Bernanke Backs Banning Dangerous Financial Products

Federal Reserve Chairman Ben Bernanke surprised members of both parties Thursday when he told a House panel that he believed transparency alone was not enough and that some financial products should be banned outright.

He acknowledged that the position represented a shift in philosophy for the Fed.

Bernanke's answer during the financial services committee hearing came in response to questioning from Rep. Tom Price (R-Ga.), who seemed alarmed by the Fed chairman's reversal and asked for an example of a product that ought to be banned.

Bernanke didn't miss a beat. "No-doc loans," he said, referring to loans given to borrowers with no documentation of their income or ability to repay.

Banning no-doc loans might sound like a common-sense approach but it slices to the core of free-market ideology, under which lending should be free from government interference.

"He surprised me. I didn't expect him to say that," said a pleased Rep. Maxine Waters (D-Calif.), a senior committee member. She noted that Treasury Secretary Tim Geithner has been unwilling to go as far as Bernanke and that most regulators say that such dangerous products should be cautioned against, but not outright banned.

Committee chairman Barney Frank (D-Mass.) said that it wasn't merely for the benefit of consumers that he wanted such products. Rather, high-risk financial products pose a threat to the entire system. He said that he has no problem with people being "stupid" and wouldn't outlaw behavior for that reason alone -- a reference to Frank's positions in favor of legalizing marijuana and online gambling.

The GOP also complained to Bernanke that a proposed consumer financial product agency would encourage banks to offer "plain vanilla" financial products -- such as easily-understood, fixed-rate, 30-year mortgages. Committee Republicans suggested that that was no role for the government.

Bernanke disagreed, explaining that sometimes financial instruments become so complex that whatever good they do is undermined by people's inability to understand them. That asymmetry of information and understanding leads to bad loans, busted homeowners and greater systemic risk.

"There are some circumstances where the benefits to the consumer are overwhelmed by the complexity," Bernanke said, in an unusually strong statement in support of consumers.

Bernanke also said that he supported limits on executive compensation and saw it as a "safety and soundness issue." There ought to be, he said, "important links between performance and pay."

From the back of the committee room, Rep. Michele Bachmann (R-Minn.) used most of her time to question the Fed chairman about, of course, ACORN. It wasn't quite clear what her question was, but, regardless, Bernanke had nothing for her.

"I just don't know," he said quickly, moving on.

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Comments

[FestivusMaximus]

11:05 AM on 10/02/2009

Wow a statement of the obvious, just a few decades too late.

[coldfall]

11:19 PM on 11/27/2009

It is not the freemarket that brought us trouble, it is appointed officials who are not holding executives as failing banks accountable, and instead, make the American consumer insure their losses.

[Itsmyland2]

10:32 AM on 10/02/2009

The government MUST regulate the financial industry. The "Free Market" has brought us to ruin

[coldfall]

11:09 PM on 11/27/2009

Last month, congressional representatives sent an open letter to the Senate Banking Committee about the Chairman of the Federal Reserve, Ben Bernanke.

Before he is reconfirmed for a second term, we should join in petition, that the Senate and American public know who got the $2 trillion the Federal Reserve has lent out over the last 18-24 months.

This is explained further in the links below:

Court Orders Fed to Disclose Emergency Loans
http://www.bloomberg.com/apps/news?pid=20601087&sid=a7CC61ZsieV4

Federal Reserve loses suit demanding transparency
http://www.reuters.com/article/ousiv/idUSTRE57O03P20090825

Court Order, by the Hon. Justice Loretta Preska (47 page ruling, pdf file, Aug. 24, 2009) http://media.bloomberg.com/bb/avfile/rVrG4U7pQhoY

For myself, I ask you to take time to skim or study in depth, and consider a vote against Fed-chairman being appointed while acting to keep secrets that should not be kept.

The Fed reserve, is the only multi-billion dollar agency or corporation in the United States presently, that is in defiance of a Federal Court Sunshine Law, disclosure order.

