Ben Bernanke: Socialist

Yesterday, Ben Bernanke gave a speech about financial regulation. In the speech he discussed what happened with Bear Stearns. It is an interesting explanation.

As you are aware, one of the key events in financial markets in recent months was the near-bankruptcy in March of the investment bank Bear Stearns. The collapse of Bear Stearns was triggered by a run of its creditors and customers, analogous to the run of depositors on a commercial bank. This run was surprising, however, in that Bear Stearns's borrowings were largely secured--that is, its lenders held collateral to ensure repayment even if the company itself failed. However, the illiquidity of markets in mid-March was so severe that creditors lost confidence that they could recoup their loans by selling the collateral. Hence, they refused to renew their loans and demanded repayment.

This is a really interesting situation and it explains a great deal about the problems in the credit markets. Even though the lenders had collateral in their hands they were unsure they could actually sell the collateral. Bernanke makes no mention of what type of collateral the lenders had. However, I seriously doubt lenders took highly exotic paper to secure a loan. Assuming that to be a fair reading of the situation, we know the credit markets were literally frozen solid.

Bear Stearns's contingency planning had not envisioned a sudden loss of access to secured funding, so it did not have adequate liquidity to meet those demands for repayment. If a sale of the firm could not have been arranged, it would have filed for bankruptcy. Our analyses persuaded us and our colleagues at the Securities and Exchange Commission (SEC) and the Treasury that allowing Bear Stearns to fail so abruptly at a time when the financial markets were already under considerable stress would likely have had extremely adverse implications for the financial system and for the broader economy. In particular, Bear Stearns' failure under those circumstances would have seriously disrupted certain key secured funding markets and derivatives markets and possibly would have led to runs on other financial firms. To protect the financial system and the economy, the Federal Reserve facilitated the acquisition of Bear Stearns by the commercial bank JPMorgan Chase.

Short version: If Bear Stearns went under we were in deep shit. Fair enough -- and I think a fairly accurate statement about what would have happened if they had gone under. HOWEVER, we now get into a really interesting policy debate. Earlier in the speech, Bernanke made the following observation:

As you know, those poor lending practices have contributed to a sharp increase in mortgage delinquencies and foreclosures. The resulting costs have been felt not only by borrowers but also by entire communities, as foreclosure clusters have caused neighborhoods to deteriorate and reduced municipal tax bases. The decline in the national housing market, which has been a major cause of the broader slowdown in economic activity, was in turn greatly exacerbated by the collapse of subprime lending.

So -- poor lending standards have led to the collapse of communities and harder times for cities. Shouldn't they be getting some help too? Aren't they too big to fail as well? This is the problem with bailing out Bear Stearns and the accompanying moral hazard. You get into these kinds of debates about who is too important or too big to fail and there is never a clear answer. However, I can tell you what this situation looks like: Wall Street firm makes many bad loans and gets bailed out despite their stupidity.

The PDCF and the TSLF were created under the Federal Reserve's emergency lending powers, with the term of the PDCF set for a period of at least six months, through mid-September. The Federal Reserve is strongly committed to supporting the stability and improved functioning of the financial system. We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end, should the current unusual and exigent circumstances continue to prevail in dealer funding markets. At the same time, we are taking measures that will serve over time to strengthen the primary dealers, other financial institutions, and the overall financial system. As I will discuss, these measures include working with the SEC and the primary dealers to increase the firms' capital and liquidity buffers and cooperating with other regulators and the private sector to help make the financial infrastructure more resilient.

So, Ben, what is the exact definition of "unusual and exigent circumstances"? When exactly are these over and who decides? Again -- we are now getting into a really gray area for which there is no answer. But, again, I can tell you what this looks like: Privatize the profits and socialize the losses.

Comments

[Erdgeist]

With his new power I hope Ben Bernanke has read the mission of the Fed. It is: "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Ben, therefore, should become a "bubble buster" because we know what bubbles can do to employment, prices, etc.

[usna73]

Let's get real. Bernanke didn't go far enough. The system is in fact insolvent. Fannie and Freddie are insolvent, with an implied government guarantee. The investment banks followed suit expecting and getting the same implicit bailouts.

So, if we have already paid as taxpayers, it is in fact socialism. Let's make us the owners as well.

Screw the so-called stockholders. Take em down. Issue preferred shares to every American and treat them the way we used to regulate the utiiites.

[Doofus]

I'm no economist, but as for high level econ policy,
it all comes down to this, apparently: if the rich get
less rich, the poor would get even more so.

[nikto]

Tax labor at 20%; Tax investment at 65%.

End of problem.

[Pdubya]

that is absurd.

reduce spending 80%, increase production 50%, let the bums fail, end lobby and get rid of the federal reserve.

[zull2]

Socialist isn't accurate. The correct term is "Corporatist". Socialism implies that those who receive aid are actual people, individuals, and not corporations. Corporations are a separate classification, and when you create taxpayer subsidized programs to bail out corporations when they make poor judgment, lose some business, or otherwise decide they need more cash, you are a corporatist.

