Wall Street Rules: The Bernanke Reappointment

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.

Comments

[pontesisto]

If you would like to help pressure your Congressmen to vote in favor of an audit of the Federal Reserve please join our voting bloc at:
http://www.votingbloc.org/Audit_Fed_Bloc.php

[tweedledeedumb]

Democrats put Republicans to run the finacial centers...and they are surprised when policy supports the rich and financial. Like I have saaid before...when's the last time we saw a real liberal come from Harvard Law School???

[lambdin1]

Questions indeed should be asked! Not just of Bernanke, but of all of the other Federal regulators that were "on watch" when everything turned sour! Where was the government then?!? Wall Street has long been a rich man's casino! It will not change! As long as GREED drives mankind, Wall Street will continue!

[Ed Howes]

If you ruled the world and you wanted to do it more efficiently, you would do everything that is now being done around the world, about the same way it is being done and has been done the past 8 years, or 50, or 100. This means you would need a multi generational plan for your heirs to follow to produce continuity. The people who oppose you would be unable to create or administer a five year plan. Who do we suppose will win? Why would the names or qualifications of the servants matter?

[vooter]

Everyone needs to read Jim Kunstler's column today--don't even bother reading anything else....

http://dailyreckoning.com/financial-crisis-called-off

[BartRoberts]

Bernanke didn't stave off another great depression. He just kicked it down the road. Like any other inside-the-beltway coward, he let tawdry poltics trump good policy.

[gotsmarter]

I think Borosage's article is brilliant. It's well organized so we the average taxpayers can understand it. It gives credit where credit is due--Bernanke worked with others to bring us back from certain financial ruin. And Borosage also presses Bernanke and others to fix the system that caused the crisis. When money is involved, regulation is a must. It is trickery to pretend otherwise. And rules are a must so that we never again pay such sickenly high monetary compensation to a few greedy souls. Borosage must continue to stay on his point. We Americans have short attention spans, and we have to hear things over and over before we "get it."

[NOSMAVAN]

Have no fear - the Republicans will rake Bernanke over the coals soon enough; after all, it is President Obama who's reappointing Bernanke, and in the eyes of the Republicans, everything Obama does is wrong and not in the best interest of the (their) Republic.

But wait - wasn't Bernanke originally appointed by Dick Cheney? I know, by Bush you say, but we now know that George W. Bush didn't so much as go to the bathroom without Cheney's permission.

NOSMAVAN

[mickthebiologist]

Foxes watching the hen houses where all the hens are laying golden eggs. My, my, all of this stupendous deification of the so-called elite class just makes me wet. Let's see, what can I do to make room for more heads on Mt. Rushmore? Weep in gratitude, kneel in reverence, grovel in shame at my own mere insignificance, beat myself with a stick for doubting the magnificence of it all?

Cluck, cluck, cluck, cluck, cluck, cluck went the duck, and we all ran for cover, fearing yet trembling in awe at the mere shadows of the great ones. In Oz, everyone lives happily ever after, just pay no attention to the man behind the curtain, or the eerie emptiness in your own life.

Saying it makes it so.

[nofanofheliumman]

Citizens of the United States, you must STUDY the history of The Federal Reserve and then determine for yourselves how "federal" it actually is.

I will say this: It is definitely not as "federal" as the Federal Bureau of Investigation--a legitimate arm of the Justice Department.

Other than that, I wish you would just put down your video games, iPhones, iPods, Twitters and FaceBooks and READ AND STUDY and LEARN. Especially STUDY HISTORY.

[plumbergirl]

History repeats itself. Thats just the way it is.

