I heard a terrific speech last Friday by the Federal Reserve Chairman, Ben Bernanke.
In his address, to a Russell Sage-Century Foundation Conference on the causes and cure of the financial crisis, Chairman Bernanke said just about everything a progressive would want to hear. Read it for yourself and see if you agree.
The financial industry, he said, had been characterized by "high levels of leverage; excessive dependence on unstable short term funding; deficiencies in risk management in major financial firms; and the use of exotic and non-transparent financial instruments that obscured concentrations of risk." In other words, Wall Street went berserk; and markets did not correct themselves. Add a little more invective about Goldman Sachs and Rolling Stone's Matt Taibbi could not have put it better.
As for the regulators, "gaps in the regulatory structure" allowed very large firms and markets "to escape comprehensive supervision." There were "failures of supervisors" and "insufficient attention to the stability of the system as a whole."
Bernanke added that though the immediate losses in the tech bust of 2000 were about the same as the losses in the value of housing -- $7 to 8 trillion -- the dot.com crash "resulted in a relatively short and mild recession with no major financial instability," while the sub-prime collapse brought down the entire economy. Why? Because of the massive disguised leverage and related abuses in the shadow banking industry that caused financial markets to grind to a halt.
Bernanke defended the Fed's policy of driving interest rates nearly to zero, including buying securities as necessary from the Treasury and from private financial markets. In pursuing these policies, he has braved attacks by the right and by several inflation-phobic regional Federal Reserve Bank presidents.
So does Bernanke deserve the accolade bestowed in the April Atlantic magazine cover profile by Roger Lowenstein, "The Hero?" Not entirely.
Bernanke certainly gets an A for using monetary policy to keep the economy from collapsing. But if you look at Bernanke over the past ten years, what you see more than anything else is a learning curve on matters of regulation. Lowenstein misses that.
Supreme among those supervisory agencies criticized in his speech that failed to contain escalating abuses was the Bernanke Fed itself.
Bernanke, in his scholarly writings about the failure of the Federal Reserve to head off or cure the Great Depression, emphasized failures of monetary policy. He said not word one about regulatory failures.
"The correct interpretation of the 1920s," he wrote in 2002, "is not the popular one -- that the stock market got over-valued, crashed, and caused a Great Depression. The true story is that monetary policy tried overzealously to stop the rise in stock market prices."
But that view is not only wrong but at odds with the views that Bernanke espouses today. The over-leveraging, conflicts of interest, and regulatory lapses of the '20s were precisely analogous to the market abuses and supervisory corruption that caused the bubble and crash of our own era.
Bernanke also gave a now (in)famous scholarly paper in 2004, in which he spoke of "The Great Moderation," meaning a world of "reduced volatility", low interest rates and plentiful capital. Bernanke utterly missed what was really occurring. Today, he would recognize that "moderation" as a fools' paradise -- the result of the reckless and un-policed creation of leverage by the shadow banking system.
Though Bernanke was determined not to repeat the mistakes of his predecessors once the system crashed in 2008, when he acted to pump in as much money as necessary, it was only later that he learned the regulatory lessons. In the spring of 2009, he was on the side of Larry Summers and Tim Geithner in wanting to prop up large, effectively insolvent banks rather than acting to nationalize them and break them up in the public interest. The Fed also resisted releasing documents on the bailout, whose disclosure was required by Dodd-Frank, until ordered by the courts.
Today, however, Bernanke is increasingly on the side of the regulators in wanting to crack down on abuses in the banking and shadow-banking systems. Which is a very good thing, because the Dodd-Frank bill, which is only a partial solution to those abuses, is under assault from all sides, and so are the other regulatory agencies.
The Republican House, urged on by Wall Street, is trying to gut Dodd-Frank's regulation of derivatives. Thousands of Wall Street lawyers and lobbyists are flooding the zone to undermine the rule-making process necessary to implement Dodd-Frank. Congress is also trying to starve regulatory agencies that have new enforcement responsibilities.
The D.C. Court of Appeals threw out the SEC's first set of rules to implement Dodd-Frank on the ground that the Commission failed to do an adequate cost-benefit analysis. This brand of cost-benefit analysis mainly looks at compliance "costs" of banks. It ignores the cost, running into the tens of trillions, of the collapse itself.
The Fed's actions are not subject to this brand of cost-benefit analysis. Nor is the Fed captive to Congressional actions limiting its enforcement budget, since the place creates money.
It is an odd feeling, certainly, seeing the largely undemocratic Fed, long an agency historically beholden to Wall Street, as an important ally in the effort to clean out the financial system and to prevent the next collapse. I'd be much happier if Congress had passed even tougher legislation, and if President Obama and his Treasury Secretary -- that would be Tim Geithner (!) -- were leading a popular crusade for deep financial reform.
Bernanke, thanks to his baptism by fire in the crisis, has steadily moved from regulatory dove to regulatory hawk. Several of his colleagues deserve credit, too, notably Governor Sarah Bloom Raskin, who prodded the Fed to take an assertive stance pressing for more housing and mortgage relief, and Governor Daniel Tarullo, the Fed's point man on banking regulation.
