A Decision Executed Behind Closed Doors
A guest post by Under Fed:
Before Alan Greenspan assumed the position back in 1987, most Americans
likely had little inkling about who the Federal Reserve Chairman was or
what he did. The Black Monday US stock market crash on October 19, 1987
permanently altered this comfortable obscurity, when Alan Greenspan’s
heroic effort to stop the US stock market’s free fall by “supplying
liquidity” was widely perceived to have saved the US economy from a repeat
of the Great Depression. With this rescue operation, Alan Greenspan
instantly transformed himself from low-profile technocratic geek to
high-profile economic rock star.
Skeptics remained doubtful that a rerun of the Great Depression was
successfully avoided. One even wrote a book whose very title strongly
suggested otherwise (Reference: The Great Depression of 1990 by Dr. Ravi
Batra
http://www.amazon.com/Great-Depression-1990-Ravi-Batra/dp/0440201683)
But the Second Great Depression was not to be; the US economy officially
entered and left recession (July 1990 - March 1991, according to the
National Bureau of Economic Research), unemployment subsequently remained
relatively high during the period through 1994 in most of the US, and even
for even longer in some parts (California, for example), and the economy
some how muddled through without a replay of the 1930s. Housing prices
remained soft in many parts of the US during the period from 1990 through
1996, but generally did not see any large, widespread or persistent
patterns of decline. By the end of 1996, less than a decade after the
Black Monday crash, US home prices had generally stabilized from the soft
period they experienced beginning in the late 1980s, setting the stage for
the most spectacular real estate boom in US history over the subsequent
nine year period.
Alan Greenspan’s stature steadily grew in the aftermath of the Black
Monday crash. He held the Fed Chairmanship over the course of four
subsequent presidential election cycles, serving during the terms of three
different presidents of alternating political affiliations.
In August 2005, giving what should have been a triumphal valedictory
speech at the Kansas City Fed’s annual Jackson Hole conference, Alan
Greenspan expressed grave doubts about the economic status quo. Curious
listeners puzzled over his suggestion that, “…history has not dealt
kindly with the aftermath of protracted periods of low risk premiums.”
(http://www.federalreserve.gov/boarddocs/speeches/2005/20050826/default.htm)
Earlier that year, in February 2005, Alan Greenspan’s predecessor in the
Fed Chairman position had given an ominous speech of his own at Stanford
University, wherein he described “An Economy On Thin Ice.”
(http://www.washingtonpost.com/wp-dyn/articles/A38725-2005Apr8.html)
After Alan Greenspan’s retirement, Ben Bernanke assumed the mantle of the
Fed Chairman post in early 2006 with limited fanfare, during a period when
a calm prosperity appeared to have finally settled over the US stock
market, following the turmoil earlier in the decade when the tech stock
bust and the 9/11/01 attacks roiled asset markets and precipitated a
recession. But dark clouds lingered on the horizon. A popular index of US
home prices, the S&P/Case-Shiller 20-city index, began to show a
discomfiting pattern of price decline, something which had been widely
dismissed by real estate experts as virtually impossible on a national
basis.
(http://www.economist.com/businessfinance/displaystory.cfm?story_id=14258851)
This unprecedented slide in US home prices was accompanied by the onset of
persistent deterioration in both new and existing US home sales.
Another unsettling ripple in the placid surface appeared in December 2006,
when an article in The Economist described a sudden downhill break in the
level of an index to the value of securities backed by subprime mortgages,
called the Markit ABX.HE index.
(http://www.economist.com/finance/displaystory.cfm?story_id=E1_RQNQDRG)
By early 2007, it was clear that not all was well, as the ABX.HE index
values precipitously declined until large percentages were lopped off from
the par levels of 100 where the indexes had held steady only months
earlier.
(http://www.markit.com/en/products/data/indices/structured-finance-indices/abx/abx-prices.page?)
Concurrently, over the course of the first half of 2007, the previously
frenzied private US subprime mortgage lending industry quickly collapsed,
in effect collectively shuttering the entire industry’s operations.
By August, a sense of full-blown panic pervaded the asset markets. In an
attempt to calm nervous bankers, Ben Bernanke and Treasury Secretary Hank
Paulson mutually offered the reassuring message that “subprime was
contained.”
