to write down bank debts so that failed banks can emerge from restructuring healthier than they entered. But another of Wilson's papers: "Debt Overhang and Bank Bailouts", shows that toxic assets are the biggest problem when banks are poorly capitalized.

There are over 8,000 FDIC insured banks in the United States, serving communities of all sizes. Most of them are not large enough to pose systemic risk to the financial system. Wilson's research shows that Geithner's plan to sell toxic assets through the PPIP is most likely to be effective if it is used on banks that are in receivership, rather than to keep banks out of receivership. It would be a misguided subsidy, which would hurt the deposit insurance fund, if the Legacy Loans Program, part of the PPIP, is used on undercapitalized small banks to keep them out of receivership to preserve shareholder value.

[Sep 6, 2009] Friedman Economics Is Fed chairman Ben Bernanke a follower of John Maynard Keynes or Milton Friedman

September 1, 2009 | Reason Magazine

Ben Bernanke just had a fine month. For allegedly saving the world from a second Great Depression, President Barack Obama awarded the Federal Reserve chairman a second four-year term. "As an expert on the causes of the Great Depression, I'm sure Ben never imagined that he would be part of a team responsible for preventing another," the president said. "But because of his background, his temperament, his courage and his creativity—that's exactly what he has helped to achieve."

"Mission Accomplished," the banner might have read.

Missing from Obama's speech was any mention of Bernanke's economic ideology. The New York Times and Bloomberg News have called him a strict Keynesian—a liberal fan of fiscal stimulus—and that label has stuck.

In reality, Bernanke is following the monetarist depression-prevention model hatched by Nobel laureate and libertarian patron saint Milton Friedman. Bernanke has repeatedly invoked the late libertarian economist in support of lowering interest rates to zero, bailing out banks, and pumping untold trillions of dollars into the financial system. The implicit goal of these policies is to ignite artificial inflation.

The story begins in 1963, when Friedman and co-author Anna Schwartz published The Monetary History of the United States. Their chapter on the Great Depression was spun off into a standalone book, The Great Contraction: 1929-1933, an epic revisionist history that changed America's understanding of the causes of the Depression. Friedman and Schwartz contended that the Federal Reserve—not capitalism or Wall Street—was to blame for the dismal '30s. "The fact of the matter is that it was the decision to tighten credit policy in 1928 that produced the Great Contraction," the 93-year-old Schwartz said by phone from her office at the National Bureau of Economic Research in New York City. Interest rate hikes had been undertaken in 1928 to curb what the Fed saw as rampant speculation on Wall Street—a conflagration of leveraging, margin buying, and outright Ponzi scheming fueled by cheap credit that was supplied in the first instance by the Federal Reserve. (Goldman Sachs' pyramid schemes of the era, when they collapsed, would generate losses of $475 billion in today's dollars.)

Friedman and Schwartz, however, denied that speculation had ever posed a problem, or that there had even been a credit bubble in the 1920s. In their narrative, a paranoiac Federal Reserve had needlessly constricted the money supply and thereby crashed an otherwise prosperous economy.

After the Great Crash of 1929, the Federal Reserve drastically cut interest rates; but, on occasion, the Fed was forced to abruptly raise them again in complicated maneuvers to stem outflows of gold into Europe. Friedman and Schwartz blamed these sporadic interest rate hikes for smothering several incipient recoveries, opening a vortex of deflation, and turning a recession into the Great Depression.

Friedman and Schwartz's overarching thesis was that the Depression would have never happened if the Federal Reserve had inflated the American economy. As Schwartz told me, "What the Fed had to do was increase the money supply. By taking that action, it would've revived the economy. That's the lesson of the Great Depression." In The Great Contraction, she and Friedman argued that the Fed had an infinite capacity to inflate. "The monetary authorities," they wrote, "could have prevented the decline in the stock of money—indeed, could have produced almost any desired increase in the money stock."

Which brings us back to the question of Ben Bernanke's economic ideology. When it comes to the Great Depression, Bernanke is a disciple of Friedman and Schwartz. In 2002, at Friedman's 90th birthday party at the University of Chicago, Bernanke was effusive. "Among economic scholars," he began, "Friedman has no peers." He developed the "leading and most persuasive" explanation of the Depression, whose impact on economics and the popular mind "cannot be overstated."

At the conclusion of his encomium, Bernanke made a stunning and ominous apology on behalf of the Federal Reserve. "I would like to say to Milton and Anna...regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

Schwartz was also present at the birthday party. "I'm sure he was sincere when he said that," she recalled. And Bernanke stayed true to his word. In 2006, he replaced Alan Greenspan as chairman of the Federal Reserve. Greenspan had engineered an era of non-inflationary loose credit that won Friedman's endorsement: "There is no other period of comparable length in which the Federal Reserve System has performed so well," Friedman declared in The Wall Street Journal.

When the economy collapsed two years into Bernanke's watch because of a massive credit bubble, Bernanke slashed interest rates to zero and ordered the money-printing presses to full steam. He also embarked on a course of "qualitative easing," whereby a central bank convolutedly buys its own government's bonds with printed money so as to sink interest rates even further (not to be confused with quantitative easing, in which a central bank tries to stimulate the economy by maintaining interest rates at or near zero).

This approach was nothing new. Friedman had recommended qualitative easing, combined with ultra-loose credit and inflation, as a panacea for Japan's slump in the 1990s, which he described as an "eerie, if less dramatic, replay of the Great Contraction." As he did with the Depression-era Fed, Friedman emphasized that, "There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so." In 1998, a year after Friedman penned his advice in The Wall Street Journal, Japan introduced monetary stimulus: a cocktail of zero interest rates and qualitative easing. But deflation continued. Today, Japan's exports are down an unthinkable 36 percent from last year and prices are plummeting at an all-time record pace.

Stateside, in light of the Fed's multi-trillion dollar balance sheet, it has been all too easy to mistake Bernanke for a Keynesian supporter of public works projects, socialistic safety nets, and government-led consumption. And while it's true that the Obama administration is pursuing Keynesian fiscal stimulus, the Federal Reserve, as an independent, semi-private institution owned by America's banks and largely walled off from the executive and legislative branches, has developed its own agenda. That agenda is monetarist. Yet the media consistently gets this crucial fact wrong.

The New York Times, for instance, has identified Bernanke as "a student if not necessarily a devotee of the British economist John Maynard Keynes." But Bernanke actually spent most of his academic career elaborating on Friedman's interpretation of the Great Depression. Though his research sometimes strayed into non-monetary subjects, it was always "an embellishment of the Friedman-Schwartz story... and no way contradict[ed] the basic logic of their analysis," as Bernanke assured Friedman at his birthday party.

Bernanke's infamous moniker, "Helicopter Ben," came about when he quoted Friedman on the importance of conjoining fiscal and monetary policies. In a 2002 speech, "Deflation: Making Sure ‘It' Doesn't Happen Here," Bernanke described the ideal fiscal stimulus as a shower of tax cuts "equivalent to Milton Friedman's famous 'helicopter drop' of money." Friedman had originally used that phrase to counter Keynes' idea of the "liquidity trap," where zero-interest rates lead to bank hoarding and leave the Federal Reserve no maneuvering room. Friedman suggested that countries could escape the liquidity trap by handing out money to consumers, and he laid out his argument in a tale about a helicopter unloading cash on a town. To that effect, Bernanke's Federal Reserve has created special "vehicles" to disburse consumer credit.

In February of this year, Bloomberg News added to the confusion by reporting, "Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money." Of course, Bernanke has said precisely the opposite. He's flooding the financial system with money as Friedman would have him do.

On February 10, Bernanke further revealed his allegiance to Friedman in an overlooked Capitol Hill Q&A session with Rep. Ron Paul (R-Texas). Their exchange is worth dusting off and quoting at length.

"Chairman," Paul began, "you have written a lot about the Depression. There was a famous quote you made once to Milton Friedman, apologizing for the Federal Reserve bringing on the Depression. But you assured him it wouldn't happen again....But the key to this discussion has to be: was it too much credit in the ‘20s that created the conditions that demanded a recession/depression; or was it lack of credit in the Depression that caused the prolongation?...Here we're working frantically to keep prices up. What's wrong with allowing the market to dictate this...and prices to go down quickly so we can all go back to work again?"

In response, Bernanke repeated the lesson of The Great Contraction and asserted that he was acting on it: "Milton Friedman's view was that the cause of the Great Depression was the failure of the Federal Reserve to avoid excessively tight monetary policy in the early ‘30s. That was Friedman and Schwartz's famous book. With that lesson in mind," Bernanke continued, "the Federal Reserve has reacted very aggressively to cut interest rates in this current crisis. Moreover, we've tried to avoid the collapse of the banking system."

For her part, Schwartz is now conflicted about Bernanke's application of her and Friedman's theories. "You don't have to lower the interest rates to the extent that he has in order to increase the money supply," she informed me. "The essential action should be increasing the money supply. That's the lesson of the Great Depression."

She upholds the analogy between today's crisis and what she and Friedman prescribed in The Great Contraction. "There's nothing contradictory in The Great Contraction with reference to what the Fed should be doing currently.... And I don't believe there's any contradiction between what The Great Contraction was reporting and the current condition of the banking system in this country."

Schwartz sounded alarmed, though, at the zealousness with which Bernanke has put "monetary expansion" into practice. She berated the Fed for going too far and predicted that it will have to raise interest rates "in the near future" to arrest inflation. Asked if she sees hyperinflation on the horizon, she exclaimed, "Oh, yes!"

But Schwartz also seems to have undergone a late-life conversion to Keynesian theory. Asked to offer a solution to the crisis, she repeated the ultimate Keynesian maxim: the government should pick up slackening demand in the private sector.

"People are saving, not spending. In order to revive this economy..." she paused, hesitating on the thought, "the government will have to resume spending. By spending, the government will require that the current inventory will be depleted and have to be replenished. And that will bring on additional production and jobs."

Paul, a libertarian like Schwartz and Friedman, worries that the Federal Reserve is bringing the pair's monetarist model into reality. In a phone interview, he noted, "In essence, Bernanke is following Friedman's advice. He's a Friedmanite when it comes to massively inflating. Bernanke was able to justify [his policies] by using Friedman."

Asked if Friedman's enthusiasm for inflation flouts libertarianism, Paul answered: "Absolutely. The monetarists said that you could overcome a natural market correction of a collapsing system by inflation—print money faster! Which contradicts Friedman's whole thesis. He wanted a steady, managed increase in the supply of money of about 3 percent." Here Paul is alluding to Money Mischief, Friedman's 1991 book in which he called on the Federal Reserve to grow the money supply at 3 percent annually, presumably forever. "Yet, at the same time, Friedman said the Depression could've been prevented by massively inflating."

Paul has kind words for Friedman, whom he praises as a staunch defender of economic liberty, but his final summation is damning: "Friedman's very, very libertarian—except on monetary issues."

With Bernanke at the helm, the Federal Reserve has unleashed monetary expansion, the polite term for inflation—and Friedman's catchall remedy for economic depression. And if Bernanke, Obama, and scores of economists are correct, it may be working. But with 300,000 more people having foreclosed on their homes in July, widespread hunger in Detroit, dust bowl conditions in the California valleys, a stock market crash in China, and unemployment projected to crack double digits later this year, the much-vaunted recovery is no certainty. And if it isn't working, we might still be in for a depression, or worse.

On top of that, the total price of the Fed's monetarist program is a mystery beyond human reckoning. Paul, whose bill to audit the Fed has stalled despite co-sponsorship from more than half of the House, declared, "We don't know for sure how much the Fed has spent—I've heard it could be six trillion dollars. But we have no knowledge of what the Fed's doing. All these dealings are very secret." Earlier this year a Bloomberg estimate pegged the number at around $13 trillion—an amount roughly 1,300 times the age of the universe. (We may soon find out the exact number. On August 25, a Manhattan court ordered the Federal Reserve to open its books.)

