Tuesday, December 22, 2009

Bernanke’s Failure

Here’s an excellent analysis I found this morning.

BernankeBendOver Foreclosures already pocked Chicago's poorer neighborhoods but the downtown still was booming as the Federal Reserve Bank of Chicago convened its annual conference in May 2007.The keynote speaker, Federal Reserve Chairman Ben S. Bernanke, assured the bankers and businessmen gathered at the Westin Hotel on Michigan Avenue that their prosperity was not threatened by the plight of borrowers struggling to repay high-cost subprime loans.

Bernanke, who was in charge of regulating the nation's largest banks, told the audience that these firms were not at risk. He said most were not even involved in subprime lending. And the broader economy, he concluded, would be fine.

"Importantly, we see no serious broad spillover to banks or thrift institutions from the problems in the subprime market," Bernanke said. "The troubled lenders, for the most part, have not been institutions with federally insured deposits."

He was wrong. Five of the 10 largest subprime lenders during the previous year were banks regulated by the Fed. Even as Bernanke spoke, the spillover from subprime lending was driving the banking industry into a historic crisis that some firms would not survive. And the upheaval would shove the economy into recession.

Just as the Fed had failed to protect borrowers from the consequences of subprime lending, so too had it failed to protect banks.

The central bank's performance has sparked a great debate about its future as a regulator, pitting those who want to expand its role against those who want to strip its powers. It also has come under pressure from politicians seeking greater oversight of its primary job, adjusting interest rates to moderate economic growth. The battles have complicated Bernanke's bid for a second term as chairman. The Senate Banking Committee voted to approve Bernanke 16 to 7 on Thursday, setting the stage for a January battle on the Senate floor.

The Fed's failure to foresee the crisis or to require adequate safeguards happened in part because it did not understand the risks that banks were taking, according to documents and interviews with more than three dozen current and former government officials, bank executives and regulatory experts.

Regulatory agencies exist to lean against the wind. But rather than looking for warning signs, the Fed had joined -- and at times defined -- the mainstream consensus among policymakers that financial innovations had made banking safer. Bernanke said the economy had entered an era of smaller and less frequent downturns, which he and others called "the great moderation."

The consequences of this miscalculation can be seen in the stories of three large banks the government ultimately rescued from collapse... [emphasis added]

Inserted from <Washington Post>

This is less than the first page from a five page article that goes into much more detail.  I encourage you to click through and read it all.

I disagree with the folks who want to do away with the Fed.  I think we need a central bank to enact monetary policy.  However, I think that the Fed’s role should be restricted to monetary policy only, with all fiscal regulation in the hands of another agency.  In addition, the Fed as a hybrid organization of shared power that is mostly in the hands of banksters is obsolete.  The Fed needs to be moved fully under government control, because banksters have proven they are too disingenuous to oversee their own privies, let alone our nation’s monetary policy.  There are none to whom this applies more than Ben Bernanke.  He should be removed from the Fed, just as Geithner should be removed from Treasury and Summers from his post as Chief Economic Advisor.


the walking man said...

I want to see the audit first then the government take back of policy second. I read this same article.

rjs said...

slightly off the regulation topic, but relevant to Bernake's policy...Bernanke’s Inflation Comments Resonate I asked about the amazing comment from Federal Reserve Chair Ben Bernanke about inflation and job growth. It’s probably the most explosive technocrat-speak paragraph in recent memory, So let’s boil it down. The Federal Reserve has two main roles – price stability and maximizing employment. This isn’t abstract: the Humphrey-Hawkins Act of 1978 requires the Fed to maintain full employment. So when asked why he isn’t engaging in actions that would move the country toward full employment, Bernanke acknowledges that a higher inflation target would stimulate “spending and output,” which leads to economic growth. But he then says that he cannot do so, because of the threat that setting a higher inflation target might lead to higher inflation than that down the road. In other words, the threat of inflation is more crucial than the reality of double-digit unemployment. This is appalling on so many levels, the biggest being that Bernanke is content to leave a generation behind – near-term joblessness hurts the young’s earning capacity over time – to keep faith with the banks. And only Jeff Merkley, on the Democratic side, has a problem with this?

