The reappointment of Ben Bernanke as Chairman of the Federal Reserve -- cleverly timed to defuse the news of burgeoning federal deficits -- was preordained. The "markets" demanded it, and as James Carville noted, when the markets speak, presidents listen. (Carville, shocked at how Bob Rubin's arguments about the markets trumped all Clinton campaign pledges, exclaimed: "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.")
The conventional wisdom holds that Bernanke's reappointment is well-deserved. Officially, we are told the recovery is beginning. Bernanke is credited for the bold, inventive and unprecedented wielding of the power of the Federal Reserve to stave off a depression. And now, as the Fed faces the next perilous months, it is hard to imagine anyone else entrusted with the job. Or as the more cynical suggest, Bernanke helped create the mess, it is only right that he be charged with cleaning it up.
But before the Senate bestows upon Bernanke the reverence once reserved for Alan Greenspan, some basic questions should be posed. Senator Chris Dodd, chair of the Senate Finance Committee, has a particular stake in challenging Bernanke about what he has learned from the past desperate months as well as what he intends for the next years. Consider.
1. What do you know now that you didn't know then?
Before the crisis, Bernanke served as Sancho Panza to Alan Greenspan's Don Quixote, extolling the virtues of deregulation, lauding the ability of markets to self-regulate, celebrating the strength of our banking system, seconding Greenspan as he jousted with imagined inflation while oblivious to the housing bubble, orgiastic greed and gambling, and predatory lending that constituted real and present dangers. Greenspan has now admitted that he was blinded by a "mistaken" set of beliefs. How has the crisis disabused Bernanke of his ideological predilections? How, in concrete ways, has it changed his views about how the economy works, and about the role of regulation and regulators in curbing Wall Street's excesses?
2. Why shovel trillions into the banks and finance houses and ask nothing of them for the American people?
Once the Federal Reserve belatedly awoke to the severity of the crisis, Bernanke joined with Treasury Secretary Paulson, and former New York Federal Reserve Bank president (now Treasury Secretary) Tim Geithner in cobbling together a series of ad hoc emergency measures to stave off financial collapse. Mistakes -- like letting Lehman go belly up -- were made, but that was to be expected since they had to make it up as they went along. For this, Bernanke deserves the thanks of a grateful nation and world.
But the Senate should press the Chairman on how he defends the terms of the deals, and what he would do now to change them.
Essentially, Bernanke, Geithner and Paulson flooded the financial system with dollars, about two trillion and still counting. They chose to resuscitate essentially bankrupt banks, not take them over and reorganize them. They asked little or nothing from the banks in return -- no requirements on lending, no marking of toxic paper to market, no change in business models or compensation schemes, no changes in management.
So now, the banks are officially said to be "healing." But they still are burdened with toxic paper; they still aren't doing much lending. People are still losing their jobs and their homes, credit card and commercial defaults remain at high levels. And the most aggressive of the investment houses seem to be headed back to the old ways. Goldman Sachs shamelessly announces that it is putting aside several billion for bonuses, based on profits largely from computerized gambling essentially with taxpayers' money.
Why not "resolve" the banks rather than just try to resuscitate them? Why not require changes in compensation schemes, limits on exotic trading and securities, mandates to return to the essential business of lending money to Main Street? Why not force changes in management to hold people accountable for their catastrophic actions?
3. If you are going to spend our money, why can't we see the books?
In the emergency, the Federal Reserve has revealed its power to put literally trillions into the economy without a vote of Congress. This untrammeled power was vital in the crisis, and is utterly corrosive in a democracy, particularly in an insulated institution that sees itself as Wall Street's protector. Bernanke has opposed a bi-partisan effort by the Congress to get an audit of the Fed's books, so that Congress could learn where the money went.