Friedman and Schwartz, in other words, have helped to spawn the grandest expansion in the Federal Reserve's history, a program of limitless market interventions and tireless money printing whose unstated aim is all-out inflation. For two libertarian champions of free markets and limited government, this legacy has the ring of a world-historic irony.

Penn Bullock is a freelance writer for Village Voice Media. He lives in Florida.

Is Ben Bernanke the right man at the Fed - The Curious Capitalist - by Justin Fox

August 28, 2009 | TIME.com

I just taped an interview for CNN's Your $$$$$, which airs at 1 p.m. Saturday and 3 p.m. Sunday. If you watch you can also see Roland Martin and Richard Quest debating the merits of pocket squares (unless CNN chooses to cut that highly informative segment). My interview was about my book, so I won't belabor it. But there was a non-book-related question that I thought Christine Romans was going to ask me (because the producer had e-mailed me a list). She didn't have time to ask it, which was a good thing, because I'm still fumbling for an answer. The question:

Did Obama make the right call keeping Bernanke?

My initial reaction was, yeah, sure. Continuity would seem to be important at a troubled economic time like this, and Ben Bernanke is a smart, decent, politically astute but seemingly not politically motivated Federal Reserve chairman. (Brad DeLong makes the case for Bernanke in more detail.) He seems to have succeeded in staving off the second coming of the Great Depression. But none of that necessarily means Bernanke is the right Federal Reserve chairman for the next four years.

Since the Federal Reserve wrested its independence from the Treasury Department in 1951, it has had six chairmen. One of them, former business executive G. William Miller, stuck around for less than two years before moving on to the Treasury Department. So let's forget about him. That leaves William McChesney Martin Jr. (chairman from 1951 to 1970), Arthur Burns (1970-1978), Paul Volcker (1979-1987), Alan Greenspan (1987-2006), and Bernanke.

The two long-timers, Martin and Greenspan, had hugely successful tenures that were tarnished by what followed: The Great Inflation of the 1970s in Martin's case, and the Great Recession of 2008 and 2009 in Greenspan's. Of the two eight-year guys, Burns is generally seen as the worst modern Fed chairman (because he was unwilling to make the hard decisions necessary to beat down inflation), and Volcker probably the best (because he was willing).

Burns was (like Bernanke) a distinguished academic economist and all-around smart guy. But he was the wrong man for the job in the 1970s. Martin and Greenspan seemed to be the right men for the first part of their tenures, but stuck around for too long. Volcker got kicked out by the Reagan administration after eight years, so he didn't have that problem.

Which brings us to Bernanke, whose first four-year term as chairman will expire early next year. He has been pretty good—if far from perfect—as a crisis manager. But crisis management will not, one hopes, be the main job of the Fed over the next four years. Instead the challenge will managing a return to monetary normalcy (and prodding Congress and the Administration to return to fiscal normalcy) without choking off the economic recovery. Is Ben Bernanke the best person for that job? Who knows? He's surely not the worst. But this much I know: If he cares about his future reputation, he shouldn't seek reappointment in 2014.

 

"The Dangers Ahead for Bernanke"

At the Room for Debate, we were asked "What’s the biggest challenge Mr. Bernanke faces in his second term?" Here are the answers:

James K. Galbraith
Tyler Cowen
Brad DeLong
Mark Thoma
Added: Vincent R. Reinhart

My response:

One important challenge Mr. Bernanke will face is to keep the financial sector recovery on track by not raising interest rates too soon, while avoiding inflation by not raising interest rates too late. It will be a difficult balancing act, particularly with the complications that a large budget deficit adds. I’m quite confident Mr. Bernanke is up to the task.

But the most important challenge is how to restructure the financial sector to reduce its vulnerability to a collapse like the one we just experienced. That’s a task that will require both institutional and regulatory change.

Some of this the Fed can do on its own, but other parts require Congressional approval. As the financial sector has started to show signs of life, we are already hearing protests against regulation. The most prominent objection is that regulation will stifle new financial innovation (never mind that it was this innovation that helped to cause the predicament we are in).

My worry is that as time passes, we’ll forget how bad things were and the desire to impose necessary new regulation will fade. Here’s where I think Mr. Bernanke’s experience will be crucial. He was there at every step in the development of the Fed’s response to the crisis and he will not soon forget the problems he faced (nor repeat his mistakes), making it more likely that he’ll be a forceful and passionate advocate for new regulation before Congress.

For example, the Fed needs the authority to dismantle “too big to fail” financial firms, authority it lacked but very much needed during the crisis. Mr. Bernanke knows first hand how hard it was to manage the crisis without this authority. He’s also seen the consequences of an unregulated shadow banking sector, and he knows how bad incentives and poor market structures created problems that could have been avoided.

There are two other factors working in Mr. Bernanke’s favor. If the financial recovery goes as I expect, his reputation will grow, giving him the authority he needs to persuade Congress to make needed regulatory changes. And just as important, unlike some past Fed chairmen, he’s been able to articulate complex ideas in ways that legislators seem to understand.

Update: This is from Barry Ritholtz. It addresses the view held by many that Bernanke should not have been reappointed because he helped to create the housing bubble (which implicitly assumes the Fed is responsible for the bubble - I think the low interest rate policy after the dot.com crash was one source of the liquidity that fueled the housing boom, but not the only source, the global savings glut also played a role, and there were other failures, i.e. false promises of high returns with low risk, that caused the funds to flow into mortgage markets and related securities rather than into other investments):

I am less critical ... regarding the Bernanke renomination [and] his 3 year term as Governor. Let’s not forget that Greenspan was known as the Maestro back then. Congress, which is now pillorying Bernanke every appearance, was adoring of Easy Al’s visage and garbled Greenspeak each and every appearance. AG ran the Fed as an unchallenged stronghold, a fiefdom where he was the central-banker-in-chief as rock star. No one challenged him directly.

That seems to be lost in a lot of the revisionism now taking place. Roach writes “While America’s head central banker deserves credit for being creative and courageous in orchestrating an unusually aggressive monetary easing programme, it is important to remember that his pre-crisis actions played an equally critical role in setting the stage for the most wrenching recession since the 1930s.”

Not exactly. It was Greenspan’s Fed. Under his leadership, the FOMC and its governors were all second bananas to the Wolrd’s most famous banker. In Bailout Nation, I criticize this deference: “The Federal Open Market Committee (FOMC) must take responsibility for following [Greenspan] so obsequiously, especially in the latter years of his reign.”

However much I blame the FOMC, I have a hard time holding them to the same level of accountability as I do Greenspan. He was the master architect, the maestro conducting the monetary policy orchestra.

Second bananas cannot should the blame for what the head of the bunch does. Once they become banana-in-chief, the standards and level of accountability all go up accordingly.

Bruce Wilder says...

MT: "One important challenge Mr. Bernanke will face is to keep the financial sector recovery on track by not raising interest rates too soon, while avoiding inflation by not raising interest rates too late. "

Mr. Bernanke will not avoid inflation altogether. Why talk as if he will, or intends to?

What is the range of inflation rates Mr. Bernanke can tolerate, accept, aim for, which would be compatible with employment growth and median income growth? Or do we not care about those anymore?

Maybe, there's no feasible policy, which would do anything, but slow the decline of median wages. Does that affect the Fed's toleration of monetary inflation? In what way?

MT: "[Bernanke] was there at every step in the development of the Fed’s response to the crisis and he will not soon forget the problems he faced (nor repeat his mistakes), making it more likely that he’ll be a forceful and passionate advocate for new regulation before Congress."

He was also there during every step in the creation of the crisis, cheering it on. His analysis of the Great Depression can be read as a lengthy meditation on how great it would have been, had the plutocracy been preserved by timely bank bailouts, money expansion and lots of liquidity. I think you are wildly optimistic about an extremely conservative man.

Bruce Wilder says...

"However much I blame the FOMC, I have a hard time holding them to the same level of accountability as I do Greenspan."

I hardly know what to say. I'm tempted to joke about the Fuhrer principle, but fear invoking Godwin's law, by accident.

Greenspan may have been diva and prima donna, but it wasn't his song that got into trouble, but the whole friggin' stupid, tragic opera, in which he played a leading role.

The institutions of our government are not supposed to be purely ceremonial, occasions for dress-up to glorify the King. The FOMC, the Council of Economic Advisers, tne National Economic Council, the Federal Reserve Bank Presidents and the Board of Governors, the various committees and houses of Congress, etc. are not function-challenged extensions of the Royal Household, filled by blameless functionaries and factotums.

And, it is not merely insulting to talk as if they were, it is also wholly unrealistic. Alan Greenspan was not some charismatic figure of extraordinary individual power and charm, pursuing an idiosyncratic vision. He was part of a vast, long-lived political movement, with a history that extends back more than 40 years, and includes the well-orchestrated actions of an veritable army. Greenspan was a mere soldier in that army, although one with better than usual P.R. Bernanke was also a committed soldier in that same Conservative Movement.

The recent financial crisis, and the economic stagnation that preceded it, was the product of the Conservative Movement and its policy ideas and enactments, not the whim of one its more prominent representatives and agents.

Greenspan had great power and influence, because he was part of that Movement and because he cooperated with it, to achieve shared political objectives and worldview -- objectives Bernanke also shared to a large degree, and presumably still shares.

rufus says...

Mark Thoma: “One important challenge Mr. Bernanke will face is to keep the financial sector recovery on track by not raising interest rates too soon, while avoiding inflation by not raising interest rates too late.”

The particularly difficult issue for Bernanke and the Fed at this present juncture is that actual lending interest rates are still quite high as a result of the contraction in available credit. This significant contraction in the supply of available credit counteracts the Fed Fund Rate movements. For most companies (other than cash rich players like Microsoft), favorable lending rates are not as available as one might be led to believe. Succinctly, although FFR may be at a historic low, the Fed lacks the mechanism other than direct lending to equate actual rates with effective rates. Restated, low actual rates such as or dependent upon the FFR do not equate to low effective rates in real lending. Point being that inflation can occur through the contraction of available credit despite the historically low FFR.

Mark Thoma: “For example, the Fed needs the authority to dismantle “too big to fail” financial firms, authority it lacked but very much needed during the crisis.”

I would suggest this part B of a necessary two part power, possibly distributed or balanced via a necessary part A power that should be held and enforced by the SEC. This power would be the explicit ability of the SEC to prevent firms from attaining TBTF status or market position in the first place. I believe some of the profound logic that governs the balance of power via our constitution should be applied if not defined by a similar set of rights and rules (constitution) for the Financial Markets.

To differ with an interpretation posted above, the systemic risks of allowing self correcting mechanisms are far too great for the economy as a whole….see Lehman.

Barry Ritholtz: “However much I blame the FOMC, I have a hard time holding them to the same level of accountability as I do Greenspan. He was the master architect, the maestro conducting the monetary policy orchestra.”

I also find it difficult if not impossible to assess Bernanke’s or any other underling FOMC member’s position regarding the Fed’s de facto promotion of the real estate bubble through the fist part of this decade, just as Ritholtz suggests. Mainly because Greenspan’s ‘Rock Star’, ‘unchallenged stronghold’, ‘fiefdom’, ‘obsequious following’, create the situation where there was really only one position and it was by definition Greenspan’s. This also led to some initial vacuum of power upon Greenspan's departure and the ensuing financial crisis.

