Ben Bernanke on The Huffington Post

Lakshman Achuthan: Analysis: Good News on Jobs, But Will it Last?

2009-12-04T17:56:44Z

Friday's news of a drop in the unemployment rate to 10 percent is a welcome development. It was presaged by earlier strength in reliable leading employment indicators, which suggest that this improving pattern will persist next year. In November, employers cut the fewest jobs since the recession began, but how should Americans interpret this information? With unemployment in double digits for the first time since 1983, many still worry about the jobless recovery.

The post-recession dip in joblessness is the good news. But, looking ahead to the later phase of the expansion, the post-World War II period shows disturbing cyclical patterns.

The jobless rate usually sees a sizable drop during the economic recovery -- and bigger recessionary spikes in unemployment are typically followed by larger declines during the first year of improving unemployment. So it would be no surprise if, a year after the unemployment rate begins to drop, it falls to the 9 percent range.

The real problem is that the rate of decline in joblessness slows during the rest of the economic expansion. The annual post-war pace of decline in unemployment during these periods has been reasonably uniform, the median being 0.5 percent a year.

If that pattern persists, the U.S. economy needs to keep expanding without interruption until 2020 for unemployment to fall to its pre-recession low of 4.4 percent. Should the next recession arrive earlier, as we suspect, it will take much longer. The implications constitute nothing short of a wake-up call for policy makers who promise to get job growth back on track.

Since World War II, there has been a clear easing pattern in the trend rate of economic growth during expansions, culminating in the 2001-07 expansion, which showed the slowest trend rate of growth on record -- especially in terms of jobs. Ominously, during expansions following the initial year of revival, growth in non-manufacturing employment has been falling in a parabolic fashion since the 1970s. A continuation of this pattern would lead a much worse job market than almost anyone expects.

The "great moderation" of business cycles once extolled by many economists, including Federal Reserve Chairman Ben Bernanke, is history. The trend rate of growth is shriveling. In other words, business cycles are back with a vengeance.

The real risk is of more frequent recessions repeatedly aborting cyclical downswings in unemployment in coming years. Some consolation comes from the fact that past performance does not dictate destiny, and extrapolation from past patterns is not a reliable forecasting method, especially if the pattern is about to change.

It is at least conceivable that either enlightened policy measures, or good luck, or both, will result in a decisive break from these patterns. The silver lining is that even an economy dipping in and out of recessions and keeping joblessness cycling near historical highs is a navigable one for decision-makers who keep a closer watch for recessions and recoveries.

Originally posted on NPR.

Lakshman Achuthan is managing director of the Economic Cycle Research Institute. He is a member of Time magazine's board of economists, and co-author of Beating the Business Cycle: How to Predict and Profit from Turning Points in the Economy. Anirvan Banerji is the director of research for the Economic Cycle Research Institute and a RealMoney.com contributor.

William K. Black: Geithner as Martyr to an Ungrateful Nation: Bo Cutter's Tragicomic Portrayal of Tim as a "Man for all Seasons" (Part 2)

2009-12-04T12:29:40Z

This is the second installment in my comments on Bo Cutter's essay defending Treasury Secretary Geithner.

Bo views Geithner as a martyr subjected to unfounded, ungrateful attacks for his actions that prevented the Second Great Depression. Bo doesn't have much use for Americans that are upset with the senior managers of the finance industry. (This is a bit weird because Bo denounces these senior managers as universally incompetent, cowardly, and unethical.)

"[L]iberals hate [Geithner] because he did not take over or dismember the banks, and publicly execute their senior managements."

This passage tells us nothing about liberals, but much about Bo and his peers' fears of the public. The finance leaders know they are guilty of destroying much of the global economy -- while growing extraordinarily wealthy in the process. They know that their primary means of destruction was accounting "control fraud." They cannot understand why the public has not turned on the finance industry and demanded that the fraudulent financial leaders be prosecuted and their immense gains from fraud recovered. They also cannot understand why we allow the continued existence of systemically dangerous institutions (SDIs). Geithner, Paulson, and Bernanke have warned that the failure of any SDI could cause a global crisis. Under their logic, SDIs are ticking time bombs that will cause recurrent global crises. Geithner, like Paulson, is making the SDIs much larger and much more dangerous by using them to acquire other large, failed financial institutions. This policy is insane. Virtually no one (that isn't on their payroll) supports the continued existence of SDIs and no one publicly argues they should be made even larger -- but that is our policy. Bo is the authentic voice of giant finance: the idea of shrinking the giant banks to this community is so painful, so personal that it is equivalent to "dismemberment." (It also shows that the giant finance is predisposed to view itself and its allies as tragic martyrs.)

Bo is only getting started with Geithner's martyrdom and the ingratitude of the murderous mob to this modern martyr.

"And no one thinks he is tall enough. If you read the accounts of Secretary Geithner's hearings last week, you know this is all classic Washington behavior. If there is one thing at which the glibocracy in DC excels, it is coming out of the hills after the battle is over and shooting the wounded. This is Washington today, a system in total gridlock, in which counting coup is the central activity."

So, Geithner is picked on by nearly everyone, not given any respect because he is short, and now that he is wounded the D.C. denizens are out to shoot him. Despite our scorn, Geithner continues to step into the breach on our behalf. Bo was a senior federal official in crises and found his peers to be cowards: "the crowd of people willing to join you in taking responsibility gets smaller by the second."

This is why he is so impressed by Geithner:

Then, beginning with his assumption of the Treasury job in November -- long before he was confirmed, so he was clearly going to be beaten up on every action he took, but he went ahead and took them -- he was at the lead of every major decision made in the recovery effort. (During this presidential transition period, it would have been easy to keep away from the decisions by saying that power was still in the hands of President Bush. But the Bush administration by that point was completely spent. Someone had to step up and Tim Geithner did.)

Unlike Bo's cowardly heroes, Geithner is a hero -- repeatedly taking the lead in responding to the crises even when he knew that if he did so "he was clearly going to be beaten up on every action he took." Geithner was abused for using stress tests.

His use of stress tests, which was roundly laughed at by everyone, worked, helping enormously to make much more transparent and less scary the situations all of the major banks were in.

The purported stress tests [see here, here, and here] did make banking seem "less scary" because they were not real and were part of the Geithner/Summers/Bernanke coverup strategy. The SDIs demanded that the accounting rules on loss recognition be junked -- and the trio acceded to that travesty. Bo tells us why the SDIs demanded that they be able to hide their massive losses when he explains why he supports the Bush/Obama administration bailouts of AIG's counterparties: "most of the banks had either insufficient or no capital." To put it more bluntly, most of them were insolvent and the remainder had so little capital that they posed intense, global systemic risk. The Bush and Obama administration have followed a three-part strategy towards these insolvent and crippled SDIs: (1) cover up the losses through (legalized) accounting fraud, (2) launch an "everything is great" propaganda campaign (the faux stress tests were key to this tactic), and (3) provide a host of secret taxpayer subsidies to the SDIs. This strategy is the opposite of making banks "much more transparent." The strategy is not shaped by finance, but by politics. Both administrations have sought to keep the American people from knowing about these cover-ups and secret subsidies because they know that we would not tolerate either policy. The cover-ups and secret subsidies are not simply awful financial policies; they are also a betrayal of democracy. When Bernanke writes that the sky will fall if the Fed is subject to audit it is precisely because he knows that the Fed's policies cannot withstand scrutiny by anyone serving the interests of the citizens (as opposed to the interests of the SDIs). (John 3:20 "For every one that doeth evil hateth the light.")

Bernanke may believe that when he acts in the interests of the SDIs he is acting in our interests. Charlie Wilson (GM President and President Eisenhower's nominee as Secretary of Defense): "I thought that what was good for our country was good for GM, and vice versa." But that's the point; the Fed and so many of its senior officials such as Bernanke and Geithner are dangerous because the institution identifies too completely with the SDIs. Like Bo, they also see us as murderous populists that cannot be trusted to make democratic decisions about SDIs. Calling Geithner's and Bernanke's cover-ups and secret subsidies "transparency" is Orwellian. The best one can say is that Paulson, Geithner, and Bernanke decided (undemocratically) that it had become necessary to destroy capitalism and democracy in order to save them.

Bo's final claim in support of his martyrdom motif is:

Tim Geithner acted. He acted at the moment action was required ... with the fullknowledge that he would face exactly what he is now facing.

Get off his back.

Luckily, I like Star Trek so I have experience puzzling through time paradoxes similar to the one Bo presents here. Geithner had "full knowledge ... that he would face exactly what he is now facing." What he's facing is calls for him to resign his position as Treasury Secretary. He became Treasury Secretary in 2009. Bo, however, emphasizes:

Starting from late 2007, as the crisis began to unfold, Geithner was at the spear point of every issue and, along with Bernanke, was a creative policy maker who clearly saw the immense dangers we faced and stretched all of the powers of the Federal Reserve Board to find solutions no one else could.