Please consider how this looks to other businesses who do not benefit from large bonus awards or salary increases during an economic crisis. If we were asked to make sunshine disclosure of our loan records, to a court, .. relevant to what we did during an emergency or crisis period, we would all be told to make that disclosure by our lawyers.

Please sign. Please forward.

[coldfall]

11:13 PM on 11/27/2009

We would be required to disclose in the 5 days or 10 days or be subjected to bad media and other disciplinary actions.

What I mean to say is that none of us can defy a Court order for information, that is lawfully requested. Especially as it is related to emergency lending, relating such a large amount of money. For me a Trillion dollars is a lot of money and it should not be held as a secret that only a few appointed officials know about.

This suit was originally filed in November of 2008. It has taken a long time to get to a decision in August of 2008. The order is part of a 47 page decision. 47 pages is comprehensive and good decision, sufficient enough in my opinion. If it was any of our businesses, we would probably make disclosure. Our attorneys would not represent an appeal, and would tell us to make disclosure or to look for another attorney.

Disclosure needs to be made. Until then, I do not believe our Senate has enough information, to correctly judge whether Mr. Bernanke should keep his job. It would be in my opinion, somewhat reckless, for the Committee to confirm Bernanke to another term given how little is known about what he has actually done with money that has NOT been approved by Congress or the Senate.

Please sign. Please forward.

[Ping]

09:30 AM on 10/02/2009

When the history of this period is written, Benjamin Bernanke and Sheila Bair will be the heroes and the politicians will be the villains.

Yesterday's hearings were just more proof that the politicians work for the banks, and Bernanke works for the people. Anyone bashing the Fed is living life wearing blinders. They do not see the obvious.

[outnow]

09:54 AM on 10/02/2009

Bernanke always wanted to stop a Great Depression. His policies led us to this brink. Now let him test his pet theories. Greenspan has backed off from the let the free market regulate its own fraudulent finacial iunstruments, now Bernanke must in turn do so. Why didn't he, and our noble politicians , do this earlier?

Linking pay to performance would help eliminate the incentive to take excessive risks. Geithner is still a banker's dream. He will never come around.

[Ping]

10:36 AM on 10/02/2009

Congress in never going to pass meaningful pay reform, because they represent the interest of the banks.

[jsarets]

10:12 AM on 10/02/2009

I don't think there are very many heroes in this story. Bernanke and Bair are spreading the debt crisis into the future by converting private debt into public debt. It will catch up to us eventually.

The Fed board is accountable to the shareholders, which are the member banks. The Fed is trying to protect the banks, which in this case involves facing up to the reality of systemic risk, whereas the politicians are trying to protect the economy, and they're not doing a very good job of it, as usual.

I think it's a false dilemma to attempt to favor one institution over the other when they're both very responsible for this situation, albeit in different ways. The financial system is plagued by perverse incentives, and the political system is plagued by dysfunctional demagoguery.

I see no reason to vindicate either of them, although I do agree with you to some extent in that I think there's better chance of the Fed getting its act together going forward than the government. The Fed is fighting for its survival right now, and the government just does not have any sense of urgency or really any clue of what we're up against.

[Ping]

10:35 AM on 10/02/2009

The FED is a dictatorship not a democracy.

[KIVPossum]

08:37 AM on 10/02/2009

Let's talk about it another couple of years until the American economy is really in the toilet.

[ibsteve2u]

08:28 AM on 10/02/2009

There is no alternative other than to ban the risky instruments - those instruments that are an amalgamation of lies.

Wall Street and our banks have shown time and time again that whenever they can profit as individuals they will toss the interests of their institution, the investor, and the nation right out the window as if they were the aristocracy of medieval Europe dumping the chamberpot upon the unsuspecting passerby.

[sonofsamphm1c]

04:23 PM on 10/02/2009

I promise to pay = risky instrument.

[vippy]

08:26 AM on 10/02/2009

Kind of late, should have been addressed right away!

[Chazmania]

08:19 AM on 10/02/2009

Ben Bernake! I think this guy would never have been placed in his position if he did not play ball with the banking interests. The worst problem we face as free people is the banking overlords that now control policy! They fear an Audit more then anything and they will fight against it. and the more they fight the more you know they have something to hide! AUDIT the FED its about time!
http://www.auditthefed.com/

[John Horner]

07:57 AM on 10/02/2009

Someone should send Bachmann to Alaska where they need a governor.