Bernanke should dutifully be prevented from reaching A.G.'s 'Rock Star' status. This and the crisis justify the need for more distributed power at the FED, where FOMC members have a true reasonable ability to debate, balance and check the powers of the Fed Chairman.

rufus says...

I personally would not underestimate nor understate the power of Alan Greenspan as Chairman of the Federal Reserve. I would recommend Laurence Meyer's book 'A Term at the Fed', for an inside perspective of the veritable unmitigated power wielded by Greenspan while in this position. Sufficient to say that as Chairman of the Federal Reserve, if Alan Greenspan held a vision for the role of the Fed and its monetary policy, than it immediately became the Fed’s vision.

And in part to address a post above, Paul Volcker was the basis from which such inherent power of the position came to be. The basis of this power was not simply his successful efforts in ending stagflation (with which he is most quixotically credited), but more importantly through his pioneering efforts in transforming our understanding of the potential effects of monetary policy. Primarily by changing the policy focus from the more lagging ineffective control of reserve ratios to a policy focus based upon effective management of the Federal Funds Rate.

rufus says...

While I’m sure this will be considered ‘over the top’ for many here, I would go so far as to state that it was not only the case that “if Alan Greenspan held a vision for the role of the Fed and its monetary policy, than it immediately became the Fed’s vision”, one could extrapolate the point further to suggest this vision then became the vision of the U.S. if not the world.

My main point here is that the position holds far too great an influence and power (particularly unchecked and unbalanced in the hands of a megalomaniac...okay that term maybe over the top) to be vested within one single person’s ideology. Bernanke might be characterized as cheer-leading the Greenspan Doctrine, but the fact is that his research and work at the Fed supported Greenspan’s vision. Bernanke’s work as an underling focused primarily upon the possibility of deflation taking hold as a result of unprecedented increases in efficiency occurring in a rapidly growing economy (not deflation as a result of economic downturn). Since this research supported and justified the Greenspan Doctrine of ‘easy money’ it therefore found favor. I firmly believe a fly on the wall at any of the twelve Federal Reserve Banks would not be unaware of the Fed’s overpowering and preoccupying focus upon efficiency gains since the early 90’s.

Thanks to Ben Bernanke, Ben Bernanke Doesn't Need to be Reappointed as Fed Chair by Tom Bozzo

Angry Bear

Back in 2005, I argued at Old Marginal Utility that "Greenspan exceptionalism" was not very well founded in that observers rarely engaged in a proper counterfactual analysis of how well Alan Greenspan performed relative to the next best monetary policy technocrat. That's a fairly stringent evaluation criterion, and even Brad DeLong's glass-half-full response revealed what could be considered major errors in Greenspan's judgment. 2009 hindsight of course shows that there was another major error in inflating the housing bubble, failing to recognize it, and allowing his Rand discipleship to overcome common sense in using Fed powers even to skim the froth.

Now some elite opinion favors Ben Bernanke's reappointment, but politicians are irritated over Fed stonewalling of bailout oversight and others (e.g. Dean Baker) point out that Ben Bernanke who put the Fed throttles to the firewall to save the world is also the Ben Bernanke who carried over Greenspan policy until it was too late among other things.

So what should the counterfactual-based evaluation of Bernanke say? What would the hypothetical panel of smart graduate students have done? It seems even harder to suggest that Bernanke was essential than Greenspan — in this case, because well-read economists should have had it from Ben Bernanke the academician that in a depression-level crisis you don't skimp on the monetary policy intervention. Meanwhile, Bernanke gets no points for prescient instincts as the save-the-world interventions have seemed to be firmly of the close-the-barn-doors-after-the-horses-have-bolted variety.

Meanwhile, significant elements like the opaque lending programs have the appearance if not reality of being in part the predator state (a la Jamie Galbraith) in action. There's a line of 'b-b-but Bernanke and Paulson saved the world' opinion along the lines of this bit of fail from the often incisive Joe Nocera:

So why the anger? Why the suggestions of “cover-up” and “lies”? On Thursday, as I watched Mr. Paulson being castigated, it dawned on me. Seven months later, with the palpable fear of a financial collapse largely subsided, it really all boils down to how you view what happened last year. Was it, as Mr. Towns believes, a bailout of a handful of unworthy but too-big-to-fail institutions? Or was it, in the eyes of Mr. Paulson, a rescue of a teetering financial system? My vote is for the latter.

To which the obvious response is, duh, who says it has to be one or the other? A reality-based critique of the bailouts allows them to be both effective at saving the world and unconscionable screw-jobs that kept an array of bad actors from paying for their greed and incompetence. (The latter clearly feeds a lot of the underlying sentiment of the tea partiers, even if it's ultimately the greedy and incompetent who are marshalling it.) However, considering Team Obama's political tone-deafness, it'll be a pleasant but major surprise if they let Bernanke go back to Princeton for some R&R.

(Cross-posted at Marginal Utility.)

The Deification of Gentle Ben

The NewsHour With Jim Lehrer can be thought of as the Potemkin village of American democracy. Every evening, it presents a prettified version of political debate--ever so civil and high-minded--that thoroughly blots out the substance of dissenting critics or the untamed opinions of mere citizens. PBS's sanitized version of news was deployed this summer to assist the charm offensive launched by the Federal Reserve and its embattled chairman, Ben Bernanke. The NewsHour staged a "town meeting" in Kansas City at which Bernanke fielded prescreened questions from preselected citizens. As town meetings go, this was strictly polite. As TV goes, it was deadly dull. The citizens were so deferential they seemed sedated. Jim Lehrer was so laconic, several times I thought he had nodded off.

The message, however, was reassuring. With folksy talk, Bernanke came across as a mild-mannered professor earnestly coping with financial complexities and sleepless nights. Gentle Ben struggles to save us from another Great Depression. People are angry at the Fed (and the elected government) for devoting so many trillions to bail out failing bankers while the populace copes with the disastrous results of the bankers' folly. Bernanke said he too hated the bailouts but had no choice. "I am as disgusted as you are," Gentle Ben allowed. To show further he is a good guy, Bernanke appointed a labor leader, Denis Hughes, as chairman of the board at the New York Federal Reserve Bank (the operating president, however, is a Goldman Sachs guy).

Bernanke's down-home touch had instant appeal among the elite media. The theme was swiftly amplified by the Washington Post, New York Times and Wall Street Journal. As it happens, David Wessel, the Journal's economics editor, has just published a new book--In Fed We Trust--that describes the Fed chairman's struggle against the darkness in blow-by-blow detail. New York Times columnist David Brooks summarized the tale as "effective muddling through." Yes, mistakes were made, Brooks conceded, "but they did avert disaster and committed only a few big blunders. In the real world, that counts as a job well done."

In the real world beyond Brooks's grasp, this "job well done" counts as cruel joke on the hapless victims. The Federal Reserve did not "avert disaster" for many millions of Americans. It helped to cause their disaster. The central bank, as I have written, was co-author of the destruction, along with the reckless financiers of Wall Street. Now we are told to feel good about its heroic efforts to clean up their mess.

The personalized narrative is the standard approach the establishment uses to disarm substantive critics and divert public opinion. Create a fictionalized drama about the wise leaders who manage "to do the right thing" in the face of horrendous adversity and wrongheaded political opposition. Remember Alan Greenspan celebrated as the Maestro. Or Time's "Committee to Save the World" cover after the 1998 Asian financial crisis--picturing Robert Rubin, Alan Greenspan and Larry Summers as our saviors. Now it is Gentle Ben to the rescue.

The tradition of dramatizing financial titans as public heroes probably started 100 years ago when J.P. Morgan was acclaimed for saving the national economy after the Panic of 1907. That comforting story is still told by adoring pundits who lionize the famous banker as a symbol of market ideology. Only they have the story backwards. The true history is that the federal government--Washington, not Wall Street--came to the rescue of banking in 1907. It was the first bailout for Wall Street. The rescue convinced bankers they needed the Federal Reserve to do more of the same and it has.

The media mobilization in behalf of Bernanke created the presumption that President Obama would be foolish not to reappoint him as chairman for four more years. A supposed "poll" of financial experts, reported by the Wall Street Journal, made it clear that Wall Street wants him. The implicit threat to Obama was that if he chose someone else, the financial markets would tank and the president would be blamed. To avoid the risk, Obama folded early--four months early--and interrupted his vacation to announce Bernanke's reappointment.

The deification is at best premature. Bernanke was right to act aggressively, flooding the streets with money to avoid the full catastrophe of deflation (the grave error the Fed committed after the stock market crash of 1929). He is wrongly criticized for his excess, but Bernanke also hasn't yet won this struggle. The big boys of Wall Street are revived or on government life support, but regional and smaller banks are still failing at an alarming rate. Prices, wages and production are still falling in various markets around the world. If financial markets break again in coming months, Bernanke may be nominated as goat, not hero.

The damaging error that Bernanke--and Treasury Secretary Timothy Geithner--have committed is to hand out all that money without demanding anything in return from the bankers and financiers. This is downright un-American, if you think about it. If the government provides subsidies to private enterprise, it has the right to expect different behavior from the recipients. Bankers were bailed out and given numerous guarantees, yet they still aren't lending.

Bernanke, after all, is a very conservative financial economist--vetted for chairman by the Bush White House and ex-hero Greenspan. Bernanke has long espoused a narrow, even right-wing doctrine that the Fed's role should be to focus primarily on fighting inflation, not improving conditions in the real economy.

When and if recovery does develop, he will be under intense pressure from financial interests to put on the brakes and head off any threat of inflation. The chorus of "hard money" advocates is already singing that siren song: raise interest rates before the economy gets too healthy. If Bernanke follows through on their demands, the president may come to regret his choice.

While the big media led cheers for Bernanke's reappointment, I was out in Decatur, Illinois, with a group of ordinary citizens who confronted the Fed for its failure to address the real pain and loss people are suffering. The Central Illinois Organizing Project brought together 500 people on a Saturday morning to deliver their own demands to the three Fed officials in attendance (Bernanke was invited but did not show). Among the propositions was a brilliant challenge to the central bank: the Fed should use its awesome influence (and maybe some of its money) to organize an investment consortium of banks to finance some real-life development projects in Peoria and Pekin. This could be a pilot project that demonstrates how this venerable institution can reform itself by serving the broader public interest.

The grassroots plans, properly grounded in analysis, were impressive-- common-sense ideas for improving lives and communities. If the Federal Reserve urged bankers to do the lending, the bankers would surely listen. Will Bernanke consider this or other such ideas? Don't hold your breath. That is what's fundamentally wrong with Bernanke and the Fed. They don't serve this public. They don't even see it.

See also

• Capitalism: A Love Story  VideoNation : In his latest film, Michael Moore goes after Wall Street fat cats and congressmen who love them, tracing the path of the economy through Bush, bubbles and bailouts.
• Sanders Unfiltered: America's Class Crisis  Brave New Films : Vermont Senator Bernie Sanders calls for a "new type of Wall Street, a Wall Street that is not interested in bubble economics," in this first in a series of videos.
• Squandered Opportunity  William Greider: After a brilliant beginning, President Obama appears to be abandoning his principles on healthcare by hedging on a public option. What should disappointed Democrats do?
• A Rancid Deal with Big Pharma  William Greider: Did Obama sell out? If House Democrats don't insist on the government's prerogative to bargain for lower prices, reform is impossible.

Ben Bernanke "World's Most Dangerous Man"

Sometimes you are pleasantly surprised by things you find in mainstream media. This is one of those times.

Please consider Dismantle Bernanke's 'Happy Conspiracy' ... now! by Paul Farrell of MarketWatch.

Any good behaviorist would tell you Bernanke's got some dangerous biases isolating him from reality (remember two years ago when he was denying the meltdown). His brash claims and radical, secretive policies present a grave danger to American capitalism and democracy.