So, Geithner acted "from late 2007″ with "full knowledge" that his actions would be so unpopular that it would destroy his career and that he "would face exactly what he is now facing" (calls for him to resign as Treasury Secretary). Geithner's career went ballistic after "late 2007." In 2009, President Obama appointed him Treasury Secretary and has moved to reappoint Bernanke as Fed Chairman. Those are the two most prestigious financial positions in the world. Exactly which aspect of being promoted to his dream job made Geithner a martyr? Where can we sign up for similar martyrdom? Tevye's response to Perchik's claim that "money is the world's curse" applies to Bo's claim that Bernanke's promotion makes him a martyr.

May the Lord smite me with it. And may I never recover. [Fiddler on the Roof.]

All time paradoxes are, of course, paradoxical and Bo's doesn't disappoint. How exactly did Geithner know in "late 2007″ that (1) Obama would be elected President, (2) would appoint Geithner as his Treasury Secretary, and (3) that he would face calls in 2009 to resign as Treasury Secretary?

Why Praise Faux Martyrs When Ed Gray is Available?

If Bo wants to praise a real regulatory martyr -- one who got the finance and regulatory issues correct early enough to prevent an economic crisis, reregulated successfully in the face of virulent, powerful opposition, and who did so despite knowing that it would destroy his career at a point where he was in financial distress the obvious candidate is Ed Gray. As Paul Volcker wrote about Ed Gray in a post-publication blurb for my book, The Best Way to Rob a Bank is to Own One:

Bill Black has detailed an alarming story about financial and political corruption....the lessons are as fresh as the morning newspaper. One of those lessons really sticks out: one brave man with a conscience could stand up for us all.

Paul Volcker was Ed Gray's only pillar of support for his reregulation of the S&L industry. When Gray became Federal Home Loan Bank Board Chairman in 1983 the S&L industry was coming out of the first (interest rate risk) phase of the debacle but descending into an even more severe second phase of accounting control fraud. The National Commission on Financial Institution Reform, Recovery and Enforcement's 1993 report on the causes of the debacle explained the characteristic failure pattern:

"The typical large failure was a stockholder-owned, state-chartered institution in Texas or California where regulation and supervision were most lax.... [It] had grown at an extremely rapid rate, achieving high concentrations of assets in risky ventures.... [E]very accounting trick available was used to make the institution look profitable, safe, and solvent. Evidence of fraud was invariably present as was the ability of the operators to "milk" the organization through high dividends and salaries, bonuses, perks and other means (NCFIRRE 1993: 3-4)."

In 1983, the S&L accounting control frauds grew at an average rate of 50%. The Texas state S&L Commissioner was sleeping with prostitutes provided by the second worst control fraud in the nation -- Vernon Savings (known as "Vermin" to its federal regulators). The California state commissioner, according to the documents, was secretly in business with the worst control fraud in the nation -- Charles Keating's Lincoln Savings. Texas and California approved over 300 new S&L charters. Most of them were troubled real estate developers with severe conflicts of interest. Many of them were control frauds. The rate of applications for new charters was expanding.

Gray's predecessor, Richard Pratt (a theoclassical finance professor) led the deregulation of the industry at a time of mass insolvency. He also largely desupervised the industry. He gimmicked the accounting rules to cover up losses and create fictional income. He cut the number of examiners. There were no criminal referrals or prosecutions of senior S&L officials. The industry was completely out of control. A regional bubble in commercial real estate was already growing in 1983.

Gray reregulated and re-supervised the industry. He ended most regulatory accounting abuses. He doubled the number of examiners and supervisors (over the vigorous objection of OPM and OMB). We began targeting the worst control frauds for closure while they were still reporting record profits and minimal losses. We adopted a rule restricting growth aimed at the Achilles' heel of every Ponzi scheme -- the need to grow massively. Gray brought in experienced regulators with a track record of vigor, courage, and professionalism and put them in place in the Dallas (Joe Selby) and San Francisco (Mike Patriarca) because they were the two worst regions. We deliberately burst the Southwest's commercial real estate bubble.

Gray put in place a system of criminal referrals and made supporting criminal prosecutions a top priority. The agency (and here great credit must also be given to OTS Director Ryan and the Department of Justice and FBI) effort was so successful that over 1000 "priority" felony convictions of senior S&Ls insiders were obtained -- the most successful effort in history against elite white-collar criminals.

We almost always resolved serious failures in a manner that wiped out entirely "risk capital" (shareholders and subordinated debt holders). Gray blocked Texas' and California's land rush style grants of hundreds of new charters by refusing to approve FSLIC insurance for any new S&Ls in those states. Gray did all this with the certain knowledge (which he often stated to us) that it would end his career. He was in his 50s and he was in financial distress, so he knew the sacrifice he would make would be severe.

Gray took on, simultaneously, the Reagan administration (particularly Don Regan and the OMB), a majority of the members of the House (who co-sponsored a resolution calling on us not to reregulate), House Speaker Jim Wright, five U.S. Senators (the "Keating Five"), the S&L trade association (which some political scientists rated the third most powerful in the U.S., his two fellow Bank Board members, much of the agency (including two of our economists that met secretly with Keating's lawyers), and most of the media (which sometimes referred to him as "Mr. Ed" -- from the TV program about the talking horse). Charles Keating sued him in his personal capacity for $400 million. The administration threatened to prosecute him for closing too many insolvent S&Ls (under the Anti-Deficiency Act). The administration tried to appoint two members chosen by Charles Keating (the most notorious S&L control fraud) to the agency (which would have given them majority control of the three-person Bank Board). (Pause for two minutes and consider how catastrophic it would have been if the administration had succeeded in giving control of the agency to that decade's most notorious control fraud.) He served as a "mole" for Keating and proposed to amend the direct investment rule (which Lincoln Savings had violated by more than $600 million) that would have had the effect of exempting it from enforcement. Lincoln's lawyers drafted the amendment (which, of course, never mentioned Lincoln). I blew the whistle on Keating's mole, which eventually led him to resign. After I blew the whistle (but before he resigned), the administration nominated him for a full term. The day after he resigned four U.S. Senators (the "Keating Five" minus Senator Riegle) met with Gray to pressure him not to take enforcement action against Lincoln's massive violation of the direct investment rule.

Don Regan tried very hard to force Gray to resign. He refused, so Treasury Secretary Baker met secretly with Speaker Wright (who, at the behest of Texas control frauds, was holding our proposed bill to recapitalize the FSLIC insurance fund hostage in order to prevent us from securing the funds to close more of the control frauds). Baker and Wright reached a cynical deal: the administration would not reappoint Gray to a new term and would not oppose Wright's demands for "regulatory forbearance" (which included debasing -- again -- the accounting rules and adopting other measures drafted by attorneys for the control frauds designed to make it far harder to close insolvent S&Ls. Wright agreed that he would support a $15 billion FSLIC recapitalization bill (instead of the $5 billion bill that the industry and control frauds supported. Wright got the better of the deal because his allies spread the word that the Speaker didn't really support the $15 billion bill and the House voted for the $5 billion bill.

Gray remains unemployed and unemployable today. But he doesn't have to avoid mirrors.

Unlike Geithner, Paulson, and Bernanke, Gray acted before the epidemic of accounting control fraud produced a bubble so large that it produced a general economic crisis. Consider what would have happened had Gray not reregulated and resupervised the industry beginning in November 1983. The roughly 300 control frauds in 1984 would have grown at 50% annually and scores of new Texas and California frauds would have entered each year. The result would have been a commercial real estate bubble of epic proportions. Such a bubble would have taken down not only the S&L industry, but also the banking industry (which had massive commercial real estate exposure) and would have severely damaged the insurance industry (which provides much of the permanent/takeout financing for commercial real estate). We cannot yet demonstrate when a bubble will collapse, but we know that accounting control fraud epidemics are capable of extending the life of financial bubbles and hyper-inflating them for several years. The direct losses among S&Ls, absent Gray's reregulation, would have been over a trillion dollars within five years. The losses to banks and insurance companies would have exceeded the S&L losses. Losses of that magnitude would have caused a severe recession.

It also needs to be stressed that subprime and alt-a loans, qualifying loans based on teaser rates, bonuses to loan officers based on volume (not loan quality), inflated appraisals, and accounting control fraud are not new. They always end badly. Mike Patriarca lead the supervisory effort in 1990-92 that prevented a nonprime lending crisis by forbidding lending practices that we have long known end in disaster. He then left federal service and went into business.