Senator Dodd should make himself the tribune of the American people here. Why should the Fed have this power? How can it be made more accountable to Main Street than Wall Street? Why should its books not be audited? Would Bernanke support the creation of a Congressional Finance Office to give Congress independent advice on the Fed and the financial community, as the Congressional Budget Office provides on the budget?
4. If you don't know where you are going, you are likely to end up in the wrong place. (from the existential philosopher, Yogi Berra)
Going forward, President Obama has stated that we can't go back to the old economy where finance captured 40% of the nation's profits. To achieve that, the banking sector should be smaller and strictly regulated. The casino should be shut down. Banking should return to the boring profession of taking deposits and distributing loans.
Yet thus far the emergency policies have consolidated the banking sector, subsidized the big guys, increased concentration, and done little to reform practices, protect consumers, curb dangerous compensation schemes, or outlaw exotic securities. The bankers have responded to even the meekest of reform proposals with full court lobbying, arguably using some of the money taxpayers provided to lobby against the protections that taxpayers desperately need.
How does Bernanke propose we get finance under control? Does he agree with Obama that the financial system must be smaller and more constrained? How would he propose to do that?
5. Why should we reward failure with more authority?
The Federal Reserve had significant powers to regulate the housing market, to crack down on predatory lending, to curb the speculative excesses of the banking sector. Yet under Greenspan and Bernanke, those powers went unused Bernanke argued forcefully that the Fed should not act to counter asset bubbles, echoing Greenspan that it was easier to clean up the messes after they burst. Clearly the last months have punctured that illusion. But Bernanke continues to argue that the Federal Reserve play the lead role in regulating the banks, assessing systemic risk, overseeing those institutions deemed "too big to fail."
Why? Why should the Fed, Wall Street's instrument from its inception, pretend to be an effective cop on the financial beat? Why not leave it to do monetary policy, and assign regulation to independent agencies more accountable to the Congress? Why would we reward failure by increasing the Fed's powers? Shouldn't Congress enforce anti-trust policies to insure that no institution is ever too big to fail, rather than trying to regulate such institutions? Why not have an independent agency tasked with protecting consumers from predatory financial practices?
6. What has the Fed learned from Japan's mistakes?
As Bill Greider and Paul Krugman have argued, the US looks more and more like Japan in its lost decade. Here, as in Japan, the major insolvent banks were subsidized, not reorganized. They remain weak, reluctant to lend, a heavy weight on the economy. As in Japan, the "green shoots" of recovery have been watered by heavy deficit spending, but political opposition is growing to taking on more debt. In Japan, when the economy would show signs of growth, worried politicians would cut spending, and the economy would sink again. The result was a decade of stagnation, until finally the Japanese garnered the gumption to restructure the banks -- and were able to export into America's bubble.
Bernanke should be pressed: Aren't the major banks in their present condition likely to remain a drag on any recovery? How will we avoid a decade of stagnation? What will provide the source of growth, since we can't relay on exports to the US?
Ben Bernanke has performed valiantly in an unprecedented crisis. But save the laurels for later; the Senate should grill him, not deify him. He was wrong about deregulation of financial markets, blind to the dangers of the housing bubble, wrong about its impact on the real economy once it burst, slow in seeing the recession coming. We need to know how his core beliefs have changed given that reality.
And his bold steps to stave off the crisis have reflected the many of the same ideological predispositions - reluctance to take over and reorganize the major banks, unwillingness to force heads to roll, opposition to mandates on the banks that were bailed out, insistence on preserving the powers and the prerogatives of the "Temple." A crisis, it is said, changes everything. We now know that the Fed has powers far beyond the mysteries of monetary policy. The Chairman can no longer hide behind opaque language, or argue that the mysteries of the Temple must be preserved. The Chairman has been revealed as the second most, if not the most powerful figure in Washington. So, before the Senate gives its consent to his reappointment, Senator Dodd, Chair of the Finance Committee, should insist that we learn learn how Mr. Bernanke's beliefs have changed, and how he would change his policies going forward.