In fact, Bernanke now appears to be America's (and the world's) most dangerous man, far more dangerous than Hank Paulson and the "Goldman Conspiracy" ever was. He's now acting like the supreme dictator of that larger conspiracy Jack Bogle called the "Happy Conspiracy" in "The Battle for the Soul of Capitalism: How the Financial System Undermined Social Ideals, Damaged Trust in the Markets, Robbed Investors of Trillions -- And What to Do About It."

This indictment of Bernanke as a dictator leading Wall Street's "Happy Conspiracy" became clear after reading "Dismantling the Temple," William Greider's brilliant essay in The Nation magazine. Greider is the author of "Secrets of the Temple: How the Federal Reserve Runs the Country." Greider's essay is an absolute must-read for anyone interested in the future of capitalism, the decline of democracy, the next mega-meltdown, and the real "Great Depression 2" ... from which Bernanke cannot save us.

The same clueless Congress that did nothing when Paulson and the Goldman Conspiracy nearly bankrupted America is now about to give Bernanke's out-of-control "Happy Conspiracy" even more power, and another bigger chance to destroy our capitalism.

Here are his "six reasons why granting the Fed even more power is a really bad idea:"

1. More power rewards failure, creating 'moral hazard'
2. Fed policies will continue destabilizing U.S. and global economies
3. The Fed's not objective, cannot investigate its own systemic flaws
4. The Fed cannot be trusted to protect taxpayers against Wall Street
5. More Fed power means more companies want 'too big to fail' status
6. The Fed will be a rich-man's club dominating everything from the top

Paul Farrell of expounds upon all all six of those points so inquiring minds will want to read his article in entirety.

Fed Uncertainty Principle In Action

Some of Farrell's thesis is rather similar to my own Fed Uncertainty Principle, especially:

Uncertainty Principle Corollary Number Two:

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Bernanke Bashing By Barry Ritholtz

August 26th, 2009 |

The Bernanke renomination has been widely approved — a WSJ survey showed 74% in favor, and amongst Economists, its even higher.

But a backlash against the Fed chief is underway, with some stinging criticisms coming from very sharp observers.

Ambrose Pierce notes in the Telegraph that BB may have saved the world, but he helped cause the crisis in the first place”

“Ben Bernanke has proved himself a heroic fire-fighter, saving world from a calamitous spiral into debt deflation by showering markets with liquidity.

A good thing too. He helped cause the raging fire of 2007-2009 in the first place. As a Princeton professor and then a junior Federal Reserve governor, Mr Bernanke was the intellectual architect of his predecessor Alan Greenspan’s policies that so distorted global finance and pushed debt to historic extremes.”

While there is a lot of truth to that statement, we cannot call Bernanke “the intellectual architect of Greenspan’s policies.” They were decades in the making, well established long before Bernanke joined the FOMC in 2002.

Stephen Roach is even more critical of the Fed Chief as FOMC governor in the FT. He notes that “It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure. Maybe the patient needs a new doctor.”

Heh. From Firefighting Pyro to MedMal Miracle cure, the metaphors are flying.

Where Roach shines is when he gets more granular. Specifically, Roach identifies “three critical mistakes” that Bernanke made prior to the September ‘08 collapse:

1) Like Greenspan, Bernanke was deeply wedded to the philosophical conviction that central banks should be agnostic when it comes to responding to asset bubbles.

2) Bernanke was the intellectual champion of the “global saving glut” defense that exonerated the US from its bubble-prone tendencies; Much to the annoyance of our Asian financiers, BB blamed their savers for our rate conundrum.

3) Philosophically, Bernanke is cut from the same libertarian cloth that led the Greenspan Fed into this mess. He is “Steeped in the Greenspan credo that markets know better than regulators.” Even worse, Bernanke was part of the “prevailing Fed mindset that abrogated its regulatory authority in the era of excess.”

Points 1 and 3 are critical to the Fed — and the global economy — going forward.

I am less critical than Roach regarding the Bernanke renomination as to his 3 year terms as Governor. Let’s not forget that Greenspan was know as the Maestro back then. Congress, which is now pillorying Bernanke every appearance, was adoring of Easy Al’s visage and garbled Greenspeak each and every appearance. AG ran the Fed as an unchallenged stronghold, a fiefdom where he was the central-banker-in-chief as rock star. No one challenged him directly.

That seems to be lost in a lot of the revisionism now taking place. Roach writes “While America’s head central banker deserves credit for being creative and courageous in orchestrating an unusually aggressive monetary easing programme, it is important to remember that his pre-crisis actions played an equally critical role in setting the stage for the most wrenching recession since the 1930s.”

Not exactly. It was Greenspan’s Fed. Under his leadership, the FOMC and its governors were all second bananas to the Wolrd’s most famous banker. In Bailout Nation, I criticize this deference: “The Federal Open Market Committee (FOMC) must take responsibility for following [Greenspan] so obsequiously, especially in the latter years of his reign.”

However much I blame the FOMC, I have a hard time holding them to the same level of accountability as I do Greenspan. He was the master architect, the maestro conducting the monetary policy orchestra.

Second bananas cannot should the blame for what the head of the bunch does. Once they become banana-in-chief, the standards and level of accoutanbility all go up accordingly.

Sources:
The troubling side of Ben Bernanke
Ambrose Evans-Pritchard.
Telegraph 8:29PM BST 25 Aug 2009
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6089383/The-troubling-side-of-Ben-Bernanke.html

The case against Bernanke
Stephen Roach
FT, August 25 2009
http://www.ft.com/cms/s/0/a2ba2378-9186-11de-879d-00144feabdc0.html

Economists React: Bernanke Reappointment Is ‘Good News’
Phil Izzo
Real Time Economics, AUGUST 25, 2009
http://blogs.wsj.com/economics/2009/08/25/economists-react-bernanke-reappointment-is-good-news/

PERMALINK | COMMENTS (2)

[Aug 25, 2009] The troubling side of Ben Bernanke By Ambrose Evans-Pritchard

Arsonist as a firefighter...

Telegraph

Ben Bernanke has proved himself a heroic fire-fighter, saving world from a calamitous spiral into debt deflation by showering markets with liquidity.

A good thing too. He helped cause the raging fire of 2007-2009 in the first place. As a Princeton professor and then a junior Federal Reserve governor, Mr Bernanke was the intellectual architect of his predecessor Alan Greenspan's policies that so distorted global finance and pushed debt to historic extremes.

Indeed, he was picked to join the Fed because he provided academic cover for Greenspan's view that asset bubbles do not matter. He blamed credit excesses on Asia's "saving glut", arguing that reserve accumulation by export nations suppressed global bond yields. That let the Fed off the hook for its own role in driving the US savings rate to zero – and consumption through the roof – by holding interest rates below "Wicksell's Natural Rate".

It is this twin-sided nature of Bernanke that raises nagging questions about his reappointment as chairman of the Fed. He has admitted errors: it was wrong to think the sub-prime crisis could be contained. But he has yet to acknowledge that his economic ideology is deeply flawed.

Bill White, former chief economist at the Bank for International Settlements, said the error of the central banking fraternity over past 20 years has been to cut real interest rates ever lower to keep the game going. This has lured the world into a debt trap. The effect is to keep drawing prosperity from the future – until the future arrives.

"It does the job for a while but moves in interest rates have to be ever more violent to achieve the same effect. My worry is that we may have reached the point where the policy ceases to work altogether.

"These imbalances come back to haunt you, and that is where the world now is. People have been induced to bring forward purchases by taking on debt and there has been a massive expansion in corporate investment," he said.

Economists call this critique "intertemporal misallocation". It is a favourite of the Austrian School. It plays almost no role in the "New Keynesian" thinking of Bernanke.

His reflex is to see any fall in demand as an outside shock to be corrected by extra stimulus. What he does not accept is that the adrenal glands of the economic system have been depleted by perpetual credit stimulus, giving the world a form of Addison's Disease.

Bernanke made his name studying the "credit channel" causes of depressions, chiefly drawing on the 1930s. He was quick to see the danger when the financial system had its heart attack on August 20, 2007, the day yields on three-month Treasuries collapsed on flight to safety.

He dusted off his manual for fighting slumps – his 2002 speech, Deflation: Making Sure It Doesn't Happen Here – and coolly embarked on monetary revolution. Rates were slashed to zero. The Fed stepped into to prop up the banks, commercial paper, mortgage securities, and finally Treasuries. Nothing like this had been tried before. He did so against fierce resistance from Fed hawks. Only a man so convinced of his mission could have pulled it off.

Given his calmness under fire, and his grasp of credit mechanics, it makes sense for President Barack Obama to give him a second term. We are not out of danger. The markets might have taken fright at a political appointee.

Yet Bernanke's certainty is troubling. The thrust of his academic writings is that the Depression was a "financial event" that could have been avoided if the Fed had flooded the economy with money (by bond purchases) to prevent a banking crash.

This theory – half-Friedmanite – has merits. The Fed made horrible mistakes. But it neglects other causes of the slump: industrial over-capacity created by the 1920s bubble, so like today.

It also led to the Greenspan doctrine that central banks can let stock market and housing booms run their course, stepping in to "clean up afterwards".

Bernanke spelled out the policy bluntly in his 2002 speech. "The US Government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost," he said.

The "no cost" flippancy grates now. Washington says the damage will lift the US federal debt by $9 trillion (£5.5 trillion) over the next decade, pushing the total towards 100pc of GDP. In any case, the Fed cannot use this machinery so easily after all. Foreigners own 40pc of US Treasury debt and have a partial veto on the policy. Overt attempts to "monetise" US debt will cause the policy to short-circuit. Investors will dump US bonds.

Bernanke's theoretical model is clearly wrong – since he was blind-sided two years ago – and must lead him into fresh error. The risk is that he will mismanage the Fed's "exit strategy" by tightening policy too soon on the false assumption that recovery is secure. He knows this was the Fed blunder of 1936-1937, but also seems to think he has basically licked our Great Recession of 2008-2009. Has he really?

As Mark Twain put it: "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."

Selected comments

We are living in the biggest financial bubble in history.

You might be interested in watching Paul Grignon's "Money as Debt II Promises Unleashed" This is available in eight parts on youtube (or to buy on DVD) and is a sequel to his animation exposing the fundamental truth and fraud about money and debt.

Australian economist Steve Keen is one of the very few who have called this economic crisis correctly. Keen is distinguished by his economic forecasts are based on levels of debt and changes in levels of debt as opposed to money supply, output capacity and other things that led most economists astray.
You can hear what he had to say at
http://www.youtube.com/watch?v=zbt3gnqpO-c

IMHO both are well worth watching.

ambrose evans-pritchard
on August 26, 2009
at 12:24 PM
 

Michael Kamperman,

Yes the Fed could do that if is aggressive enough, and willing to let the dollar go.

I suspect that they will in fact have to do this next year when we get a real deflation scare. By then foreigners won't care. People will be egging on the Fed to do it.

I agree that the Fed is tilting to the inflation hawks right now -- both within the FOMC, and externally. I think they have been spooked by Chinese warnings.

This will all change. China is in more trouble than people realize -- like Japan circa 1989.

ambrose evans-pritchard
 

WalterW

You are right to sense ambivolence. There are so many variables in the global economic and political mix, and cross variables by time sequence, that you cannot take a frozen position.

What is good policy at one moment, can be bad policy months later.

My view essentialy is that fiscal excess is going to bankrupt the OECD club of countries. However, I also think emergency stimulus was necessary in the meltdown over the winter. That was an extremely dangerous moment.