You hear the term corporatist bandied around quite a bit, and frequently applied to folks who are entirely undeserving of the term. Corporatism has nothing to do with whether a politician accepts corporate donations, its whether or not they support programs that directly involve providing aid from the taxpayer's pocket to corporations, and refuse to cut that aid when it exists. Socialism would be more in line with employment insurance...a safety net for individuals only.

[Dunnage]

Supply Side Socialism.

[Chavez08]

The current economic situation is this simple: 90+% of the wealth is consolidated with 3% of the population, this is Neoliberalism and it was designed to produce only slaves and kings and nothing in between. When the American sheep allowed Corporate controlled Washington to eliminate labor, human and consumer rights, they'd condemned themselves and their descendants to Social-Darwinist slavery.

Ask yourself - "What is the definition of slavery?"

[biwee]

The FED is a scam! Why can not we Americans recognize that? While federal law does have
guidelines for the FED, who exactly will define what assists the economy?? Volker thought taking
interest rates into the stratosphere was the way to reign in exploding inflation. Now, Helicopter Ben
thinks taking interest rates into the basement is good. But, good for WHO?? The low interest rates best help the Wall St crooks who "securitized" debt, and then, to sustain the CDOs/CMOs, pushed
the sub prime borrowers into a mortgage they could not afford. Yes, the unsophisticated borrowers
are to blame....but, so are the sleazy mortgage operators who cared not for their clients. The FED must be abolished. Only when we return to the supremacy of the US Constitution will we again be free. Due to FED policies, the dollar is a joke. And, do not give me the garbage about a weak dollar helping exports. Only about 15% of the US economy is in exporting. What about the other 85%??

[edva]

Today's Corporate-Government Capitalism looks more like dark-ages Feudalism. Just as in many areas of our society, patriotic citizens have been duped into defending a system whose name means one thing to them and something very different to those who have hijacked it for their own greed.

[jhNY]

"Whatever is not nailed down is mine. Whatever I can pry up is not nailed down."-- Leland Stanford, 19th Century Railroad Capitalist.

Here is one of the most succinct expressions of the greedy impulse that dominates the actions of the powerful. They take because they can. But if they fail, you must pay, mostly because your representatives, in legislatures local and national, are not nailed down.

[Chavez08]

"When the government fears it's people, there is Liberty..." (you know the rest)

When the people gave all their power to government, this was sure to happen. If you want change, - revolt assertively and make them afraid of the people once again.

[jazzman]

Forget privitization and socialism. These are empty words used as symbols to arouse the deepseeded prejudices and passions of the mass electorate. The system is set up and gamed to benefit the very wealthy few at the expense of the many. If it takes some socialism to realize it, then that's fine. If it takes some privatization to make sure it happens, then that's fine. Only the poor schlubs driving the pick up trucks with their 'cut taxes' and W bumper stickers fall victim to the socialist vs. free market propaganda that spews forth from the media. The truth is. The rich get richer. The poor get poorer by any means necessary. All options are on the table.

[zizyphus]

Bear Stearns should have been allowed to fail. The fact that a secretive cabal of international bankers decides that US taxpayers need to go into debt for generations to save the fortunes of the elite, shows how far down the path to fascism we have wandered. Yes, by all means and with great haste, supply billions to a crooked Wall Street firm, while 30 million Americans wonder where their next meal is coming from.

Our government has sat quietly by as organized crime has taken over every federal agency that is supposed to look out for the interests of the American people. Not one group tasked with oversight is willing or able to perform its duties, but who will know, since the media is part of the propaganda machine.

[Vinca]

Tonatsuissa: IS IT 2009 YET? CAN'T WAIT FOR CHANGE

[Gma11]

"Privatize the profits and socialize the losses.: --Well said!!

I'm reading Soros' new book, "The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means." It's an excellent book, which I'm about three-fourths of the way through. It helps me make sense of news such as the above. Soros articulates theoretical and methodological problems with our current economic paradigm and explains WHY things are happening as they are. He notes the "bubbles" that have occurred in the past decades and the "super-bubble" that is occurring now. And explains WHY the current thinking can't cope. It's written in a way that a non-economist like I am can understand. And, yes, deregulation and greed are major factors.

[RoloTomassi]

I just love the idiot GOPers around here who love to call progressives "socialists"; they don't have a clue about what is going on.

You would think that at least some of these mindless GOP foot soldiers would look into the situation enough to see the lay of the land; the GOP supports keeping their "base" from hitting bottom at all costs, but could give a damn about anyone else, including the boobs at the bottom who simply fail to see that they consistently vote against their own best interest.

Hey, if I can vote to save myself and others like me from financial ruin, and that makes me a socialist, then go ahead and slap that label on me and I will wear it proudly!

Jeez, why are these clueless 30% or so determined to remain clueless?

Ideology, I suppose is the answer--but clearly it is mindless ideology.

Americans need a social safety net and a UHC system; voting to keep GOP corporate water-carriers in office is counter-intuitive to those needs in every way imaginable.