You might think that the first two calls Geithner, Paulson, Summers, Rubin, and Bernanke would have made once they finally realized there was a crisis would have been to Ed Gray and Mike Patriarca to see how successful reregulation is accomplished and how one successfully prosecutes the accounting control frauds that drove the current crisis. But, if you think that you probably also think that the one regulator that stood openly in support of Gray's reregulation of the industry -- Paul Volcker -- would be President Obama's primary economic advisor. Instead, Summers, Geithner, and Bernanke have marginalized Volcker. The Bush and Clinton anti-regulatory Wrecking Crews remain in power in the Obama administration despite a dismal record. They are never held accountable. Bo wants them left in power. He wants us to stop criticizing their failures, to apologize to them for our ingratitude, and to honor them for the terrible career sacrifices they have (mythically) made to protect us from harm.

I disagree. I urge us to learn the lessons not simply of regulatory failures but regulatory and prosecutorial successes (the Gray and Ryan years). Mike Patriarca is in his prime. Put him in charge of a major regulatory agency immediately. Paul Volcker is a national treasure that petty, power-hungry failures (yes, I mean Summers) are wasting.

Oh, and Jim Baker, Jim Wright, and John McCain should show some class and apologize for the shoddy treatment they handed out. Let me be clear on this last point -- they shouldn't apologize for the shoddy treatment of Ed Gray the man -- they should apologize for the damage they caused our nation when they took their policy advice from major political contributors (that were leading control frauds) and impeded Gray's substantive reforms that were essential to protecting our citizens.

Sen. Bernie Sanders: Where Was the Fed?

2009-12-04T11:48:29Z

The American people overwhelmingly voted last year for a change in our
national priorities to put the interests of ordinary people ahead of the
greed of Wall Street and the wealthy few. What the American people did not
bargain for was another four years for one of the key
architects of the Bush economy.

Fed Chairman Ben Bernanke, in charge of the central bank since 2006, could
have demanded that Wall Street provide adequate credit to small and
medium-sized businesses to create decent-paying jobs in a productive economy,
but he did not.

He could have insisted that large bailed-out banks end the usurious
practice of charging interest rates of 30
percent or more on credit cards, but he did not. He
could have broken up too-big-to-fail financial institutions that took Federal
Reserve assistance, but he did not.

He could have revealed which banks took more than $2
trillion in taxpayer-backed secret loans, but he did not.

The American people want a new direction on Wall Street and at the
Fed. They do not want as chairman someone who has been part of the
problem and who has been responsible for many of the enormous difficulties that
we are now experiencing. It’s time for a change at the Fed.

We need a new chairman. We need somebody who is going to pay attention to
small- and medium-sized business, somebody who is going to do everything he or
she can to grow our economy and create decent paying jobs, somebody who is
going to protect consumers against outrageously high interest rates on their
credit cards, and somebody who is going to stand up for ordinary people.

I
am going to do my best to see that Mr. Bernanke’s nomination is defeated.

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Federal Reserve Chairmen Never Learn: Calculated Risk

2009-12-04T08:18:06Z

In his 2001 testimony, Fed Chairman Alan Greenspan testified before the House Committee on the Budget, and while offering his usual cautions and caveats, Greenspan talked of surpluses for the foreseeable future.

Washington Post : Ben Bernanke Has Earned Second Term

2009-12-04T02:22:07Z

Facing a Senate confirmation vote on a second four-year term as chairman of the Federal Reserve, Ben S. Bernanke finds himself under attack from both ends of the political spectrum. Libertarian Rep. Ron Paul (R-Tex.), abetted by a number of liberal Democrats, has made Mr. Bernanke's alleged failures a principal argument for his bill to subject the Fed to intrusive congressional auditing. Sen. Bernard Sanders (I-Vt.), a self-described democratic socialist, has announced that he will put a "hold" on Mr. Bernanke's renomination, forcing the Senate to come up with 60 votes to proceed to a vote. The wrong-headedness of this left-right pincer emphasizes the moderate wisdom of President Obama's decision to offer Mr. Bernanke another term.

Cenk Uygur: Hell No on Bernanke!

2009-12-03T17:34:28Z

I had large misgivings about Ben Bernanke before his hearings began. He's given credit for steering our economy to safe shores after we hit an enormous economic iceberg. First, I would argue we are nowhere near safe shores. Second, why are we rehiring the guy who steered the Titanic into the iceberg in the first place?

But despite all of that, I wasn't dead set against him. He does have Republicans and Democrats who believe in him. He obviously has the confidence of President Obama (though, so does Geithner and Summers, so that might not tell you much). He is an expert on the Great Depression. The problem is he was at least partly responsible for creating the situation that called for his expertise. His knowledge in handling depressions might not be so handy if he hadn't gotten us into one.

So, I was not predisposed to support him but I was not dead set against him, either. Until now.

He just said in his hearings that he would get more money by going after Social Security and Medicare. When Sen. Reed suggested that we could also get the money by taxing some of the richest people in America (some of whom got rich causing the economic crash in the first place), all of sudden he demurred. He says that's not his place to say if we should ever raise taxes. But apparently it is his place to encourage going after your retirement money. So, taxing the rich is never under consideration, going after the retirement money of the middle class is his first option. Sorry to be blunt, but fuck that.

He even has the nerve to quote famous bank robber Willie Sutton by saying that he would go after Social Security and Medicare because "that's where the money is." Well, give him points for honesty. He plans on robbing more of your money to give to his Wall Street friends - because that's where the money is. As if they haven't taken enough of our money.

First of all, this shows that it was not a coincidence that George W. Bush selected him as the head of the Fed. He has a bipartisan reputation in Washington. But going after these programs shows you his inclination is unmistakably Republican. Screw the middle class first and protect the rich at all costs. But more importantly, it's a matter of perspective. From his perspective, he doesn't consider raising taxes of the wealthiest people in the country, or even more pertinent the taxes on financial transactions, as even a remote possibility. His perspective is to protect Wall Street, not you. He views you as the bank that they withdraw from.

On top of all this, he refuses to disclose where the Fed distributes its money and says we shouldn't audit the Fed to find out where they send trillions of our dollars to. Is this a joke? This guy is going to have enormous power to distribute our currency and unlike Congress he doesn't even have to account for the money. And we're going to hand over the keys to the economy to a guy with this perspective? Hell no! We'd be crazy to agree to this.

Is Ben Bernanke the change we voted for? How can anyone believe that? What is the matter with Obama? Picking the same guy as Bush, and the same exact guy who was at the helm when the economy crashed, is definitely not change we can believe in. Ben Bernanke is the definition of the status quo. He is part and parcel of the Washington and Wall Street establishment that caused our economic problems in the first place. Why the hell would we put this guy back in charge?

Watch TYT on You Tube

William K. Black: Fraud and Failure: Bo Cutter's Indictment of the Finance Industry (Part 1)

2009-12-03T15:48:15Z

Bo Cutter has presented the best possible defense of Treasury Secretary Geithner.

It is a remarkable defense because it is premised on a scathing indictment of Wall Street, theoclassical economics, modern finance, and the sycophants that the financial community installed as anti-regulators. Indeed, Bo's account is sometimes particularly credible because it is a confession. Bo was a managing partner of Warburg Pincus, a major global private equity firm, and led President Obama's Office of Management and Budget (OMB) transition team. His defense of Geithner provides so rich a vein of ore that I will mine it in three installments: (1) Bo's indictment of the finance industry, Greenspan, Geithner, Paulson and Bernanke, (2) the martyrdom of Geithner, and (3) Geithner as Bo's Last Action Hero.

Bo's explanation of Geithner's unique virtues begins the indictment.

It comes down to this: the combination of brains, guts, calmness, and a willingness to act are virtually non-existent in Washington in any era, but particularly in this one. When you find the combination in a significant cabinet level job, you should value it.

[T]his crisis was long in coming and it was a totally integrated failure of intellectual traditions, global macro-economic imbalances, government policy making, regulatory supervision, financial sector greed, incomprehensible boards of directors, absences without leave, and breath-taking management short-sightedness. No one and no institution put together an understanding of the set of factors that triggered this particular debacle. Tim [Geithner] is included in this "no one", but so is everyone else.

I think the last two years have revealed the single largest failure of senior management in the financial sector, and of the board system in American history. I think I am correct in saying that there was not a single independent director in America who stood up on this issue. I do not understand why every board of every institution that failed was not asked to resign immediately.

Bo's indictment is compelling, but his logic proves a deeper failure. There is no reason to restrict his indictment to "the last two years." The senior managers' and directors' failure did not begin with the recession. They failed throughout the expansion of the bubble, the backdating of stock options, after-hours trading, the collapse of the auction rate securities market, the "epidemic" of mortgage fraud by lenders, the massive scandals of the Enron and Worldcom era, and the savings and loan debacle. The financial sector has been in recurrent, intensifying scandals for decades.