The task now is to right the ship very slowly by lowering debt levesl as a share of GDP over a 25 year period. This has to be paced. Too fast and we tip back into crisis (which makes the fiscal picture even worse), too slow and never get out of this.

The error after LTCM in 1998, and then after the dotcom bust, was to retain stimulus too long. It was a grave error to keep Fed rates at 2pc until June 2004 when the economy was alreay growing fast.

The concern now -- one raised by Bill White -- is that this intertemporal train-wreck has now gone so far that we can no longer keep the game going with lower rates and more stimulus. If so, we are at a watershed moment.

What do we do? I'm darned if I know.

The political forces will dictate the outcome. Society will change the rules. Bond holders may be exproriated. Exchange controls may be imposed. Debts may be monetized. Who knows. This is idle conjecture.

Bill White had a great quote when we spoke. He said there are two main risks:

1) central bank policy "works": we get out of this recession and start another asset boom, perpetuating the cycle of ever greater addiction to artificial stimulus.

2) They fail. The recovery aborts. We realize that we have already hit the end of the road with this strategy. Then we face a globalized Japan for fifteen years or so, or worse.

Which of these two will occur? I am still mulling it over.

ambrose evans-pritchard
on August 26, 2009
at 11:54 AM
 

Ben and Greenspan's years of excessively loose policy has created this mess worldwide. He is trying to change the law's of physics (action/reaction). Ultimately this will lead to a total collapse of the $ and the end of an empire. Ditto for the UK.

Jim
on August 26, 2009
at 11:34 AM
 reply protgodzila

I believe that most OECD states will ultimately monetize their deficits, starting with Japan.

The bond vigilantes will not like it, so this will create a different kind of crisis.

ambrose evans-pritchard
on August 26, 2009
at 11:27 AM
 reply stuart.

I'm not sure which quotes you mean. There are only three sets.

The quote from ex BIS chief economist Bill White was from a long conversation we had yesterday morning so there is no "link", though his views are no secret.

The quote from Bernanke from his own speech in November 2002 and is by now so widely known that it is hardly necessary to dwell on the point.

Ditto Mark Twain.

By the way, these articles are written for the print newspaper. A version is put on line but they are not structured for hitting instant links.

Blogs are different. They are written for the net

ambrose evans-pritchard
on August 26, 2009
at 11:27 AM
 

A policy error is highly likely in 2010, not only in the US but also in Germany. Most likely the German government will raise tax rates too soon leading to a plunge in consumption (which had risen recently due to wage increases and falling import prices). Although the German government does not want to see it unemployment is sure to rise once a stand-still pact between Angela Merkel and the business lobby ends after the Bundestag election in September.

Ismail
on August 26, 2009
at 10:39 AM
 Helicopter Ben simply doffs his cap and does what he is told.

Lets have that audit of the Fed.

If They Dare.

Watch and marvel as it somehow is deemed impossible.

Little Miss Rage
on August 26, 2009
at 10:16 AM
 

Surely we know that the debt being incurred now and in the next few years will be monetised? Given the huge public sector borrowing requirement and the true state of banks' balance sheets, the medium-term outlook for inflation is for a consequent rise.

protogodzilla
on August 26, 2009
at 09:27 AM
 

Is the underlying suggestion here that interest rates cannot/should not be set by committees, however expert?
Hugh Bartholomew
on August 26, 2009
at 08:43 AM

 Good article as usual from Ambrose,I believe this credit cycle started about forty years ago,people wanted things now not tomorrow,and the credit agencies were there to help them do it,nobody wanted to save,from that time till now everything we buy is on hire purchase,credit cards ect,live now,pay in a months time,credit is everwhere,its good to borrow,and look at us now? the whole world is mired in debt,Reagan done his best to de-regulate,and so did the rest of them after him,Greenspan was a major conspiritor,he should have raised rates,but decided,no doubt under Political pressure,to keep them low,look at our own problems here,the man at the financial helm for the past elevern years saw none of this coming,and now he is equally useless as Prime Minister,it was his job to keep an eye on this,look at the house price explosion,all done on credit,these so called "leaders" have made a right mess of it,and we are just at the start of what is going to be a very painfull time,A very clever man called Kyle Bass tried to warn Wall St of the folly of subprime,he was laughed at,he went on to make a fortune for himself betting against it,greed on Wall St was out of hand and still is,and now unprecidented sums of money have been printed,we are flooded with bits of paper no longer backed by gold so what is it backed with? thin air, head for the hills,unless you live in Holland that is.

Lord Barnett
on August 26, 2009
at 08:39 AM
 Can someone explain to me what is the essential difference, other than size and power, between the actions of the Federal Reserve and the Maddof scam?
Scott
on August 26, 2009
at 07:46 AM
 I have been wondering just how much Bernanke let the bubble inflate just in order to prove his own ideas about FED action. This is a bit cynical, but maybe the world's economy is being subject to Bernanke's Great Economic Experiment? If he did his job properly, then we would like in his "Goldilocks" world. But for a man like Bernanke this would be far too tame, he could not inflate his ego by being the world's most boring central banker. Self appointed "Saviour of the World" sounds much better, especially if you can cause the problem in the first place.
Bob Travels
on August 26, 2009
at 07:31 AM
 Good article, but I am old enough and have read enough opinions, that now I want to know the "provenance" for the critical statements about a person or event; I want to click on the "link" that includes your quotes. Your view from outside the USA is refreshing, but I still want to click on the link that provides "your provenance."

Stuart A. Riddle
on August 26, 2009
at 07:31 AM

Amidst the justified gloom and doom from ARP and Liam Halligan come the only stories that seem to really matter. This is one of them, while Mr. H's lead story today is another.

Could it be that finally we are on the cusp of a revolution where people really start to understand the inverted pyramid and inherent instability at the heart of the scam of central banks and fractional reserve lending?

Money created out of nothing backed by Government IOUs which make debtor pawns of us all, while banks and the hidden money oligarchy grow richer at all our expense? Couldn't government issue debt free money to its people directly rather than involving the banks?

Much of this talk is condemned as conspiracy theory. It is not - banks have simply had it their way for far too long relying on the complicit silence of big Government and media outlets - all bailed out by Joe Dope the general public, who are lied to by big government in league with banking excess.

Of course debt matters, banks profit from it and politicians stay in office having made promises they/we can't afford, which are then passed to future generations without a vote.

Monetised debt doesn't matter only if the monetised value of that money becomes worthless. This is the second wave of inflation taxation that hits the public's pocket after the more public first wave of general direct taxation.

Gold is still sky high. Why one wonders?

Why is no one talking? Why was Caroll Quigley's book, Tragedy and Hope, describing the banking scam of the financial elites suppressed in the US?

Why is the Federal Reserve seen as a branch of US Government when it isn't Federal and has no Reserves.

Are central banks really on our, the people's side? Who owns the gold in Fort Knox confiscated from the American people? If it is not the US Government then who owns it?

Liam Halligan and ARP lead the way. There is a story to be told to the general public and once those details are known there will be hell to pay.

Brown and co are just pawns in all this led by their silly little egos trying to do "good", when the greatest good is served by charity as just that (beginning at home) with people allowed to keep more of their own money so that big state debt slavery whithers.

Capitalism and free markets are good. Private property is good along with individual freedom. But we are not free and don't have free markets and it's the money oligarchy getting away with murder again at all our expense.

Something is going to give, but people have to start reading up on it. Goldman-Sachs and co had better start worrying - because it's time to get the pitch forks out.

They've even solved that though haven't they, by making weapon systems, out of printed money, so expensive it will always give big government the edge over the masses who might want to take the b*st**ds on.

Democracy only thrives when weaponry is cheap and available to people and Government alike. Then government know they can only push things so far.

We're all being f***ed by big Government and big money and there's no one out there talking about it, or trying to right it, and therefore no one to vote for.

It calls into question the whole international banking enterprise which has lost sight of lending for projects that add true value in the real world.

This is not going to end well.

John Parsons
on August 26, 2009
at 07:26 AM

As soon as they claim to have saved the world, we know the next (and more calamitous)stage is about to hit. Within 3 weeks.

Mart
on August 26, 2009
at 07:26 AM
 Great article on how the US is keeping all the balls in the air for now:

http://www.chrismartenson.com/blog/shell-game-how-federal-reserve-monetizing-debt/25806

Level-headed and based on Fed data.

The truth for the UK and for the US, is that we need to ease away from this path, cut consumption drastically and get back to making high value exports that cannot be copied at a lower price by the Chinese.

AEP and Karl Marx (who wrote specifically about structural imbalances) would agree on this point I'm sure!

Jonathan W
on August 26, 2009
at 07:26 AM

Man I'm glad to see by the prior posts that other people know a scam when they see it.

When this breaks down, do not make the mistake of attributing it to stupidity. Is the Con Artist stupid or does he only act that way when his victims lay hands on him with malintent?

I don't want to see it happen but I think Bernanke should start seriously considering how to ensure his personal safety and security. History shows that when people figure out they were duped that it does not go well for the snake oil salesman.

Think About It
on August 26, 2009
at 07:11 AM
 US consumption did not go through the roof.
This chart shows consumption as as percent of US gdp with and without health care...

http://home.earthlink.net/~root.man/pix/gdp.jpg

consumption gdp
http://www.ft.com/cms/bfba2c48-5588-11dc-b971-0000779fd2ac.html

If rising health care spending is a consumption boom then you are correct.

rm
on August 26, 2009
at 06:50 AM

Well done AEP on a great article. I read up recently on Bill Whites comments regarding the recent bull markets and credit growth. He was absolutely right on his analysis and concerns. We are enjoying the present by simply indebting our future: nothing clever here in my view.

You talk about the additional $9trl of US debt over the next ten years. Remember that this is based on unrealistic assumptions of US growth (next 4 years at over 4%), unreal tax receipts, Social Secuity and Medicaid projections, unrealistic unemployment etc. Once these projections fail as they almost certainly will, then the true disaster of Benanke and Greenspan will become known. This is probably not until 2011. Enjoy the ride until then!

D Rumsfeld
on August 26, 2009
at 06:36 AM

Ambrose, I keep getting more bewildered by your articles on the crisis, in the sense that I less and less understand what exactly your own - consistent, I would hope - view is of how policymakers should respond.

I recall that last year while pinching your nose against the stench of it, you supported Bernanke's approach of 'whatever stimulus it takes', since not doing so would sink the global economy into an (even more) utterly disastrous deflation spiral. And currently your greatest worry seems to be that Bernanke will decommission his stimulus too +early+. However, you also -if I read you correctly- seem to agree with Bill White's view above that wealth can only be drawn from the future until that future actually arrives - which, if it hasn't already done so, is about to happen real soon. In which case on the day of reckoning it will turn out that all that the stimulus will have achieved is having made matters worse. How do you reconcile these two positions? Or put another way, what in your view IS the endgame that could defuse the crisis and keep the world from sinking? Perhaps 40 years (conservatively estimated: twice Jpaan's slump) of no or slightly-below-zero growth, just to pay back all the wealth pulled forward from the future that is being channeled into the stimulus today? No matter how you slice it, somehow all that pulled forward wealth will have to be evened out by setbacks in the future, as its wealth will simply have been consumed today. (Assuming you would not maintain that from now on growth can and will somehow be ++permanently++ levied above and beyond its historical averages.)

WalterW
on August 26, 2009
at 06:36 AM

The tightening of money in 36-37 was not the choice of the Fed, but of Morgenthau, responding to political pressure to start trying to balance the budget. Fed Chairman Marriner Eccles argued, rightly, against the move, coming simultaneously with the introduction of Social Security that removed billions of dollars from the liquid economy. Eccles was right, Morgenthau was wrong . . . and after a second recession stalled recovery, Eccles was allowed to loosen finances again.