The Fed remains a deeply undemocratic institution, structurally in bed with the financial industry. But in times like these, we take allies where we can find them. And Ben Bernanke's odyssey deserves our respect.
Robert Kuttner is co-editor of The American Prospect and a Senior Fellow at Demos. His latest book is A Presidency in Peril.
Richard (RJ) Eskow: The White House and Mortgage Fraud: So Far It's All Talk, No Action
Mike Lux: Most Conservative Congress in How Long?
Dylan Ratigan: Is the Federal Reserve Coming Clean?
Thanks Mr. Kuttner
Thanks to Ron Paul & his ilk, we now have an Army of drugstore Economists, who insanely believe that after listening to an hour or two of his nonsense;
they are now competent to critique the Federal Reseve
Almost as bad as the Army of Pseudo-Constitutional Scholars, who never heard of the Commerce-Clause, or the Proper-&-Necessary-Clause
OR
the Establishment-Clause
We are RACING towards the status of GREECE
. . because our citizens are too stupid to govern themselves
QEs MUST be renamed Titanics so that slathered congressmen and THE 299 million successfully obfuscated Americans, might actually have some idea what they do TO OUR BUYING POWER, and OUR held property. TANK IT CONSTANTLY, and treasonously create inflation widened and tax free equity streams to lechers.
THE ONLY thing that stopped Ben from a quick clandestine QE float WAS THE FACT THAT WE ARE ENRAGED and WATCHING. We couldn't stop him for the payola, euro-buy to compensate bankers for writing down Greek debt to something closer to reality. Ll0rd knows what that money would have done to HELP Greece directly. WHY ON THIS EARTH ARE WE PAYING UNTAXED GANGSTERS?
Send them some Navy SEALS to repatriate our money. NO MORE tax breaks and begging to keep them from a food/gas feeding frenzy with tens and tens of trillions in untaxed, remotely positioned equity.
At the time I was in law school and was very skeptical of their views, so I asked a lot of questions over the course of that week. The overwhelming impression I got was that these guys were
A) "Nice" guys. Polite, intelligent, congenial, etc.
B) Convinced that they were smarter than basically everyone else.
C) Utterly confident that letting the "foxes" (i.e. members of the financial services industry) guard/self regulate the "hen house" (i.e. the financial services industry) was not only not a problem, but was in fact the BEST way to safeguard the "hen house". I think we ALL know how that worked out.....EPIC FAIL!!!
There is nothing "federal" about it. It is a private institution and a secretive organization. It is the ultimate cartel. The banksters don't need to engage in drug dealing, prostitution or other illegal industry. They have written the legal tender laws so that only THEY can counterfeit money.
Look at the money in your wallet. Does it say "United States Note" or does it say "Federal Reserve Note"?
https://federalreserve.gov/events/publichearings/20000907/20000907pm.htm
Helicopter Ben will be Revised to be as B IG a CLOWN . . as the Maestro? Greenshades . .
For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them. Corporations borrow cheap here & expand overseas.
We had interest rates too low--for too long and thus credit problems The problem of interest rates, which are artificially low and below the rate of inflation it does force investors into risky investments including individuals and pension funds with no way to buffer stock market losses by CD's or treasuries. .
"Supreme among those supervisory agencies criticized in his (Bernanke's) speech that failed to contain escalating abuses was the Bernanke Fed itself.
Bernanke, in his scholarly writings about the failure of the Federal Reserve to head off or cure the Great Depression, ...said not word one about regulatory failures.
...(Yet) the over-leveraging, conflicts of interest, and regulatory lapses of the '20s were precisely analogous to the market abuses and supervisory corruption that caused the bubble and crash of our own era.
...In 2004, ...he spoke of "The Great Moderation," meaning a world of "reduced volatility", low interest rates and plentiful capital. Bernanke utterly missed what was really occurring. Today, he would recognize that "moderation" as a fools' paradise -- the result of the reckless and un-policed creation of leverage by the shadow banking system."
Time is money. In the time it has taken for Bernanke to come around to believe regulatory failure was a root cause of our undoing, billions upon billions have been raked off the table--on his watch-- by speculators whose governments cannot allow them to lose when they lose.
And he's a regulatory hawk now because he's suppressing interest rates even more than Greenspan did?
It's a bizarre world where someone credits Bernanke with learning because rather than blaming himself, the Fed, and other government regulations (that made MBS more attractive investments than loans, that cartelized the ratings industry through the NRSRO designation, that pushed banks to loaning to individuals who weren't good credit risks, etc.) he blames Wall Street and says he didn't have enough oversight.
Well.. I'll leave it to Hayek to talk about that...
"Oversight? The government’s long been in bed
With those Wall Street execs and the firms that they’ve bled
Capitalism’s about profit and loss
you bail out the losers there’s no end to the cost
the lesson I’ve learned? It’s how little we know,
the world is complex, not some circular flow
the economy’s not a class you can master in college
to think otherwise is the pretense of knowledge"
But Bernanke's got it all down pat now, right? He's sounded so confident about his ability to reverse any trend that gets too far. I'm sure he can be trusted now just as much as he could be in 2007 and 2008. Good luck with that.