Bo's arguments require us to focus on at least the last four years (even if he continues to ignore the FBI's 1984 warning that the mortgage fraud "epidemic" would cause a crisis).

In fact, by 2006 and early 2007 everyone thought we were headed to a cliff, but no one knew when or what the triggering mechanism would be. The capital market experts I was listening to all thought the banks were going crazy, and that the terms of major loans being offered by the banks were nuttiness of epic proportions.

By early 2006 -- roughly four years ago -- "everyone" agreed "we were headed to a cliff" and that the banks' "major loans" were "nuttiness of epic proportions." An industry whose claimed expertise is the sophisticated evaluation of risk and value universally failed to come remotely close to valuing either. As Bo emphasizes, these were massive errors. These managers got immensely wealthy because -- not despite -- their willingness to make hundreds of thousands of loans that were certain to crash and burn as soon as the bubble ceased to inflate (which it did in 2006). Bo knows them, and Bo says that every independent (sic) director betrayed their fiduciary duties to shareholders. Every senior officer at the major banks failed. Bo portrays them as incompetents, cowards, and moral failures.

Bo's indictment of his finance peers is even more severe than his portrayal. White-collar criminologists have shown that the lending pattern he describes ("nuttiness of epic proportions" when "everyone" agrees "we were headed to a cliff") demonstrates that the lenders are frauds that have produced an epidemic of accounting "control fraud" (where the persons controlling a seemingly legitimate organization use it as a "weapon"). The FBI began publicly warning of an "epidemic" of mortgage fraud in September 2004, with 80% of the losses occurring when lender personnel were involved in the fraud. The number of criminal referrals for mortgage fraud indicates an annual rate of mortgage fraud in the many hundreds of thousands. The recipe for a lender optimizing accounting control fraud is: (A) grow extremely rapidly, (B) make extremely bad loans, (C) have extreme leverage, and (D) provide minimal loss reserves. (The first two ingredients are related. In a mature product like home mortgages, the optimal way to grow extremely rapidly while increasing yield is to make loans to individuals that cannot repay the loans. The rapidly expanding bubble allows fraudulent lenders to postpone loss recognition by refinancing the bad loans.) Nonprime specialty lenders followed this recipe. The pattern produces guaranteed record accounting profits in the short-term. Because a significant number of lenders follow the same strategy, the result was a hyper-inflated financial bubble followed by an economic crisis.

The accounting fraud optimization pattern that a lender follows, however, creates two weaknesses that we exploited as S&L regulators during the debacle. The lender must gut its loan underwriting standards and suborn its internal controls. Secured lenders must encourage inflated appraisals. Officers must be disciplined for rejecting bad loans and given bonuses for making bad loans. No honest lender would follow such suicidal practices. Bank examiners can easily, quickly, and precisely identify these perversions of honest, normal underwriting practices. We made closing such lenders our top priority -- while they were still reporting record profits and minimal losses (See: The Best Way to Rob a Bank is to Own One). The economists and lawyers thought that this proved we were insane because they were clueless about accounting fraud. The second weakness is that optimizing accounting fraud requires extremely rapid growth. This provided a quick screening device for identifying likely frauds and a means to force their rapid collapse -- by restricting their growth. Regulators could have targeted these same weaknesses and contained the ongoing crisis. Instead, despite the FBI's early warnings about the fraud epidemic, they functioned as anti-regulators. The FBI has put the matter starkly: it is "irresponsible" to purport to explain the crisis without discussing fraud.

This post originally appeared on New Deal 2.0 and New Economic Perspectives.

Bernanke Channels Willie Sutton In Assault On Social Security: 'That's Where The Money Is'

2009-12-03T14:27:23Z

Ben Bernanke has overseen the greatest expansion of the Federal Reserve's balance sheet in its history, pouring trillions of dollars into Wall Street firms at roughly zero interest rates.

His generosity, however, has a limit.

In testimony before the Senate Banking Committee today, where he's seeking re-appointment as the Fed's chairman, Bernanke called for cutbacks in Medicare and Social Security even as unemployment rises and the middle class is endangered.

Citing legendary bank robber Willie Sutton, Bernanke said of the retirement and health care funds that are the legacy of the New Deal: "That's where the money is."

Sen. Bob Bennett (R-Utah) sympathized with Bernanke, saying that, because of entitlement spending, "you're going to be looking at a situation where the Congress will be unable to provide any kind of fiscal discipline because of the mandatory spending. That puts an enormous burden on your plate."

"Well, Senator, I was about to address entitlements," Bernanke replied. "I think you can't tackle the problem in the medium term without doing something about getting entitlements under control and reducing the costs, particularly of health care."

Bernanke reminded Congress that it has the power to repeal Social Security and Medicare.

"It's only mandatory until Congress says it's not mandatory. And we have no option but to address those costs at some point or else we will have an unsustainable situation," said Bernanke.

But there are several other obvious options that could make the situation sustainable -- including a transaction tax on Wall Street speculation or a slight tax hike on the wealthiest Americans.

Bernanke talks as if increasing taxes on the wealthy simply isn't an option.

Sen. Jack Reed (D-R.I.) followed Bennett and pointed out that "there's only really two ways you can deflect this deficit, and that's either by cutting expenditures or raising income taxes or other forms of taxes."

Reed asked him if he could think of other ways, but Bernanke returned to entitlement money as the way to balance the budget.

"Willie Sutton robbed banks because that's where the money is, as he put it," Bernanke said. "The money in this case is in entitlements."

There's also money at the very top of the income ladder. Reed asked if Congress would be wise to tax some of it. Full of suggestions when it came to cutting entitlements, Bernanke was suddenly overtaken by a bout of policy modesty.

"Would you take taxes off the table?" Reed asked.

"Those decisions are up to Congress," Bernanke said.

"Well, your predecessor signaled very strongly that the tax cuts in 2000 were appropriate," Reed reminded him.

"I have not done that. I've done my best to leave that authority where it belongs, with the Congress," Bernanke said, just moments after telling Congress to cut entitlement spending.

Sen. Bernie Sanders, an independent from Vermont who has placed a hold on Bernanke's nomination, was apoplectic when HuffPost told him Bernanke was pushing for cuts in entitlement spending. "Bernanke wants to cut entitlement spending? Well, that confirms everything I'm saying," Sanders fumed.

"The CEOs and top people on Wall Street make huge bonuses, and what? We're going to cut back on Social Security and Medicare? That's what we're going to do?"

Bernanke worked to assure the committee he had nothing against old people. "I'm not in any way advocating unfair treatment of the elderly, who have worked all their lives and certainly deserve our support and help, but if there are ways to restructure or strengthen these programs that reduce costs, I think that's extraordinarily important for us to try to achieve," he said.

Bernanke allies in the Senate are working to see he gets his way. Senate Budget Committee Chairman Kent Conrad (D-N.D.) has been pushing hard for the creation of an independent commission that could cut entitlement spending. He has met recently, he said Thursday, with Senate Majority Leader Harry Reid (D-Nev.) and Treasury Secretary Tim Geithner, reiterating his threat to block Senate legislation if the commission isn't created.

"We're on a course that's just unsustainable," Conrad said, but put emphasis on Medicare rather than Social Security.

While the debate about entitlement spending is often masked with high-minded talk about fiscally-responsible policy solutions, it is little more than a struggle between competing classes for scarce resources.

Sanders said he sees it for what it is. "That's the solution? To cut back on the middle class and the elderly? That only adds fuel to the fire," he said. "Look, let's be clear. The middle class in America today is collapsing. Within the confines of the Beltway, we don't talk about that too much. But that is the reality. It's not just unemployment or underemployment. People are working longer hours for lower wages. People are unable to send their kids to college. People are losing their homes. People's jobs are going to China. That is the reality."

David Segal: Bernanke Must Answer for Dark of Night Change in Bank Regs

2009-12-03T13:53:39Z

Co-authored with Rhode Island State Rep. Peter Wasylyk

Just as would a credit card company itself, the Federal Reserve has buried a key pocket-pinching regulatory change in the fine print. In its regulations issued last month, the Fed did Americans a huge disservice, doing away with consumers' potential right of recovery of past and future overdraft charges -- which will total nearly $37.5 billion in 2009 alone. As the Senate considers Ben Bernanke's re-nomination to the Fed's chairmanship, senators must call him to task for this cynical maneuvering.

For years, advocates have strived to develop a legal theory that would allow consumers to recoup these fees and prevent banks from charging them in the future. They've asserted that the banks have engaged in deceptive trade practices, breach of good faith, and the like, but have generally found roadblocks along these avenues, in the form of preemptive federal regulations.