Quincunx
on August 26, 2009
at 06:30 AM

 Ambrose,

You state "overt attempts to "monetise" US debt will cause the policy to short-circuit. Investors will dump US bonds."

Consider that if the Fed were to get really aggressive and purchase more net bonds than the federal deficit, then the Fed while monetizing the debt could still overwhelm both foriegn and short sellers. Right now it appears the Fed is leaning more towards appeasing the re-inflation crowd rather than getting really serious about fighting the debt-induced deflationary depression the world has entered.

Michael A. Kamperman
on August 26, 2009
at 06:21 AM
 

"It also led to the Greenspan doctrine that central banks can let stock market and housing booms run their course, stepping in to "clean up afterwards".

To be honest, this was a very common view. Most investors believed that, if a financial crisis occurred, the Fed and Fed Govt would intervene, and be effective in containing the damage, i.e., allowing business as usual to continue. This implicit guarantee goes back at least to the 80's, and was bipartisan.
 

Don the libertarian Democrat
on August 26, 2009
at 06:21 AM
 

There are overwhelming similarities between the inability of those motivated to construct massively overcentralized data-based social control systems (vide Ross Anderson's ongoing criticism of that phenomenon) to run those products of their grotesquely over-inflated political egos and the inability of those motivated to construct massively overcentralized finance-based market control systems (that we used to call - vide Mussolini - fascism, but now know as globalization) to run the products of their grotesquely over-inflated greed that all but a few of the most marginalized appear to notice (and they, mindful of the legal stupidity of having libel laws so expensive as to be affordable only by the psychopaths and criminals running those scams, therefore usually present that view as art or poetry or some other such non-contentious flower arrangement instead of any pragmatically useful socio-political insight). Until the millions in the middle have the guts to call a spade a spade, grab one (having thus empowered themselves to recognize one when they see it) and go out and collectively hit the first aforementioned control freak they encounter over the head with it - more or less in actual fact: the raising of lumps on the cranium and so on - then all the huffing and puffing in all the newpapers and electronic journals in the world, including even the Huffington Post, will not prevent a single step towards the Easter Island of this culture, and possibly (in fact probably) this species. So what stops the spade grabbing? Simple. 99.872% (I won't go into the tedious and exacting mathematics behind that extremely accurate figure) of those decrying the system when it fails are really simply envious of its controllers when it is "successful". They don't want to change it in any regard. Like Margaret Thatcher on a train near Gratham, they simply want to depose the current incumbents and ensconse themselves. All any potential movers and shakers amongst them have to do to manage the transition for themselves is find a political party to channel those desires of so many into their own service and find a competent patsy anxious to play train drivers to mind the locomotive. Enter Bernanke, made for the job.

Reginal Hightower
on August 26, 2009
at 06:21 AM

Bernanke was always going to be reappointed. Ambrose your analysis is absolutely right.
We are far from out of the woods perhaps for a temporary period it may look ok. However until the excess capacity and debt is cleared and we return to sound money economies will struggle. I suspect the clearing process is going to be very painful.

Colin
on August 25, 2009
at 11:39 PM

Excellent news. Bernanke ain't getting off this runaway train so easily. At this relative point in his career Greenspan was also considered a Maestro - monetary magician who could do no wrong.

When history delivers its final verdict, Bernanke's reputation will be recycled through a media shredder until nothing is left of it. America today is run by frauds, from very top down the line, with Helicopter Ben fitting the pattern to perfection. The fact that he is not quitting while he is ahead should tell you that America's banker supremo doesn't understand the all-demolishing nature of this crisis.

Congrats, Ben, enjoy your champaigne now, before you become The Most Hated Man in America.
 

alec
on August 25, 2009
at 11:11 PM
 

Bernanke is an mis-educated fool, a dupe and a shill for the Money Powers represented by JP Morgan/Chase, Goldman-Sachs, etc.

It is obvious to 4 year olds that you cannot put out a fire by adding fuel to it.  Glib rhetoric and false history are NEVER the proper answer to ANY question.  Read Rothbard on the Great Depression. www.mises.org

The Anti-Greenspan

Dani Rodrik wants the Anti-Greenspan - someone who truly distrusts financial markets and the ideology that surrounds them - to be the next Fed Chair:

Let finance skeptics take over, by Dani Rodrik, Commentary, Project Syndicate: ...Federal Reserve Chairman Ben Bernanke’s term ends in January, and President Barack Obama must decide before then: either re-appoint Bernanke or go with someone else...

 [I]n recent decades central banks have become even more significant as a consequence of the development of financial markets. Even when not formally designated as such, central banks have become the guardians of financial-market sanity. The dangers of failing at this task have been made painfully clear in the sub-prime mortgage debacle. ...

This is a job at which former Fed Chairman Alan Greenspan proved to be a spectacular failure. ... As a member of the Fed’s Board of Governors under Greenspan..., Bernanke can also be faulted...

What hampered Greenspan and Bernanke as financial regulators was that they were excessively in awe of Wall Street... They operated under the assumption that what is good for Wall Street is good for Main Street. This will no doubt change as a result of the crisis, even if Bernanke remains at the helm. But what the world needs is a Fed chairman who is instinctively skeptical of financial markets and their social value.

Here are some of the lies that the finance industry tells itself and others, and which any new Fed chairman will need to resist.

Prices set by financial markets are the right ones for allocating capital and other resources to their most productive uses. That is what textbooks and financiers tell you, but ... there are far too many “market failures” in finance for these prices to be a good guide for resource allocation. ... Implicit or explicit bailout guarantees, moreover, induce too much risk-taking. ... So the prices that financial markets generate are as likely to send the wrong signals as they are to send the right ones.

Financial markets discipline governments. This is one of the most commonly stated benefits of financial markets, yet the claim is patently false. ... If in doubt, ask scores of emerging-market governments that had no difficulty borrowing in international markets, typically in the run-up to an eventual payments crisis.

In many of these cases ... financial markets enabled irresponsible governments to embark on unsustainable borrowing sprees. When “market discipline” comes, it is usually too late, too severe, and applied indiscriminately.

The spread of financial markets is an unmitigated good. Well, no. Financial globalisation was supposed to have enabled poor, undercapitalised countries to gain access to the savings of rich countries. It was supposed to have promoted risk-sharing globally. In fact, neither expectation was fulfilled. ...

Financial innovation is a great engine of productivity growth and economic well-being. Again, no. Imagine that we had asked five years ago for examples of really useful kinds of financial innovation. We would have heard about a long list of mortgage-related instruments... The truth lies closer to Paul Volcker’s view that for most people the automated teller machine (ATM) has brought bigger benefits than any financially-engineered bond.

The world economy has been run for too long by finance enthusiasts. It is time that finance skeptics began to take over.

My view is that Bernanke should be reappointed.

Anton Yarotsky says...
But Bernanke isn't a finance skepic.

Posted by: Anton Yarotsky | Link to comment | Aug 13, 2009 at 01:38 AM

wjd123 says...
"Failing to diagnose a disease is different from not knowing what to do once you figure it out. The disease was a difficult one to diagnose or it wouldn't have missed so widely, and it wasn't clear at first precisely what was wrong, but in every case, once they understood the problem, they took the proper course of action.

"Here's the question I ask myself. If I were to suddenly come down with the same disease, would I want the current group with it's current leadership in charge of bringing me back to health, or would I want a different group led by someone new who thinks they know what to do, but has never actually been through it? I'd want this group, the one with experience. They're likely to have learned enough to spot the disease the next time and head it off all together, one hopes so. But if not and I get the disease, they are also likely to know just what to do - while avoiding the missteps they took the first time - to get me back on my feet as fast as possible (and please don't let politicians second guess them)" --Mark Thoma

I can't agree with Mark here. Bernenke either didn't see the disease progressing or he saw it and wasn't willing to act. I don't see how he could have missed the housing bubble forming. But he did miss the fact that financial markets couldn't handle the risk they were taking on. How do investment banks leverage 30 to 1 and claim that risk is diverse enough to handle it. At what point does the Fed step in?

As for spotting the disease next time, notice that Wall Street is once more ratcheting up risk and Bernenke is silent. And why expect that it will be the same disease next time? The danger lies in the fact that accommodaters are accommodaters. Bernanke, Geithner, and Summers are accommodaters, and they should all go. You need someone at the Fed who is willing to take the punch bowl away before a potential disease becomes life threatening to the economy.

Wall Street isn't performing an important task for our society. It's speculating or investing with an eye to its cut. It's not spreading capital around in the economy efficiently. In fact it's harming our society. it wasn't long ago that a retired health insurance executive was complaining that shareholder's expectations of quarterly return set by Wall Street were terrorizing health insurance companies into denying claims.

Wall Street doesn't help Main Street; it helps itself. We need more than a financial skeptic as head of the Fed. We need a financial ogre who is willing to terrorize Wall Street.

Posted by: bob mcmanus | Link to comment | Aug 13, 2009 at 03:28 AM

bob mcmanus says...
Oh, and I think there will be other seats for Obama to fill. So Elisabeth Warren, L Randall Wray, and Jan Toborowski.
Palley or Perelman would be fine.

Posted by: bob mcmanus | Link to comment | Aug 13, 2009 at 03:32 AM

vimothy says...
I thought that before the crisis hit, risk premia in all asset classes were being reduced, which was why despite widespread consensus that something was going to give, it was very hard to call precisely where that would be. Did Rodrik call it exactly right?

Posted by: vimothy | Link to comment | Aug 13, 2009 at 03:55 AM

bakho says...
I am not sure that a person with otherwise qualifications for the Fed would also be sufficiently skeptical to suit Rodrik. I do think that we would be better off with someone more favorable to regulations than Bernanke.

Posted by: bakho | Link to comment | Aug 13, 2009 at 04:22 AM

bakho says...
Obama is a "don't rock the boat kind of guy. Bernanke could be the compromise choice. Clinton kept Greenspan in part because he did not want a confirmation fight with the Republicans. That did not work out so well. Keeping FBI Director Freeh worked out even worse.

What would happen if the Senate blocked a Fed Chair the same way they are blocking the Secretary of the Army in a time of war?

http://www.wwnytv.com/news/local/52627962.html

Posted by: bakho | Link to comment | Aug 13, 2009 at 04:28 AM

ken melvin says...
The financial problem was but a wee bit of the overall that hasn't yet been meaningfully addressed. If Bernanke's the man to run the Fed the question remains as to who is best to for Secretary of Treasury, and, even who best to be President.

Posted by: ken melvin | Link to comment | Aug 13, 2009 at 05:13 AM

OrganicGeorge says...
wjd123

Amen

Posted by: OrganicGeorge | Link to comment | Aug 13, 2009 at 05:21 AM

Robbie says...

"Even when not formally designated as such, central banks have become the guardians of financial-market sanity. The dangers of failing at this task have been made painfully clear in the sub-prime mortgage debacle. ..."

Bernanke is nothing more than a glorified janitor. As a custodian of monetary policies he has been great, but he seems to lack any sense of anguish when dealing with regulation of credit and systemic risks.

It does not take a genius to open up the discount window. So don't confuse the reaction to crises as a the only qualification for a great leader of money.

Dani Rodrik is correct when asking for the anti-Greenspan; We need a FED chief that is going to make finance sweat from the heat of a stern and omnipotent regulator.

Posted by: Robbie | Link to comment | Aug 13, 2009 at 05:32 AM

chriss1519 says...

There's a difference between what should happen and what will happen.

Bernanke should not be reappointed, if for no other reason than he was a Bush appointed. Everything about the Bush administration should be thoroughly, unequivocally repudiated.