[Balzac]

07:30 AM on 10/02/2009

Agreed. The system can't have integrity without the removal of the most ethereal entities in the system. If you can't really explain it, it's probably not a good product.

[hglindquist]

03:04 AM on 10/02/2009

Well, well, well ... Federal Reserve Charirman Ben Bernake -- previously a tenured professor at Princeton University in the Department of Economics -- is being rational ... maybe I shouldn't say "finally".

Look at is this way ... what if I sold explosive devices but I didn't explain upfront that they were defective -- mostly because I had convinced myself that they really, really weren't ;-) -- and would explode on their own under some fairly common conditions for the use of the devices.

And from the profits I made from that sale, I paid myself a handsome bonus ... and just to sure, because I wanted to play it safe, I sold insurance to my device purchasers against an accidental explosion ... but that had never happened before, or not for awhile at least, and we had fixed those problems ... so the insurance was cheap ...

Then those damn devices started exploding all over the place ... what would I have learned?

What would a good professor have learned?

Don't sell anymore of those damned things ... at least not until we get the problem fixed!!!

I would think.

[hglindquist]

03:34 AM on 10/02/2009

And to have a little more fun with this analogy ...

What if these devices started exploding in neighborhoods all over the country, with devastating effect ...

And THEN I said that if I wasn't allowed to sell more devices, the damage would grow and be even worse ... and everybody (not just the device purchasers, 'cuz they couldn't) would have to both give me enough money to keep going AND you would have to clean up the past wreckage best you could ... because I am going to sell all the questionable stuff to you but without you looking at it ... yes, some of it has already exploded, and some of it will explode ... but as long as you give me what I say it is worth ... trust me ... we are going to come out of this just fine. (Yes, I understand it means that "I" am going to come out of this just fine ... but you understand, don't you? I am what makes this economy what it is.)

Back to reality.

Do I laugh or do I cry?

[Lahonda]

02:35 AM on 10/02/2009

Ben,

Ask President Obama to apply a small 2 penny fee to every stock transaction being processed in those ponzi-like exchanges.

Two cents on every one of those micro transactions would instantly bare the steamy underside of a rotting pile of economic hay.

Jus' sayin'

[spinns17]

02:33 AM on 10/02/2009

bit to late ha ben?

[americaforme]

01:47 AM on 10/02/2009

Thanks Ben, you have given us all a great gift, a light at the end of the tunnel. These products have nearly destroyed our society. We need the resolution of deep change to these financial deregulated loan sharks contracts. We'll never be innocent in America again, we'll never trust Gov. like we did, but your decision to change the loop holes, and close the door for unqualified loans gives us courage. We now can believe there is a chance of recovery.

[pov]

11:34 PM on 10/01/2009

Like an audit.

[vascopyjama]

11:03 PM on 10/01/2009

Wow, Mr. Bernanke has has a revelation. I wonder why he didn't want to ban them before?

[EminemsRevenge]

11:44 PM on 10/01/2009

MAYBE because he worked down the road from the greatest SCAMMERS ever---wall Street?

REAL "reform" happens when these http://www.youtube.com/watch?v=pnIDNJqXKbI are made public!

An internet IPO of the names & addresses of these "masters" of the universe SHOULD put a halt to the Cult of Cupidity!

[Chazmania]

08:24 AM on 10/02/2009

Ok i don't quite understand your link went to an Alice cooper concert?
http://www.youtube.com/watch?v=pnIDNJqXKbI

[jinxed]

11:47 PM on 10/01/2009

He's hoping if he suggests such actions Congress will drop the audit they want to do on the Fed. He's trying to offer good will so the ton of bricks that will fall on him if an audit is done doesn't bury him, permanently.

[sonofsamphm1c]

01:04 AM on 10/02/2009

I don't know what your definition of before is, but he killed exotic subprime quite some time ago.