Bernanke’s Failure

Here’s an excellent analysis I found this morning.

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.