Bernanke will be reappointed, because no President (especially extra cautious Obama) is going to risk a fight to replace known commodity Bernanke with an unknown who could be a "socialist".

And in reality, Wall Street calls the shots here. Bush was all set to appoint another buddy, Andy Card, to the Fed helm. Wall Street put the kabosh on that post haste.

Posted by: chriss1519 | Link to comment | Aug 13, 2009 at 06:08 AM

Walt says...

At the core of financial markets and its problems is limited liability. In the stock market, this means that the most a stockholder is liable for is the value of the stock. This creates a "heads I win, tails you lose" situation when losses exceed the value of the stock.

Unless markets are regulated, one can have a market described by Joseph Stiglitz.

That is, with limited liability (in this case, the worst that happens to a firm's employees is that they lose their job), financial markets have the incentive to make bets where the potential social loss exceeds the social benefit because those making the bet only suffer a limited loss.

I am for "free markets" but not markets where people are free to impose losses on others. That is a recipe for disaster. I am not against limited liability -- but by its very nature it requires regulation.

Posted by: Walt | Link to comment | Aug 13, 2009 at 06:14 AM

bakho says...

Term limits?

I think it is a BAD idea to have a single person in that powerful a position for too long. Maybe 4 years is not enough?

But how much is too much? Is 12 years too much? 16 years?

Is an organization that is force to adapt to new leadership every 4 years better at making the transition because they have more experience doing it?

Greenspan was Fed chair for far too long and his anti-regulatory bias accumulated a great imbalance over time. Greenspan also accumulated enough political power to influence fiscal as well as monetary policy, despite the mandate for the Fed to stay out of fiscal policy. Greenspan had an anti-spending bias against domestic spending and social programs that was one more influence on the underinvestment by the Federal government in important public goods and services.

J Edgar Hoover is another example of someone who accumulates too much political power over time.

There is danger in reappointment de facto. It turns the tables and changes the power relationship. The president must justify replacing a sitting Fed chair, rather than the Fed Chair making the case to stay on. The issue of reappointment is a pressure point that can be used to compromise the independence of the Fed and affect the power relationship.

The Fed has always been problematic with regard to checks and balances.

Posted by: bakho | Link to comment | Aug 13, 2009 at 06:34 AM

Don the libertarian Democrat says...

It is a bad idea to have a Central Bank so reliant on the personality of the Fed Chairman. Milton Friedman showed why this is not a good idea in "Should There Be An Independent Monetary Authority?". I like Bernanke, and I'm glad that someone who understood Fisher was at the helm after Lehman, but that just tells me that it's too iffy to rely on the Chairman's views.

I'm not for an "Independent Fed", but, if I were, I'd be very worried about the policy views of the Chairman, even if he/she seems to echo my views.

Posted by: Don the libertarian Democrat | Link to comment | Aug 13, 2009 at 07:08 AM

Bradley Stark says...

Walt and Bakho raise good points. The legal system and most regulatory agencies work best when they adopt a wary eye towards the regulated. No such wariness has existed since Volker.

Question regarding those who endorse Bernanke for another term. How much of this is 'status quo bias'...the benefits that flow to the incumbent for no good reason but incumbency?

Posted by: Bradley Stark | Link to comment | Aug 13, 2009 at 07:41 AM

Cynthia says...

Because the Supreme Court has ruled and will continue to rule that money is a form of free speech, corporate lobbyists with very deep pockets are here to stay. And needless to say, their main mission in Washington is to socialize losses and privatize gains for their corporate overlords.

So I think we might as well just bite the bullet and turn all of our companies in the too-big-to-fail arena of our economy (namely the ones in telecommunications, energy, banking, and healthcare) into monopolies. In exchange for this, they must live under the watchful eye of regulators and be made to exist as non-profit entities.

Thinking back, Ma Bell was a monopoly which was heavily regulated yet was extraordinarily innovative through its heyday. So I think it's simply hogwash to say that heavily regulated monopolies are absolute dinosaurs when it comes to innovation. There's no doubt that a lot of new telecom products and services were developed following the breakup of Ma Bell, but most of them were merely offshoots of existing technologies. None of the Baby Bells nor any of the telecom startups have come close to Ma Bell (via Bell Labs) in terms of developing breakthrough technologies.

Let me close by saying that since our too-big-to-fail banks have proven that all of their innovations are nothing more than financial weapons of mass destruction, they should be forced to live in a straitjacket, functioning as plain-vanilla entities, as they did prior to the Reagan years.

Posted by: Cynthia | Link to comment | Aug 13, 2009 at 08:36 AM

don says...

"What hampered Greenspan and Bernanke as financial regulators was that they were excessively in awe of Wall Street..."

This is a generous interpretation. IMO, AG and BB were too much in fear of Wallstreet (or possibly of the short run public opinion) than in awe of it. I have a hard time picturing either of them doing as Volcker did.

If things get bad again, anyone who supports the bailout strategy as the best way to go (coming on top of the government exposure left over from the last such episode) seems to me to lack sufficient imagination to assess the possible effects of a failure in the market for U.S. government debt.

Posted by: don | Link to comment | Aug 13, 2009 at 11:00 AM

Roger Chittum says...
If you are a regulator and the regulated community is not complaining vociferously about you, you aren't doing it right.

Posted by: Roger Chittum | Link to comment | Aug 13, 2009 at 11:40 AM

TigerPaw says...
Part of the reason Greenspan went over so well was the "father knows best" image he projected. There seems to be an innate need for this in modern society and Greenspan did the indecipherable commentary stunt to perfection. Thus everyone could imagine he was saying something they agreed with.

Posted by: TigerPaw | Link to comment | Aug 13, 2009 at 12:16 PM

bob mcmanus says...
I have a hard time picturing either of them doing as Volcker did.

Doesn't anybody remember what equities were like during the seventies, and then in the eighties and after?

Volcker was the best thing that ever happened to Wall Street.

Posted by: bob mcmanus | Link to comment | Aug 13, 2009 at 12:22 PM

Karsan says...
Well, one neat idea would be to insist that central bankers always be non-citizens of the country (or economic area) whose central banks they run. This would a) lower the chances of cognitive capture. b) reduce some of the problems of political identification c) import a temperament into monetary policy that runs counter to the dominant fiscal temperament of the country. Maybe the world would look slightly different if we had had Tietmeyer and Trichet running the Fed for the last 20 years (I'll leave out Wim on the theory that the Buba head matters more if the ECB is run by a small-country national), and Greenspan and Bernanke had run the Buba and the ECB.

Posted by: Karsan | Link to comment | Aug 13, 2009 at 12:31 PM

ken melvin says...
Volker wasn't very good for the working class, and he could have cared less. Now me, I could care less about the Wall Street crowd.

Posted by: ken melvin | Link to comment | Aug 13, 2009 at 03:50 PM

K Ackermann says...
Its laudable that you post alternative viewpoints. This day and age it is laudable.

I have to say, I am not in favor of BB. It's not just a populist thing; fresh blood is needed. The Fed is working furiously to create boom and bust cycles, and that has to stop.

It's not just the Fed that has to change. We need to get back to stability and job creation. The country needs a stonger manufacturing base. Better, smarter, faster, is what we used to be all about.

Using short term financing to fund off-balance sheet investments is not my idea of creative and efficient was to employ resources. We need a Fed chairman who doesn't look at this kind of stuff as wonderful.

Posted by: K Ackermann | Link to comment | Aug 13, 2009 at 03:56 PM

less is better says...
Bernanke is the last choice possible. The best description in the looting of the american people should be "unindicted coconspirator." Bernanke first decides what is right for his friends, what is right for the Reserve and what is right for his family. The american public is the last thing he thinks of and never has cared a dime about ruining their lives.

Bernanke stubbornly refuses to drop the insane propaganda put out by the economists that totally disregards nepotism, favors, friends' influence,pure bribes and that an enormous amount of money is not able to be accounted for and screams for "unregulated markets." which time after time after time have been shown to be unadulterated horseshit. Somalia has "unregulated markets." Perhaps sending Bernanke on a fact finding tour there would end the problem of the Federal Reserve.

The highest that I would like to see Bernanke is to make him the money washer for the Harlem mob. They would kill him for what he does to the american public every stinking day.

Posted by: less is better | Link to comment | Aug 13, 2009 at 04:13 PM

Winslow R. says...
The anti-Greenspan

Ron Paul

Posted by: Winslow R. | Link to comment | Aug 13, 2009 at 06:59 PM

mrrunangun says...
Bernanke is printing money in order to fill the gap left by the money the banksters vaporized. There are potential problems with this approach, but the alternatives are not appealing either. The short term risk of BB's approach is that it will blow another bubble. Nevertheless, trying to change direction in order to adopt another approach might not turn out to be good policy either.

Regulation of banks above a certain size should perhaps be the job of an agency other than the Fed.
 

Bernanke's Shell Game by Mike Whitney

http://www.counterpunch.org/

Isn't Anyone Watching the Fed?

Fed Chairman Ben Bernanke is a man who knows how Washington works and uses that knowledge to great effect.  His appearences on Capital Hill are always worth watching. He sits politely with his hands folded in front of him playing the bashful professor while one one preening congressman after another makes a fool out of himself. In contrast, Bernanke looks modest and thoughtful, faithfully upholding the public's trust.  But things aren't always as they seem. The Fed chief is sticking it to the American people big-time and no one seems to have any idea of what's really going on. Former hedge fund manager Andy Kessler sums it up in a recent Wall Street Journal article, "The Bernanke Market". Here's a clip:

"By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market."

What does it mean?

It means the revered professor Bernanke figured out a way to circumvent Congress and dump more than a trillion dollars into the stock market by laundering the money through the big banks and other failing financial institutions. As Kessler suggests, Bernanke knew the liquidity would pop up in the equities market, thus, building the equity position of the banks so they wouldn't have to grovel to Congress for another TARP-like bailout. Bernanke's actions demonstrate his contempt for the democratic process. The Fed sees itself as a government-unto-itself.

Over at Zero Hedge, Tyler Durden did the math and figured that the recent 45 per cent surge in the S&P 500 had nothing to do with the fictional economic "recovery", but was just more of the Fed's hanky panky. Durden noticed that the money that's been sluicing into stocks hasn't (correspondingly) depleted the money markets. That's the clue that led him to the truth about Bernanke's 6 month stock rally.

Zero Hedge: "Most interesting is the correlation between Money Market totals and the listed stock value since the March lows: a $2.7 trillion move in equities was accompanied by a less than $400 billion reduction in Money Market accounts!

Where, may we ask, did the balance of $2.3 trillion in purchasing power come from? Why the Federal Reserve of course, which directly and indirectly subsidized U.S. banks (and foreign ones through liquidity swaps) for roughly that amount. Apparently these banks promptly went on a buying spree to raise the all important equity market, so that the U.S. consumer whose net equity was almost negative on March 31, could regain some semblance of confidence and would go ahead and max out his credit card. Alas, as one can see in the money multiplier and velocity of money metrics, U.S. consumers couldn't care less about leveraging themselves any more."

So, the magical "Green Shoots" stock market rally was fueled by a mere $400 billion from the money markets. The rest ($2.3 trillion) was main-lined into the market via  Bernanke's quantitative easing (QE) program, of which Krugman and others speak so highly.

Wouldn't you like to know if Bernanke sat down with G-Sax and JPM executives and mapped out the details of this swindle before the printing presses ever started rolling?

So, how long can this kind of fakery go on before our creditors grow weary of dealing with chiselers and stop buying US Treasuries altogether? Here's a piece from Friday's Wall Street Journal on that very topic:

"Shaky auctions of Treasury notes this week reignited concerns about whether the government can attract buyers from China and elsewhere to soak up trillions in new debt.

