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”?!
If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.
John Maynard Keynes
We’re not there yet.
This brings up an interesting point. Why are economists supposedly put in charge of the Fed? These people are really just theorists, with no real world experience in running, say, a lemonade stand.
So if it’s the theorist part that gets them the job, what the hell is the philosophy? We go from supply-siders to Chicago school and Keynsians, and back over again. Then, let’s not forget Greenspans strength, which the media praised, of talking endlessly, and not saying anything (with a smirk, no less.)
Perhaps, a mild school-teacher type guy is a better figurehead for such a powerful organization than the three-piece suit types, flying in from the Bahamas, and walking in and telling congress, “just trust us, we know what we are doing” ?
At least one of the most effective Fed Chairmen was not an academically-trained economist. He is famous for his advice for the Fed to “to take away the punch bowl just as the party gets going.”
Yeah, but still:
‘he was viewed as an ally of Truman, who strongly opposed Fed independence. During negotiations, Martin reestablished contact between the Treasury and Fed, which had been forbidden’
Then there is the Ex-Im bank thing. This guys was an internationalist, which is another aspect of the worlds central banks. And he was a Wall Streeter, surprise, surprise.
I suppose the first question one should ask is whether the Fed-managed banking system we live under is the best America can achieve. The reappointment decision appears to provide affirmation that this is the case, and that there is no need to take a close look into the question of whether the Fed, itself, might be fostering conditions to promote the very ’systemic risk’ that it claims to want to contain.
By analogy, I keep remembering stories I have read about firemen who led closet lives as arsonists before getting caught. One story I heard years back by way of mouth from a close personal friend was of a fireman who got caught starting fires. His defense? He claimed he wanted to get ‘practice’ putting them out. (To top it off, he was also a violinist
)
Those violinists, they’re all the same.
“Those violinists, they’re all the same.”
You’re right! You remind me of a joke one of my former violin teachers was fond of retelling:
Q. What’s the difference between a violin and a viola?
A. A viola burns longer.
I am in truly august company. Thank the Lawd that there are a few good academics out there willing to confront the real issues, instead of just vapidly rubber stamping approval of the reappointment decision.
My hunches:
1) In the long run, this guy’s still, small, persistent voice will win the policy debate over louder-voiced chest beaters.
2) In the short run, we just may have to muddle through.
3) If he is right and everyone knows he is right, then wouldn’t it be wisest to currently adjust our policy regime to reflect his critique? (Easier said than done, I am sure, but I note that the threat of jail time provides a powerful deterrent to arson.)
August 27, 2009, 7:38 am
Bernanke and Other ‘Firefighters’
By Simon Johnson
Simon Johnson, a professor of entrepreneurship at M.I.T.’s Sloan School of Management, is the former chief economist at the International Monetary Fund.
Firefighter arson is a serious problem. The United States Fire Administration, part of Homeland Security, concluded in 2003, “A very small percentage of otherwise trustworthy firefighters cause the very flames they are dispatched to put out.” Illustrative and shocking anecdotes are on pages 9-15 of that report, as well as here and here.
Macroeconomic policy making now has a similar issue to confront.
…
For real estate, it was sure party central. All the punch you could drink.
No job? No income? No questions asked. Well, almost.
Now we’re in the toilet bowl.
But luckily, toilet bowl respiking operations are already well underway…
You telling me this is what it has come to
“…the three-piece suit types, flying in from the Bahamas, and walking in and telling congress, “just trust us, we know what we are doing” ?
Massive bribery, graft, deception, and theft from the taxpayer on the grandest scale possible, is what they know how to do best.
“Managing” the economy, primarily for their own benefit as the largest private bank in the world, is where they run into the pesky details.
What is the difference between “private” and “government-run”? I am losing track.
EZ - The government does what the corporations (private) ask and the corporations do whatever they want.
Do ppl think highly of dentists? I thought they had a reputation for being crooks. I guess it depends on your insurance.
The point of the ‘dentist’ concept, as I understand it, is that central bankers’ jobs should be boring, routine and uneventful. Joey was looking for a criteria by which to judge central banking success, and I agree with JM Keynes that the ‘dentistry’ standard is far preferred to the ‘fireman’ yardstick being widely applied today (including by BB himself at the Jackson Hole pow-wow).
Regular cleanings instead of root canals and pulled teeth. I get it.
I know one dentist who is a crook: Dennis Hastert.
No, it doesn’t depend on your insurance. It depends on your highway.
Dentists? I’ve lost faith in these tooth fairies.
We’re inDENTUREd to them.
Helicopter Ben, “A real estate bubble does not exist.” Huh? Get out of here.
Just think of an economist as, “Dentist the Menace.”
We need to sit Barnanke in a dark room and shove a flashlight in his face and start asking some tough questions. I wholeheartedly support RP’s bill to audit the FED. I could go on and on but I’m allergic to tin foil
One possible implication of the reappointment decision: An re-empowered Bernanke Fed would find it easier to block a Congressional audit, and to sweep under the rug any lingering questions about alleged improprieties during last fall’s rescue operation.
Tin foil probably is the right coloring for our skin tones right about now.
And heck, you could be really creative with stylizing your head piece.
I think we are doomed, doomed, I say DOOMED.
There is no honest man in congress/senate, nor WS
IMHO. And forget the Bahamas. Sheesh, can you say Cayman Islands?