But a new legal theory has showed promise: Attorneys and some regulators argue that overdraft fees amount to a credit feature. It's a loan, after all: An overdraft entails a bank providing a consumer with money, which must then be paid back, with penalty. The Truth In Lending Act (TILA) requires that lenders clearly and conspicuously disclose the terms and conditions of the loans they offer to borrowers, whereas consumers typically aren't even given notice prior to a bank charging them overdraft fees. Attorneys from across the nation (including Peter Wasylyk, coauthor of this piece) filed a class action suit in federal court in Rhode Island against Citizens Bank on August 18 on the TILA theory, and the argument has caught people's attention -- so much so that the Federal Reserve saw fit to acknowledge it in new regulations which it promulgated last month.

The Official Staff Commentary on overdrafts adopted by the Board of Governors of the Federal Reserve on November 12 -- to which the courts must give deference when deciding relevant cases -- notes that "Some consumer advocates ... argued that overdraft services should be subject to TILA." The Fed then "clarifies" matters, asserting that TILA protections never did, and never will, apply to overdraft charges: "the addition of an overdraft service to an accepted access device does not constitute the addition of a credit feature under Regulation Z [pursuant to TILA]."

As Congress strives to improve protections from overdraft fees -- Senate Banking Chairman Chris Dodd (D-Conn) has proposed tough new legislation -- and as consumer advocates get closer than ever to the recovery of tens of billions of dollars in overdraft charges, the Fed has bent over backwards to protect the banks from accountability to the very public which has generously provided them with a $700 billion bailout.

Congress can rectify the situation by making clear that TILA protections do, in fact, apply to overdraft fees -- and by shaming Bernanke for adopting these predatory regulations in defiance of the will of Congress and the public.

Senator To Fed Chair Bernanke: 'You Are The Definition Of Moral Hazard'

2009-12-03T12:53:37Z

This report has been updated

A few hours after Federal Reserve Chairman Ben Bernanke began a spirited defense of his much-maligned tenure leading the nation's central bank, a Republican Senator reached across the aisle to join one of the chamber's more liberal members in declaring his intention to delay Bernanke's likely confirmation.

Sen. Jim Bunning, of Kentucky, told video journalist Mike Stark that he will place a "hold" on the Bernanke's confirmation, joining Bernie Sanders, of Vermont, an Independent who caucuses with Democrats. The video was first posted on the left-leaning blog FireDogLake.

Bunning added that he and Sanders won't be the only ones to pull this procedural delaying tactic. However, unless they get 39 others to join them in opposing Bernanke, he'll likely be confirmed. It'll just take Senate Majority Leader Harry Reid (D-Nev.) a bit more time, as he'll have to round up 60 votes to bypass the "hold."

***

Federal Reserve Chairman Ben Bernanke was scolded Thursday by a group of senators who let the country's top economic official know how angry they are with what they perceive as his multiple failures both before and after the financial markets crashed.

Lead among them was Jim Bunning, a Republican from Kentucky.

The only senator to vote against Bernanke's confirmation four years ago, Bunning ripped into the Fed chair for handing out "cheap money to [his] masters on Wall Street"; referring to him as "the definition of moral hazard"; and stating flatly that it was either "incompetence or a desire to secretly funnel more money to a few select firms" that led Bernanke to not pressure then-New York Fed President Timothy Geithner to demand concessions from AIG's counterparties during the government's massive bailout last fall.

Bunning's prepared remarks are below.

Statement of Senator Jim Bunning as Prepared for Delivery
Banking, Housing, and Urban Affairs Committee
Hearing on the Nomination of Ben Bernanke
December 3, 2009

Four years ago when you came before the Senate for confirmation to be Chairman of the Federal Reserve, I was the only Senator to vote against you. In fact, I was the only Senator to even raise serious concerns about you. I opposed you because I knew you would continue the legacy of Alan Greenspan, and I was right. But I did not know how right I would be and could not begin to imagine how wrong you would be in the following four years.

The Greenspan legacy on monetary policy was breaking from the Taylor Rule to provide easy money, and thus inflate bubbles. Not only did you continue that policy when you took control of the Fed, but you supported every Greenspan rate decision when you were on the Fed earlier this decade. Sometimes you even wanted to go further and provide even more easy money than Chairman Greenspan. As recently as a letter you sent me two weeks ago, you still refuse to admit Fed actions played any role in inflating the housing bubble despite overwhelming evidence and the consensus of economists to the contrary. And in your efforts to keep filling the punch bowl, you cranked up the printing press to buy mortgage securities, Treasury securities, commercial paper, and other assets from Wall Street. Those purchases, by the way, led to some nice profits for the Wall Street banks and dealers who sold them to you, and the G.S.E. purchases seem to be illegal since the Federal Reserve Act only allows the purchase of securities backed by the government.

On consumer protection, the Greenspan policy was don't do it. You went along with his policy before you were Chairman, and continued it after you were promoted. The most glaring example is it took you two years to finally regulate subprime mortgages after Chairman Greenspan did nothing for 12 years. Even then, you only acted after pressure from Congress and after it was clear subprime mortgages were at the heart of the economic meltdown. On other consumer protection issues you only acted as the time approached for your re-nomination to be Fed Chairman.

Alan Greenspan refused to look for bubbles or try to do anything other than create them. Likewise, it is clear from your statements over the last four years that you failed to spot the housing bubble despite many warnings.

Chairman Greenspan's attitude toward regulating banks was much like his attitude toward consumer protection. Instead of close supervision of the biggest and most dangerous banks, he ignored the growing balance sheets and increasing risk. You did no better. In fact, under your watch every one of the major banks failed or would have failed if you did not bail them out.

On derivatives, Chairman Greenspan and other Clinton Administration officials attacked Brooksley Born when she dared to raise concerns about the growing risks. They succeeded in changing the law to prevent her or anyone else from effectively regulating derivatives. After taking over the Fed, you did not see any need for more substantial regulation of derivatives until it was clear that we were headed to a financial meltdown thanks in part to those products.

The Greenspan policy on transparency was talk a lot, use plenty of numbers, but say nothing. Things were so bad one TV network even tried to guess his thoughts by looking at the briefcase he carried to work. You promised Congress more transparency when you came to the job, and you promised us more transparency when you came begging for TARP. To be fair, you have published some more information than before, but those efforts are inadequate and you still refuse to provide details on the Fed's bailouts last year and on all the toxic waste you have bought.

And Chairman Greenspan sold the Fed's independence to Wall Street through the so-called "Greenspan Put". Whenever Wall Street needed a boost, Alan was there. But you went far beyond that when you bowed to the political pressures of the Bush and Obama administrations and turned the Fed into an arm of the Treasury. Under your watch, the Bernanke Put became a bailout for all large financial institutions, including many foreign banks. And you put the printing presses into overdrive to fund the government's spending and hand out cheap money to your masters on Wall Street, which they use to rake in record profits while ordinary Americans and small businesses can't even get loans for their everyday needs.

Now, I want to read you a quote: "I believe that the tools available to the banking agencies, including the ability to require adequate capital and an effective bank receivership process are sufficient to allow the agencies to minimize the systemic risks associated with large banks. Moreover, the agencies have made clear that no bank is too-big-too-fail, so that bank management, shareholders, and un-insured debt holders understand that they will not escape the consequences of excessive risk-taking. In short, although vigilance is necessary, I believe the systemic risk inherent in the banking system is well-managed and well-controlled."

That should sound familiar, since it was part of your response to a question I asked about the systemic risk of large financial institutions at your last confirmation hearing. I'm going to ask that the full question and answer be included in today's hearing record.

Now, if that statement was true and you had acted according to it, I might be supporting your nomination today. But since then, you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies are too big to fail. Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out. In short, you are the definition of moral hazard.

Instead of taking that money and lending to consumers and cleaning up their balance sheets, the banks started to pocket record profits and pay out billions of dollars in bonuses. Because you bowed to pressure from the banks and refused to resolve them or force them to clean up their balance sheets and clean out the management, you have created zombie banks that are only enriching their traders and executives. You are repeating the mistakes of Japan in the 1990s on a much larger scale, while sowing the seeds for the next bubble. In the same letter where you refused to admit any responsibility for inflating the housing bubble, you also admitted that you do not have an exit strategy for all the money you have printed and securities you have bought. That sounds to me like you intend to keep propping up the banks for as long as they want.

Even if all that were not true, the A.I.G. bailout alone is reason enough to send you back to Princeton. First you told us A.I.G. and its creditors had to be bailed out because they posed a systemic risk, largely because of the credit default swaps portfolio. Those credit default swaps, by the way, are over the counter derivatives that the Fed did not want regulated. Well, according to the TARP Inspector General, it turns out the Fed was not concerned about the financial condition of the credit default swaps partners when you decided to pay them off at par. In fact, the Inspector General makes it clear that no serious efforts were made to get the partners to take haircuts, and one bank's offer to take a haircut was declined. I can only think of two possible reasons you would not make then-New York Fed President Geithner try to save the taxpayers some money by seriously negotiating or at least take up U.B.S. on their offer of a haircut. Sadly, those two reasons are incompetence or a desire to secretly funnel more money to a few select firms, most notably Goldman Sachs, Merrill Lynch, and a handful of large European banks. I also cannot understand why you did not seek European government contributions to this bailout of their banking system.