“A fuse was lit this week when traders noted China's apparent absence from direct participation in two Treasury bond auctions. While China may have bought Treasurys just before the auctions, market participants read the country's actions as a worrying sign that China and other foreign investors may be ratcheting back purchases at a time when the U.S. is seeking to fund a $1.8 trillion budget deficit.

“This week alone, the U.S. deluged the bond market with more than $200 billion in record-size sales. The U.S. has had little trouble finding buyers in recent months. But that demand is fading, and the Treasury market has become volatile."

Uncle Sam is goosing the bond market just like he is the stock market. Take a look at Treasury's latest bit of chicanery which was stuffed in the back pages of the Wall Street Journal back in June:

"The sudden increase in demand by foreign buyers for Treasurys, hailed as proof that the world's central banks are still willing to help absorb the avalanche of supply, mightn't be all that it seems.

“When the government sells bonds, traders typically look at a group of buyers called indirect bidders, which includes foreign central banks, to divine overseas demand for U.S. debt. That demand has been rising recently, giving comfort to investors that foreign buyers will continue to finance the U.S.'s budget deficit.

“But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners." ("Is foreign Demand as Solid as it Looks, Min zeng)

Nice touch, eh? So, someone doesn't want you and me to know when foreign demand drops off a cliff, so they just bend-and-twist the definitions so they meet the Fed's requirements.  How's that for transparency?. Apparently, Bernanke et al. don't believe the Chinese have translators who can make sense of all this subterfuge. That may be a miscalculation, however, given recent rumblings from the Orient.

But, perhaps, Bernanke knows that foreign demand for Treasuries will dry up and has made other plans to stabilize the dollar already. Maybe he worked out an agreement with the banks that if he pumped up the stock market--which he has--and built up the banks equity position--which he has---the banks would return the favor by buying up the lion's-share of Treasuries.  

This is from Bloomberg (August 3):

"U.S. lenders bailed out by the government are returning the favor by stepping up purchases of Treasuries, helping to temper a rise in borrowing costs.

“Bank holdings of U.S. government securities are up 15.6 per cent from a year ago, almost double the average annual growth rate of about 8 per cent since the Federal Reserve began tracking the data in 1973, according to the Greenwich, Connecticut-based trading and research firm MKM Partners LP. Purchases may accelerate as lenders look for places to park rising deposits as sales of federal agency debt of companies such as Fannie Mae and corporate bonds slow." (Bloomberg)

One hand washes the other. Funny how that works.

So, the bottom line is that the dollar is increasingly balanced on the rotting scaffolding of Bernanke's buyback programs (Quantitative Easing) and the circular purchases from collaborating banks that are concealing their backroom dealings with the Fed.

To keep this game going, Bernanke will have to keep juicing the market while the banks use the $850 billion in reserves (which the Fed has provided in the last year) to keep purchasing US sovereign debt.

Is anyone in Congress watching or is this shell game going to go on forever?

Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.net

[Aug 7, 2009] Larry Summers, Economic Recovery, And Ben Bernanke «

The Baseline Scenario

with 48 comments

In a memo to Congress on Tuesday, Larry Summers – the head of the White House National Economic Council – laid out his view of where we are and what is likely to happen next in our economic recovery.

His tone was more upbeat than we’ve heard in recent utterances, although he has been heading in this direction for a while – contrast this April speech with this appearance in July.

What is beginning to turn the economy around?  Summers claims great effects from the fiscal stimulus Recovery Act, but much of that money has not yet been spent.

He also puts weight on “an aggressive effort to tackle the foreclosure crisis.”  There have been sensible steps in that direction, but so far the effects have been decidedly modest.

The main explanation has to be that the administration prevented the financial system from collapsing.  In an economy as large and diverse as that of the United States – with much more government spending than at the time of the Great Depression – as long as the entire provision of credit does not disintegrate, we will recover.

Summers refers to “A Financial Stabilization Plan”, but this is ex post grandiosity.  In fact, the government simply demonstrated unflinching support for all big financial firms as currently constituted.  We the taxpayer effectively guaranteed all these firms debts, unconditionally.  Once the market figured out that the Treasury, Federal Reserve and other officials could pull this off, the panic was over.

But this victory brings also real danger.

Rahm Emanuel, the White House Chief of Staff, put it well recently, “The [finance] industry is already back to their pre-meltdown bonuses.  We need to make sure we don’t slip back to risky behavior where the institutions have all the upside and the taxpayers have all the downside, which is why we need regulatory reform.”

Summers does not shy from this issue.  In his letter to Congress he says we need, “Comprehensive reform of the nation’s financial regulatory system so that a crisis like this never happens again,” and “Financial regulatory reform is vital to preventing against (sic) the asset market bubbles that have characterized previous recoveries.”

There are, however, three problems with what he proposes.

First, he says that the administration “has unveiled a sweeping set of regulatory reforms.”  But the reality is more modest.  There will be some slight strengthening of capital requirements, somewhat more attention paid to “systemic risk” (although this is not well defined), and mildly tougher regulation of derivatives.  Most of this amounts to essentially business as usual.

Second, to the extent that the administration does have a few good ideas – for example on a new consumer protection agency for financial products – it has let opposition build to the point where the lobbyists may well be able to prevent progress.  The time to push for change was earlier this year, when banking was still in political disarray; now the sector is stronger than even on Capitol Hill.

Third, the administration can’t even bring its own regulatory agencies along with its modest reforms.  Last week, Treasury Secretary Tim Geithner expressed extreme frustration with the efforts of these agencies to block reform.  This week, appearing before the Senate Banking Committee, the same people were still in serious blocking mode.

Even the Federal Reserve chairman, Ben Bernanke, does not seem to be on board with reform as proposed by Geithner and pushed by the White House.  It’s not clear if Bernanke has become too close to the banking industry or too captured by his staff, but in any case Treasury feels that he is not fully on board.

If the administration really wants to put the economy on a path to sustainable bubble-free growth, it looks increasingly likely that it will want to replace Bernanke when his term is up early next year.

Secretary Geithner is the most plausible replacement.  He was previously head of the New York Fed and vice chair of the Federal Open Market Committee, so he knows the system intimately.  He has spearheaded all the financial rescue efforts of the past few years; better than anyone he knows what went wrong.  The markets see him as a safe and friendly pair of hands.

And, increasingly, if he wants any kind of real reform, it looks like Secretary Geithner will have to go to the Fed and implement it himself.

By Simon Johnson

This post originally appeared on the NYT.com’s Economix blog and is reproduced here with persmission.  The usual fair use rules apply to short quotations, but if you wish to reproduce the entire post, please contact the New York Times.

For more on why I’m taking the side of Secretary Geithner against the regulators, see my conversation with Ben Eisler of The New Republic.

[Jun 26, 2009] Ben Bernanke: Smooth Criminal

I know this isn't a universally held opinion, but to me there is a simple reality. Between September and December we were facing a significant chance of another Great Depression. Beyond that, we were potentially looking at a financial disaster from which the United States would never recover.

Today, it looks like we are merely facing a very bad recession.

Who deserves credit? Certainly not Hank Paulson and the Bush administration. They choose philosophy over pragmatism every chance they got. They gave in to the moronic "moral hazard" bullshit argument. They stuck to their right-wing "fuck off and die" mentality toward the banking system. That worked out great didn't it? Then when they had the chance to use the TARP right, they failed miserably. Again, they gave into the moral hazard wing of the Republican party and instead of buying up bad securities, they initiated the Capital Assistance Program. No moral hazard there!

Can't credit Obama either. I'll admit that the Stress Test was a much better idea than anything Bush ever came up with, but I'd argue that by December we had already turned a corner. Obama just managed to keep the momentum going. Besides, his $800 billion stimulus program is, at best, a waste of time, and at worse, contributing to rising Treasury yields and thus retarding the recovery.

I have to give most of the credit to Ben Bernanke. He understood that while liquidity wasn't the whole problem, illiquidity could have made (and was making) the problem much much worse. He understood what really made the Great Depression a 15 year affair rather than a 2 year recession. He understood what created Japan's lost decade (and counting). He saw how dangerous debt deflation could be, and he attacked it with both guns blazing.

Some people derided the Fed's efforts as ineffective. That's because they were looking at how the stock market or housing market was reacting to Fed rate cuts. But the cuts were never meant to "solve" anything. Housing prices had to fall to more affordable levels. Nothing could (nor should have) been done to stop that. Stocks had to fall in reaction to the oncoming recession as well as the reality of a weak recovery. For that matter, unemployment was bound to rise as workers are moved from leverage-oriented jobs to someplace else. The Fed wasn't trying to solve any of these problems.

Compare this with Alan Greenspan's constant manipulation of the stock market. In today's FT, Greenspan says as much in an opinion piece. "In my experience, such episodes [rising or falling stock prices] are often not mere forecasts of future business activity, but major causes of it." (My emphasis). That sums up Greenspan's tenure at the Fed doesn't it? He's basically saying that by creating bubbles, he was able to spurn real economic activity. Look, a lot of us fell for it for a long time. He was called the Maestro for the Force's sake. But now, in hindsight, we can certainly see the folly in this philosophy.

Now the morons in congress are coming for Ben Bernanke for how he handled the Bank of America/Merrill Lynch merger. Seriously? Now, let there be no doubt. Ken Lewis was pressured by the Fed in a way that should leave a bad taste in the mouth of any free citizen. But we were in the middle of an economic war. Sometimes some bad shit happens on the battlefield and sometimes its OK if we look the other way.

If the Republicans push this, though, Obama will be left with little choice but to not reappoint him. Then we'll get Larry Summers. Great. Even if you forget all the virtues I've just bestowed on Bernanke, remember this. The key to an effective Central Bank is independence. Otherwise we have Arthur Burns. It was Burns, not oil, which caused the Great Inflation of the 1970's.

How can we seriously assume Summers will be independent of Rohm Emanuel? If Summers winds up running the Fed, mark my word, inflation will follow.

Selected Comments

steve B said...

disagree: this more than just a bad recession. This is a structural change in our economny that will take years to adjust too

agree: when we look back, we will realzie Bernanke was the right man at the right time.

disagree: the stimulus is more than just a waste of time. just look at today's income numbers. it's haveing its positive, albeit slowly.

Jeremy said...

You lost me at 'the moronic "moral hazard" bullshit argument' line.

The Oriole Way said...

While I disagree with you assessment of stimulus (though I don't think it was exactly the most effective thing in the world), I completely agree that Bernanke has done a bang up job. And I ESPECIALLY agree that the Cogressional antagonism towards Bernanke can only end badly. Seriously, Summers had a nice big role in getting us into this. We need to keep him as far away as possible.

Flow5 said...

Bernanke is a treasure. All managers make some mistakes.

If the masses understood what Volcker did, there would have been a rope around his neck.

Accrued Interest said...

Steve:

I think its a structural change in our economy that will cause a bad recession during the transition. I don't think we just go back to our old ways. But I think Bernanke prevented it from being something much worse.

Lockstep said..

I agree. Bernanke deserves a lot of credit.

I think Obama deserves credit like a good relief pitcher too. Could have done a lot worse.

Lockstep said...

Let me add... don't think the Depression is off the table yet.

David Merkel said...

AI -- Sorry, BB didn't prevent a crisis, he just delayed it, perhaps at the cost of deepening it. You can't get something for nothing, aside from neomercantilists buying up US debts, fools that they are.

Darth Fluffy said...

AI - I disagree with your assessment of Bernanke. What people sometimes forget is, Bernanke studied the Great Depression under a comparative studies framework. He compared different country's economies during the GD and studied how som