Randal Graves said...

Boy, and I thought I was a terrible Time Person of the Year. Even I didn't screw up this much.

TomCat said...

Mark, this time we agree. I also want to see the audit.

RJ, the threat of inflation is more crucial than the reality of double-digit unemployment can be best interpreted as the threat of inflation is potentially more harmful to millionaires who, like Bernanke, don't give a damn about the unemployed.

Randal, you are an excellent screw-up, but in Bernanke's company, I'm afraid you're out of your league. ;-)

Tao Dao Man said...


Oso said...

thanks for expanding on Bernanke's comments.it hadn't quite clicked.

I don't think congress is capable of conducting monetary policy for many reasons.But with "regulatory capture" neither is the FED.

I don't think it can be fixed,with partisanship and special interests.
Our choice is what's best for the banks,or best for getting congress members re-elected.

TomCat said...

Thanks RZ. I've seen that. I may have even posted it.

Oso, you're probably right, but I won't stop fighting for reform. Congress is the LAST body to entrust with monetary policy. The Fed is the right agency for it, IF we can strip control of the Fed from the banksters.

Kentucky Rain said...

Hmmmm. I am of mixed minds here. I have never been an economic type guy, probably because I am lousy at math and avoid it all costs, and I think economic shit needs math. Regardless Randall's comment caught me, so I think I am with what he said!

Merry Christmas!~

Oso said...

TomCat yeah, gun to my head give it to the FED.
Only thing I could suggest to avoid Regulatory Capture (acting in the interest of the guy you regulate rather than the public interest)would be a higher turnover rate.Less time to become entrenched and "captured".

Oso said...

I know you knew the term,in case someone new didn't.

Like RZ or SJ who would think it might be a new rock group.

j/k guys.

Jolly Roger said...

The Government is firmly in the hands of corporatists, which means Ben and the boys aren't going anywhere.

Tao Dao Man said...

Come on guys. The Fed, Goldman Sachs, et al. are the government. Lets just be honest about it. The ones who still believe in the power of the vote, or the illusion that we live in a free democracy. Are sadly mistaken. He who controls the finances controls the country, and its people. I WILL SAY IT OVER AND OVER AGAIN. ----THE SYSTEM IS BROKEN--The clock is ticking-tick-tock.

Tao Dao Man said...


rjs said...

this the quote youre looking for , RZ?

“Give me control over a nations currency, and I care not who makes its laws.” ~Baron M.A. Rothschild

Tao Dao Man said...

rjs; LOL. Great follow up. I knew I could count on you. Yes that is the one. The [red shield] Rothschild Dynasty is still working on perfecting their agenda. These snakes in the swamp never sleep. These are the shadows behind the curtains that form global policy. Bernanke is their boy, as is Geithner. The BIS [Bank of Intenational Settlements] is the HQ for these Central Banks. If Bernanke gets an extension,which I believe he will. Then start listening for for the IMF, and their SDR instruments. 2010 will be the beginning of the tanking of the greenback.

libhom said...

I would so like to see Summers fired.

Oso said...

I would suggest this approach for both Summers and Geithner,libhom:
1. tarred
2. feathered
3. then,fired.

Real_PHV_Mentarch said...


I just see that you are back TC!


TomCat said...

LOL, Mike! Don;t give up. I flunked algebra in HS. Later I taught myself advanced trig and calculus.

Oso, that's an excellent idea. It's always better to spell it out. I do know it, but I'd be surprised if the majority of our readers do.

JR, so it appears.

OK, RZ. For the sake of argument, let's assume you are right. Now what? Do we just whine or is there a way forward?

That's apt, RJ.

Libhom, I fully agree.

Oso, I fully agree again.

Mentarch!! Hello, old friend!! What a delightful Christmas gift you are!!