The earthshaking events which played out from the onset of panic in August
2007 to the present are too numerous, shocking and unprecedented to
adequately describe in this post. The agonizing details are documented in
the Housing Bubble Blog archives for anyone who cares to review them. They
will certainly provide ample subject matter for graduate dissertations,
academic research programs and books for years to come in the fields of
finance, political science and economics. Suffice it to say that by late
2008, what had been the major firms in the Wall Street investment banking
sector had collectively ceased operations as investment banks; many of the
largest mortgage lending firms whose exotic lending practices had fueled
the Housing Bubble had gone out of business; and the leadership at the Fed
and Treasury had undertaken a series of policy responses which one
venerated expert on US banking history characterized as a “rogue operation.”
(http://www.bloomberg.com/apps/news?sid=a1ctn1Xfq5Do&pid=20601109,
http://online.wsj.com/article/SB122428279231046053.html)
Fast forward once again to August 2009: Ben Bernanke spoke before the same
Kansas City Fed Jackson Hole conference which Alan Greenspan had addressed
four years previously. His speech quietly lionized his own overwhelming
success in rescuing the financial system from the crisis that had so
violently erupted in the fall of 2008, thereby preventing a replay of the
Great Depression of the 1930s. Shortly thereafter, Barack Obama announced
a decision to reappoint Ben Bernanke to the Fed Chairmanship.
———————————————————————–
Pundits have recently expressed a wide range of views on the Bernanke Fed
and the Obama reappointment decision:
- Paul B. Farrell
Aug 25, 2009, 12:01 a.m. EST
Dismantle Bernanke’s ‘Happy Conspiracy’ … now!
6 reasons more power for the Fed will destroy capitalism and democracy
(http://www.marketwatch.com/story/dismantle-bernankes-happy-conspiracy-now-2009-08-25)
- The case against Bernanke
By Stephen Roach
Published: August 25 2009 16:02 | Last updated: August 25 2009 16:02
(http://www.ft.com/cms/s/0/a2ba2378-9186-11de-879d-00144feabdc0.html)
- Dismantling the Temple
By William Greider
This article appeared in the August 3, 2009 edition of The Nation. July
15, 2009
(http://www.thenation.com/doc/20090803/greider)
- For Obama, the Only Choice for the Fed
By Robert J. Samuelson
Wednesday, August 26, 2009
(http://www.washingtonpost.com/wp-dyn/content/article/2009/08/25/AR2009082501829.html)
- In FED We Trust: Ben Bernanke’s War on the Great Panic
by David Wessel
(http://search.barnesandnoble.com/In-FED-We-Trust/David-Wessel/e/9780307459688)
- The Bernanke Re-Appointment
By: John M. Mason
Wednesday, August 26, 2009 8:49 AM
(http://www.istockanalyst.com/article/viewarticle/articleid/3437836)
- Robert L. Borosage
Co-Director of the Campaign for America’s Future
Posted: August 26, 2009 01:47 PM
Wall Street Rules: The Bernanke Reappointment
(http://www.huffingtonpost.com/robert-l-borosage/wall-street-rules-the-ber_b_269596.html)
- Wall Street Journal
* REVIEW & OUTLOOK
* AUGUST 26, 2009
Bernanke’s Second Chance
Has Ben Bernanke learned his lesson?
(http://online.wsj.com/article/SB10001424052970203706604574372384193773524.html)
- WEDNESDAY, AUGUST 26, 2009
THE STRIKING PRICE DAILY
The Bernanke Call
By STEVEN M. SEARS
Investors want to see the Bernanke put converted into a bullish call.
(http://online.barrons.com/article/SB125124066729558549.html?mod=googlenews_barrons)
- Four More Years
President Obama’s wise decision to rehire Ben S. Bernanke
Wednesday, August 26, 2009
(http://www.washingtonpost.com/wp-dyn/content/article/2009/08/25/AR2009082502735.html)
- Editorial
A Second Term for Mr. Bernanke?
Published: August 25, 2009
(http://www.nytimes.com/2009/08/26/opinion/26wed2.html)
———————————————————————–
A decision that will affect the material welfare of millions of American
citizens has recently been executed behind closed doors;
American voters generally had no say in the choice. Since you most likely
missed the opportunity to personally weigh in on Mr. Bernanke’s
reappointment decision, at least tell us what you think about it!
- How do you view Mr. Bernanke’s reappointment?
- Is it a foregone conclusion that his actions saved us from a Second
Great Depression?
- Has the “protracted period of low risk premiums” which so gravely
concerned Alan Greenspan finally ended?
- What is a “risk premium”?!