[ClarcKing]

If the United States does not implement economy formation measures; the U.S. economy will stop functioning in less than 60 days. The collective stupidity of the American people and our Congress for going along with the diktats of a defeated/bankrupt enemy, the Federal Reserve and the International member private central bankers, is a mystery. The international monetary financial system creates scarcity and than speculates, charges usury for surviving, demands war, free trade, austerity and fascism. The global monetary system is a killing machine. The world productive powers are contracting production. (See Toyota's announcement) A threat to the population as all out war. As per Lyndon LaRouche: put the Fed into bankruptcy protection; get the bailout trillions back; banks that qualify will join the U.S.National Bank. Credits and currency will be issued into the population's physical economy. A massive job mobilization program must ensue. Stop the foreclosures; enact the Homeowners and Bank Protection Act. Terminate the insurance/HMO system; re-enact the Hill-Burton Act; the general hospital system. Stop the perpetual war policy; pull the troops out of Afghanistan. Food, water, and energy production levels must be maintained and increased via infrastructure projects. The citizenry must be roused and demand that the U.S. government act as if it is created of the people, for the people and by the people.

[marinara]

yeah and a cherry on top

[Popham]

Excellent commentary---the sentiment of millions of responsible Americans.
The points in this article are well made and taken, but while the Senate is doing all this examination,
questioning and probing, then the House should be giving seriuos consideration to HR1207,
an auditing of the fiat Federal Reserve Bank.

[larry278]

I have an inane question. If the feds show us the books, is anybody going to show us how to look at the books & what to look for?
I'm one of those people who can balance my check book but that is the limit to my financial skills. Is there an idiots guide & if so, which of the Idiots Guide or Dummies series does it?

[jemborg]

Fail.

[jmpurser]

A lot of economists (including Krugman) are for Bernanke's reappointment to a second term and I give their words a lot of weight.

On the other hand after the last 7 months I can think of no reason NOT to replace the ENTIRE Obama financial team. IMHO their sole claim to credibility is the fact that they may not have done the worst thing possible at EVERY turn. They're clearly in office to support the banks, large corporations, and the wealthy with little or no regard for the rest of us.

[Doubledoot]

Exactly : as I have been saying for the last 6 months ! A leapord does not change it's spots. Expect more of the same with Bernanke. Protections for the power elite at the expense of the rest of the nation. It was not a good idea to retain Bernanke or allow Paulson to do what he did with the banks nor do I think Sommers is a good bet either. We need someone with a new and progressively reformist view who is interested in reviving the health of the entire country not just a small privilaged segment. Everyone knows that without a healthy middle class the economy is going nowhere: everyone except Bernanke and the current economical advisory board. Artificially puffing up large banks and corporations is no long term solution. Obama has proven now to be clueless when it comes to the economy and Beiden follows closely behind. The time to declare a national emergency has passed and the drastic measured needed to make a true recovery w/ long term protections included has passed. They now cite the housing upswing as a "turn around" but realize that is being built on the backs of foreclosures and the $8000. stimulus for new home buyers. They should be ashamed to mention it at all.

[WritusMaximus]

"3. If you are going to spend our money, why can't we see the books?"

This Obama idea to give Bernanke and the Fed Res more power, including bailing out with our tax money the financial institutions Bernanke/Fed Res deem necessary to the economy/financial system (yeah, "too big to fail" comes to mind) should be shot down NOW. Imagine a world where, instead of Congress deciding, we get Bernanke and future heads of Fed Res deciding to pump hundreds of billions into bank coffers and sticking in the American people's collective wallet. Once this is done, does not matter what Congress or the American people want, because the Fed Res is a private and independent entity, and it's actions will be final.

The plan is oh so very obvious---remove from elected officials (answerable to their constituents) from deliberating and then deciding, and put such power in the hands of an unelected person in charge of a private organization which represents banks.

[jedthekidd]

I think your right on with this article. Bernanke did a wonderful job but I'd like to have the answers to your questions. Why can't we see the books, and why didn't the fed spend the money more directly on the American public rather than huge banks. If the Federal Reserve gave my employer the money required to maintain my position and me enough money to offset the loss of equity in my home, I think I could have watched the banks choke on their own mistakes.

[zaydee]

I agree...Borosage nailed it. Now we need some answers. And one more question:
Why not increase the punishment for these violations of public trust?...the punishment
should fit the crime.