From monetary policy to regulation, consumer protection, transparency, and independence, your time as Fed Chairman has been a failure. You stated time and again during the housing bubble that there was no bubble. After the bubble burst, you repeatedly claimed the fallout would be small. And you clearly did not spot the systemic risks that you claim the Fed was supposed to be looking out for. Where I come from we punish failure, not reward it. That is certainly the way it was when I played baseball, and the way it is all across America. Judging by the current Treasury Secretary, some may think Washington does reward failure, but that should not be the case. I will do everything I can to stop your nomination and drag out the process as long as possible. We must put an end to your and the Fed's failures, and there is no better time than now.

Bernanke Confirmation Hearing LIVE, Follow The Latest Updates On Twitter (VIDEO)

2009-12-03T10:08:00Z

Today on Capitol Hill, Fed chairman Ben Bernanke faces what are sure to be some tough questions from lawmakers as they weigh his chances to be confirmed for a second term.

We've got a clip of the live hearing, and we'll be monitoring the latest updates and conversation on Twitter.

WATCH:

Visit msnbc.com for breaking news, world news, and news about the economy

And check out the Twitter conversation below:

Bernanke Confirmation Hearing: Latest Updates

2009-12-03T09:51:04Z

WASHINGTON — Senators took aim Thursday at Federal Reserve Chairman Ben Bernanke, linking him to rising unemployment, regulatory lapses that led to the financial crisis and the corporate bailouts that followed.

And some warned that the Fed's record-low interest rates could feed a new speculative bubble.

Dylan Ratigan: Americans Don't Have Jobs, Will Ben Keep His?

2009-12-03T06:47:22Z

You want to do something about jobs? Well, considering a different Fed Chairman might be a good place to start.

Nothing would more clearly display the inability of our leaders to deal with the disastrous state of our economy than easily reconfirming Ben Bernanke for another round at the Fed on the same day that they hold a "job summit" in a harebrained attempt to try to figure out how to create jobs in this country.

So far in his tenure, Chairman Bernanke has already told us that housing prices won't go down, the subprime market will be "contained", unemployment won't get to 10% and that instead of regulation, those responsible Wall Streeters who used credit derivative swaps could just be trusted to use them "properly". Of course, he thinks this performance should be rewarded with more power and utter secrecy.

If the definition of insanity is doing the same thing over and over again and expecting different results, does that make Bernanke crazy for still basing our nation's economic policies on his terrible predictions? Does it make Congress crazy for reconfirming him? Or does it make us crazy for voting these people into office??

Defenders like to point out what a fantastic job Chairman Bernanke has done "rescuing" our economy from supposed CERTAIN DOOM, utilizing his formidable expertise on the Great Depression as his guidance (or cover) for providing an infinite supply of money to our most culpable banks with no strings attached. Dropping the future wealth of America from the sky is a pretty easy way to put out almost any economic fire, but in this case our superstar fireman also happens to be one of the primary arsonists.

So what does Bernanke's failure to be a proper steward of our nation's banks have to with jobs?

Unlike any other business, banks and insurance companies are the only companies that do business with the wealth of others. Banks are also the only business granted a list of special privileges and responsibilities. This was done to encourage banks to take the savings of others and lend it out to American businesses and individuals, with the goal of helping grow new ideas and businesses that serve the current and future needs of society and, in the process, create jobs that help fulfill those needs.

But our banks haven't been serving the interests of the broader economy for quite some time.

Instead of being incentivized by the government to lend money to all the innovators, investors and workers in this country, our banks are either hoarding cash, playing the spread between low interest government loans and higher yields or just flat-out gambling through the giant and ongoing insurance fraud that is the derivatives market.

The Federal Reserve and other government programs are literally pouring a potential $23.7 trillion of taxpayer money into bucket with a giant hole in the bottom and wondering why there are no jobs.

Would you work if you could steal money without consequences? Would you do the hard work of lending money to the small businesses of America if you could just make more gambling it in swap markets of New York and never have to worry about the losses?

This economic model is not geared towards jobs. This is not capitalism. This is not American. This is a crime.

So when the very same government proclaims today at a so-called "jobs summit" that, by golly, they really want to try and come up with some ideas to help you get a job, tell them a good place to start would be to deal with the recent job performance of one of our economy's chief arsonists.

Questions For Ben Bernanke's Senate Hearing

2009-12-02T22:40:43Z

The Senate Banking Committee will be chatting with Ben Bernanke this Thursday to vote on his reappointment.

Demand that the Committee ask the following questions for our esteemed Esteemed Chairman (and contact your own Senators also and demand that they find out the answers to the following questions). If you are a Senate aide, please get these questions to your Senator.

Dean Baker: Fed Transparency Should Precede Bernanke Confirmation

2009-12-02T12:59:34Z

The following is a joint piece by Dean Baker, the co-director of the progressive Center for Economic and Policy Research, and Mark Calabria, the director of financial regulations studies at the libertarian Cato Institute.

Congress will soon consider whether Ben Bernanke merits another term as Chairman of the Federal Reserve. It is fair to say that no single individual played a larger role in responding to the recent financial crisis. The Fed has directly lent more than $2 trillion to financial and non-financial institutions in the last two years. It has guaranteed trillions more. It is also fair to say that few individuals and institutions played as large a role in the economy leading up to the crisis than Ben Bernanke and the Federal Reserve.

However, at the moment Congress lacks the independent and objective analysis needed to fully assess Bernanke's performance and therefore to make an informed judgment as to whether he deserves re-appointment. For this reason, Congress should put off a vote on Bernanke's nomination until there has been a full audit of the Fed's actions preceding and during the crisis.

Before considering Bernanke's role in containing the financial crisis, Congress should, via the Government Accountability Office (GAO), investigate the role of Fed policy in allowing the housing bubble to grow. This is not just an effort at playing the blame game; an objective assessment of this policy will also be helpful in avoiding future bubbles.

It is often noted that Mr. Bernanke's research on the Great Depression makes him well prepared to run the Fed in this period of crisis. Unfortunately, Mr. Bernanke's research apparently did not tell him the obvious: that allowing an $8 trillion housing bubble to grow unchecked would lead to an economic disaster like what we are now experiencing. He and his colleagues at the Federal Reserve Board either could not see, or did not care about, this huge bubble. As a result, Ben Bernanke has been running around for much of the last year and a half telling us about his knowledge of the Great Depression.

It is worth quickly explaining why a collapsed housing bubble leads to a recession, since the policy people responsible for this disaster have done so much to try to obscure the obvious. In the years prior to its collapse, the bubble was driving the economy. Bubble-inflated house prices created an unprecedented housing boom. Residential construction peaked at more than 6.0 percentage points of GDP in 2005.

The $8 trillion in bubble housing wealth led to a consumption boom also. This is the well known housing wealth effect that holds that one dollar of additional bubble wealth will cause annual consumption to increase by 5-7 cents. The implication was that an $8 trillion bubble would push annual consumption up by between $400 billion and $560 billion.

When the bubble collapsed, residential construction fell through the floor as builders suddenly realized that we had an enormous housing glut. The drop in annual construction was more than 3 percentage points of GDP, or more than $500 billion. At the same time, when the bubble driven housing wealth disappeared, we lost close to $500 billion in annual consumption.

Further losses in demand associated with the bursting of a bubble in non-residential real estate, added to the problem pushing the total drop in annual demand to more than $1 trillion. This was an entirely predictable outcome of the collapse of a housing bubble.

The simple reality is that there is nothing in the Fed's bag of tricks that allows it to easily replace over $1 trillion in annual demand. In short, the bubble guaranteed the economic disaster that we are now experiencing: end of story.

Those who are opposed to a full audit of the Fed's conduct often contend that this sort of audit counters an international consensus towards central banks that are independent of legislatures. While the extent of this consensus is questionable, it worth noting that Iceland was often held up as a model by those who shared in this consensus because of its independent central bank and its strong record on inflation targeting.

Examining the Fed's decision-making during the crisis can also inform Congress, and the public, not only on the appropriateness of Bernanke's actions, but also on the Fed's framework for distinguishing between liquidity and solvency problems. The public has been given the impression that such institutions as Citibank and Bank of America are worth more as on-going concerns than if they were liquidated as insolvent banks. To better understand the nature of financial crises, GAO should analyze the Fed's framework for evaluating market liquidity and bank insolvency.

Bernanke has argued that an audit of Federal Reserve activities would undermine the independence of the Fed and unhinge inflation expectations. Nothing could be further from the truth. Subjecting the Fed's decision-making on monetary policy to objective and independent analysis could improve inflationary expectations by increasing the public's understanding of the conduct of monetary policy.

Congress and the White House already have ample opportunity, both in regular hearings and in private meetings, to influence the Federal Reserve as to monetary policy. It would not be unfair to characterize Bernanke as an active member of both the Obama and the Bush Administrations. A GAO audit will, if anything, reduce political pressures by exposing such pressures to the light of day, as well as the influence of the financial industry on Fed policy.

As Bernanke can continue to serve indefinitely as Chairman after his term expires in January 2010, there is no urgency in his nomination. Congress has ample time to consider an audit of the Fed before weighing the merits of his confirmation.

Bernanke's Confirmation Hearing: Questions Senators Should Ask The Fed Chairman

2009-12-02T12:13:08Z

Federal Reserve Debates A Bubble-Popping Strategy

2009-12-02T08:19:02Z

Amidst calls to bring greater transparency to the Federal Reserve, the central bank's leaders are torn over one key issue: can the Fed pop financial bubbles before they become dangerous?

As the much-criticized chairman Ben Bernanke faces a confirmation hearing in Congress on Thursday, the Wall Street Journal reports that the Federal Reserve is now looking to take a more proactive stance toward asset bubbles.

Of course, the Fed has long come under fire for missing -- or outright empowering -- the housing bubble and the credit crisis. In the WSJ's words, the Fed is currently "groping for alternatives" to its failed strategy.

According to minutes released from its closed door meeting last week, the Fed openly admitted that its officials are worried that record-low interest rates "could lead to excessive risk-taking in financial markets." For many, this admission was a long time coming.

In the near term, the Federal Reserve may already have more than a few candidates for the next financial bubble. Gold hit a record high on Tuesday; a hedge fund run by billionaire John Paulson owns more gold than many large countries. And many have pointed to the possibility of an a property bubble in Asia.

Here's the WSJ:

"..the question of whether and how to tackle bubbles before they burst is becoming a growing concern amid fears of new bubbles developing in commodities markets and in emerging economies. Gold prices are up more than 50% in a year's time. China's Shanghai Composite stock index is up more than 75% this year. Stocks in Brazil are up even more. Oil prices have rebounded. They remain far below last year's peaks but a return to those highs could fuel inflation in goods and services more directly than tech stocks or housing did."

But the explicit admission that the Fed can identify and should combat financial bubbles is, as Barry Ritholtz points out, a severe change of course for Bernanke. Ritholtz speculates that Bernanke is trying to distance himself from the low-interest, hands off legacy of Alan Greenspan:

Bernanke made his Fed bones, so to speak, back in 1999, when he presented a paper to Fed officials at their annual Jackson Hole meeting, arguing against the Fed popping bubbles. His argument? The Fed should focus on controlling inflation, not trying to manage the cycle of booms and busts.

That argument resonated with Easy Al.

Under Alan Greenspan, the Fed accomplished neither goal. The various Greenspan era bubbles such as tech-stocks, credit, oil and commodities boom, and of course, housing all ran their course unabated, with no interference from the Fed. Inflation -- much higher from 1999 to 2007 than CPI falsely reports -- also ran wild."

While Fed critics push to audit the central bank and kill the renomination of Bernanke, Henry Blodget argues that the next bubbles are already upon us. Blodget suggests the Fed should learn from the tenure of former chairman Paul Volcker, who raised interest rates in the early 1980s during a time of economic unease. As for our current regime Blodget says:

"Today, we are led by men like Ben Bernanke and Tim Geithner. Men who are so afraid of the consequences of making people pay for their profligacy and stupidity that they have restarted the debt bubble (free money and bailouts for Wall Street, FHA, cash for clunkers) and made Too Big To Fail a national policy."

Read the entire WSJ story here.

Fed Needs To 'Start Giving A Red Hot Damn About The American Public,' Says Sen. Whitehouse

2009-12-01T16:29:46Z

Two days before Ben Bernanke's confirmation hearing, most Democrats on the Senate Banking Committee are withholding judgment, waiting to hear directly from the chairman of the Federal Reserve.

Given the depth of the ongoing economic crisis, the hearing promises to be a lively one, as senators plan to take out their constituents' anger on the monetary policy chief. Bernanke will likely have a difficult time explaining why the Fed wants to keep bank lending to a minimum while the lack of bank lending is exacerbating the unemployment crisis. At a meeting of the Federal Open Market Committee earlier in November, Fed officials expressed concern that banks might start lending again.

The Fed is required by law to keep inflation low and to maximize employment. But, according to Sen. Sheldon Whitehouse (D-R.I.), the Fed only seems interested in performing one of those tasks. High unemployment keeps wages down. Wage growth is seen by the Fed as a sign of inflation and something that should be kept down.

Before voting to confirm Bernanke, Whitehouse told HuffPost he wants to hear "[t]hat they're willing to take their eyes off an exclusive gaze on the welfare of Wall Street and start giving a red hot damn about the American public."

Sen. Tim Johnson (D-S.D.) -- a a favorite of Wall Street -- told HuffPost that he has decided to vote to confirm Bernanke, but Sens. Charles Schumer (D-N.Y.), Tom Carper (D-Del.) and Mark Warner (D-Va.) all said they'd wait until hearing from Bernanke. Committee Chairman Chris Dodd (D-Conn.) said earlier that he's inclined to support Bernanke but that his confirmation is not a "foregone conclusion."

Sen. Bernie Sanders (I-Vt.), who caucuses with Democrats, said that he will oppose Bernanke's nomination. Sanders and other critics have been unimpressed by Bernanke, who failed to foresee the housing bubble's collapse and who has withheld information about its lending practices from Congress.

Rep. Ron Paul (R-Texas) and Rep. Alan Grayson (D-Fla.), who led a successful effort recently to move House legislation to audit the Fed, have asked Dodd to postpone the vote until Bernanke turns over information relevant to assessing his performance.

The Fed has lost much of its luster in the Senate; the recent financial reform proposal from Dodd strips it of much of its regulatory power, which it largely elected not to use over the past decade.

Bernanke, however, won't need much Democratic support. Nominated by President Bush before being re-nominated by Obama, Bernanke has won the backing of Sen. Mike Johanns (R-Neb.) and Judd Gregg (R-N.H.). Many Republicans look to Gregg for leadership on economic issues. (He was briefly tapped to be Obama's Commerce Secretary, before withdrawing his name.)

Sen. Bob Corker (R-Tenn.), however, said today he was unsure whether Bernanke would have the votes on the floor or to get out of committee.

The committee's top-ranking Republican, Richard Shelby (R-Ala.), wasn't excited about voting for Bernanke. "I used to be a big defender of the Fed, but I think the Fed has utterly failed as a regulator," he said. Asked if he'd support him, he said, "We'll see."

The GOP praise of Bernanke, insofar as it goes, skips the cause of the crisis and focuses on his reaction to it. "He was a dynamic force at a difficult time for the country," Johanns said.

Fed critics are concerned, however, about Bernanke's response to the crisis. Despite turning on the monetary spigot full blast to prevent the collapse of the financial industry, banks have tightened lending practices, contributing to rising unemployment.

"Bank credit declined in September and in the first half of October," the minutes of the recent Fed meeting report. "[B]ank lending standards and terms tightened further and demand continued to decline, on net, for most types of loans in the third quarter... The pace of decline in total loans at large banks continued to exceed that at smaller banks... Bank loans continued to contract sharply in all categories."

At a speech two weeks ago, Bernanke said that "some important headwinds -- in particular, constrained bank lending and a weak job market -- will likely prevent the expansion from being as robust as we would hope."

But "constrained bank lending" is just what some Fed leaders want, according to meeting minutes.

The Fed is mandated by law to maximize employment, but focuses on inflation -- and "expected inflation" -- at the expense of job creation. At its most recent meeting, board members bluntly stated that they feared banks might increase lending, which they worried could lead to inflation.

Board members expressed concern "that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation." That summary was spotted by Naked Capitalism and is included in a summary of the minutes of the most recent meeting. The bank keeps secret the actual transcript. Likewise, because of Fed secrecy, it's unknown which or how many members voiced such concerns.

Suffering high unemployment in order to keep inflation low cuts against the Fed's legal mandate. Or, to put it more bluntly, it is illegal.

"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates," reads the relevant statute.

The tight lending policies, meanwhile, are hurting small businesses far more than large firms, which are benefiting from the lower wages and expanded pool of job seekers.

From the minutes: "Participants noted that the dichotomy between significant easing of conditions in capital markets and continuing tight conditions in the banking sector implied that financing conditions differed for large and small firms. Large firms with access to debt and equity markets for financing had relatively little difficulty in obtaining credit and in many cases also had high levels of retained earnings with which to fund their operations and investment. In contrast, smaller firms, which tend to be more dependent on commercial banks for financing, reportedly faced substantial constraints in their access to credit. Limited credit availability, along with weak aggregate demand, was viewed as likely to restrain hiring at small businesses, which are normally a source of employment growth in recoveries."

Jeff Muskus contributed to this report

Federal Reserve's Lessons From AIG: How To Fix The Central Bank

2009-12-01T11:10:34Z

The Federal Reserve made one unambiguous mistake: It kept interest rates too low for too long after the 2001 recession, in the forlorn belief that Wall Street money hounds would exercise restraint instead of getting drunk on cheap money and heading to the casino. The Fed also could have spotted the housing bubble sooner than it did and acted more quickly to deflate it. And once the financial system was in full meltdown in 2008, the Fed arguably could have done a better job managing the collateral damage.

Georges Ugeux: Why Ben Bernanke Should Not be Confirmed, and the Fed Should Keep its Autonomy

2009-12-01T10:05:30Z

The debate about the Federal Reserve hides an issue of leadership and management that needs to be tackled.

With the approval of Sen. Ron Paul and amendments requiring increased Congressional oversight of the Federal Reserve System, we run the risk of destroying a key element of the monetary policy of the country and its influence around the world. Only Members of Congress believe that they might actually do a better job than the Fed. They seem to relish the relative impunity for their absence of leadership and their own inability to protect the United States from a catastrophic scenario.

Not everybody forgot that it took $150 billion in "bribes" to Republican and Democrat leadership to get the TARP $750 billion Act voted by the House. The inability of Congress to agree on anything has paralyzed the country. While Congress was arguing, the Federal Reserve avoided a collapse of the financial system. Let's keep the score straight. In the match between Congress and The Federal Reserve, it is clearly 0-1.

However, Ben Bernanke, for all his courage, failed to see the iceberg in front of him: in 2007 he said "the impact of the problems in the subprime markets seems likely to be contained". He denied the fact that the country was in recession waiting for the National Economic Bureau to acknowledge the recession. One year after it started. But what is more worrisome, is that in front of a $ 1,700 billion refinancing risk for commercial real estate, consumer confidence tanking and 10% unemployment, he believes that we will cut unemployment in half within two years. Responding to criticisms from foreign governments and central banks regarding financial markets, Federal Reserve Chairman Ben Bernanke said Monday, that the issue of asset market bubbles remains one of the biggest challenges facing policy makers, though he added that he does not see anything in the U.S. markets right now that concerns him.

One of the casualties of this crisis is the capacity of economists to read the signs and launch warning signals. While Ben Bernanke understands economics and numbers, he lacks the great capacity of Alan Greenspan and Paul Volcker: the ability to read the indicators and have instincts that will allow him to prevent a further crisis.

He has lost the confidence of the American people. President Obama was right to confirm him in the middle of the crisis. This was not the time to change the captain of a sinking ship. But the man is in denial: he believes in numbers, and does not see that 2010 will be dangerous to navigate. And the resonance of his recent statement to the Economic Club is a frightening reminder that he did not see the tsunami approaching.

How can we trust that he will be able to anticipate future adversities? Should the country's current "crisis manager" become the next Fed President? I think not.

It seems to me that we need someone with not only a great intellect, but someone with sensitivity to the evolution of the market, as well as the foresight to predict what will rock the ship in the coming months and years.

We cannot afford to employ a captain who did not see the approaching iceberg and who lost the confidence of his crew to protect the ship from the next one.

Ben Bernanke Confirmation Targeted By Progressives With 'Stop Bailout Ben'

2009-12-01T09:29:39Z

Federal Reserve Chairman Ben Bernanke is up for confirmation this Thursday for a second four-year term. Despite rising public anger at the Fed over the secretive bailouts, the Senate Banking Committee is widely expected to approve President Obama's choice.

But Chairman Chris Dodd (D-Conn.) says it's "not necessarily" a foregone conclusion. Now, a group of progressives are trying to make it a real fight.

The Progressive Change Campaign Committee has launched a petition at StopBailoutBen.com, urging senators to vote against Bernanke. In an email to supporters, they highlight a conversation between the Fed chairman and Rep. Alan Grayson (D-Fla.) in which Bernanke said "I don't know" which foreign banks got half-a-trillion U.S. dollars in exchange for foreign currency.

The full letter:

Pop quiz.

You are a U.S. senator deciding this Thursday whether to confirm Ben Bernanke for another 4-year term as Chair of the Federal Reserve.

The Federal Reserve recently gave over a trillion dollars in new bailouts to various banks, and Bernanke refuses to say who got the money. He actively opposes attempts by Congress to audit his books.

What do you do?

If you think senators should vote "no" on Bernanke if he refuses to say where trillions of dollars went, click here to sign our petition. Then, tell your friends.

Here's a fascinating exchange that happened recently between Chairman Bernanke and Rep. Alan Grayson (D-FL) about some of these unaccounted-for loans:

GRAYSON: So who got the money?

BERNANKE: Financial institutions in Europe and other countries.

GRAYSON: Which ones?

BERNANKE: I don't know.

GRAYSON: Half-a-trillion dollars and you don't know who got the money?

In total, over a trillion dollars are unaccounted for. Reps. Grayson and Ron Paul (R-TX) propose an audit of the Federal Reserve, but Bernanke opposes it.

Click here to tell senators to say "no" to Bernanke if he continues to say "no" to transparency. Then, tell your friends.

Sen. Bernie Sanders (I-VT) said on Sunday that Bernanke is "part of the problem" facing our economy and that he will vote "no."

But many senators are on the fence. Sen. Chris Dodd (D-CT), the head of the Senate Banking Committee, called the Federal Reserve an "abysmal failure" but said he was "waiting to see how members react" before deciding how to vote.

This week, senators need to hear from us. Click here to sign our petition. Then, tell your friends.

Thanks for being a bold progressive,

Nassim Nicholas Taleb: Good Bye! The Reappointment Of Bernanke Is Too Much To Bear

2009-11-30T18:24:47Z

What I am seeing and hearing on the news -- the reappointment of Bernanke -- is too hard for me to bear. I cannot believe that we, in the 21st century, can accept living in such a society. I am not blaming Bernanke (he doesn't even know he doesn't understand how things work or that the tools he uses are not empirical); it is the Senators appointing him who are totally irresponsible -- as if we promoted every doctor who committed malpractice. The world has never, never been as fragile. Economics make homeopath and alternative healers look empirical and scientific.

No news, no press, no Davos, no suit-and-tie fraudsters, no fools. I need to withdraw as immediately as possible into the Platonic tranquility of my library, work on my next book, find solace in science and philosophy, and mull the next step. I will also structure trades with my Universa friends to bet on the next mistake by Bernanke, Summers, and Geithner. I will only (briefly) emerge from my hiatus when the publishers force me to do so upon the publication of the paperback edition of The Black Swan.

Bernie Sanders: Bernanke Won't Get My Vote For Second Term (VIDEO)

2009-11-29T11:04:54Z

Sen. Bernie Sanders (I-Vt.) said Sunday that Fed Chairman Ben Bernanke would not get his vote for another five-year term.

"I absolutely will not vote for Mr. Bernanke," the Vermont senator said on ABC's "This Week." "He's part of the problem. If he's the smartest guy in the world, why didn't he do anything to prevent us from sinking into this disaster that Wall Street caused and which he was a part of? No, I will not vote for Bernanke to stay on as chairman."

In August, Sanders sharply disagreed with President Obama's decision to renominate Bernanke, saying the Fed chair had been "asleep at the wheel."

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Ben Bernanke Makes Case For Strong Fed Role On Banks

2009-11-29T10:20:10Z

NEW YORK — The chairman of the Federal Reserve is concerned that congressional efforts at financial reform could weaken the central bank's ability to handle future crises and may politicize monetary policy.

Fed Chairman Ben S. Bernanke made the comments in an Op-Ed piece to appear in Sunday's Washington Post, five days before the Senate Banking committee holds a hearing on his nomination for a second term. His current four-year term expires Jan. 31.

Tom Gregory: Dubai Completes 110 Story Middle Finger!

2009-11-29T01:35:21Z

(Reuterz - Dubai) Visible from space, Dubai has completed construction of the World's largest structure, the 110 story "Burj Dubai Middle Finger Tower."

The dedication festivities were hosted by Dubai's Sovereign Ruler, His Highness Sheikh Mohammed bin Rashid Al Maktoum, who took the opportunity to simultaneously announce he was suspending payments to the international lenders who financed it.

"We wanted to show the world a great symbol," he said. "You gave us $59 billion in loans and a payment schedule -- and we give you this!"