UBS in Switzerland.
Here’s a discussion from the BB that might belong better here:
joeyinCalif
‘PB, you do understand that the Fed, in the normal course of affairs, not only creates money, but it also destroys money..’
‘That while it often must create money for various reasons, it has no interest in inflating the money supply beyond reasonable, economically healthy parameters.. right?’
From Bits Bucket For August 29, 2009, 2009/08/29 at 9:33 AM
I’m curious how you know what the Feds interests are, or even its goals. A presidential candidate in the 80’s noted once on CSPAN, “if you ask a central banker what measure of performance he would consider success, he doesn’t have one,” or something like that.
‘inflating the money supply beyond reasonable, economically healthy parameters’
So what was the housing bubble then?
How can anyone know what someone’s true intentions are? We all have a limited view of the world and we formulate our opinions based on that limited, imperfect view.
Is the father who spanks a child administering discipline and helping the child or is he abusing the child?
When a father attempts to grant a child it’s every wish, is the father showing love and affection or abusing the child by spoiling it?
People look at the Fed’s actions and decide for themselves what the motives are. Are they trying to avoid financial meltdown or are they sucking the life out of the economy? Evidence of both exists. We are free to accept and defend either view.
What was the housing bubble.. yeah.. what was it?
Could the money supply have been expanded as it was if people didn’t willingly participate in the housing mania? Did banks and Fed policy force people to buy property they couldn’t afford?
Are we the people simple minded children who will surely drown ourselves in debt if allowed to approach the money pool?
Did banks willingly and knowingly destroy their own industry?
How can a central banker or anyone else accurately pin down success?
What is Tiger Wood’s measure of success.. to win every tournament? To win 5 a year? 15 a year? It’s probably more like concentrating on each stroke as it comes and doing the best he can moment by moment.
Joey:
Some areas are gray and some aren’t. If your dad hits you upside the head with a hammer, then it’s abuse. No argument there, right? The Federal Reserve has gone so far that almost anyone who looks at it will call it abuse.
Congress was put in control of the money supply for a reason. Because they are accountable to the people. They created the Fed as a tool to accomplish that goal, but then somewhere along the line they took their eye off the ball and started to act like the Federal Reserve was the agency in charge. Not surprising to see an agency run out of control when the checks and balances are lifted.
The only ppl represented by the Federal Reserve are the creme de la creme of the banking industry.
When did congress take away their oversight of the Fed? Who was instrumental in the past yrs in letting that responsibility go away?
Asking for more input, because V, you brought up good points.
I don’t know who was instrumental, but I’d take a look a the Senate Banking and Finance Committee and the House Financial Services Committee for starters. They’re supposed to be the elected experts, no?
The President would, obviously, also be a huge VIP.
“The Federal Reserve has gone so far that almost anyone who looks at it will call it abuse.”
Enter a few URLs to those articles referenced above into your favorite web browser and skim them. There is no perfect consensus of which I am aware on whether the Federal Reserve is serving the US well or poorly.
Oh, I know. Just like there was no consensus about the housing bubble. That’s just because no one was really looking at it. The pundits, the MSM, and the Congresscritters haven’t gotten around yet to questioning their unacknowledged assumption that the Federal Reserve is a steward of prosperity. They haven’t gotten around to actually looking at it yet.
My thinking is that, as this thing plays out, they will all be forced to start analyzing what was once unquestionable. That’s the point at which we will see a consensus form.
“…steward of prosperity. They haven’t gotten around to actually looking at it yet.”
So far as I can tell, the game plan is to respike the punchbowl and hope the illusion of prosperity returns in time to obviate the need for any probing introspection.
Big V, granted that Congress is accountable to the people, but does that make politicians better or more honest or more effective central bankers?
Imagine today that govt wielded all the powers of the fed, and those politicians were responsible for setting interest rates and adjusting money supply.
Do you think they would be more concerned with our economic stability, our costs of living, the preservation of the value of our currency, than with continuing to satisfy the desires of the big money and special interests that got them elected?
I do not.
Much of the justification for creating a somewhat independent central bank was to take politics out of the decision making..
The responsibility lies with Congress. That’s the Constitution’s doing. It’s an ee-noo-mer-aited power, see? I really don’t care whether or not the Federal Reserve thinks it can do a better job without Congress getting involved. The bottom line is that it’s Congress’s job to make sure the system is working, and it ain’t. That means they need to make a change. Take away some of the Fed’s extra powers and reduce its scope. It has gotten way out of hand.
joey,
Do you honestly believe the Federal Bank is independent from politics or Wall Street? Come on the chairman is a political post. Nominated by the President, approved by the Congress. Can’t be anymore politica than that.
But the system is working. Many of these thugs have a job for life.
These hypocrites don’t want to talk about the “real” issues so they talk about the evils of gay marriage and then cruise public toilets. Or hire a gay prostitute.
Pushing granny, with terminal cancer, under a bus is a good issue. That really instills fear. Fear is good.
Let’s vote for a divider not a uniter.
The current congressliars won’t ever rock their boat and make a change or speak louder on the issue of overlooking the fed. sadly.
Zachary nailed it dead center.
Interesting and long speech about the Federal Reserve’s independence:
Even a limited degree of independence, taken literally, could be viewed as inconsistent with democratic ideals and, in addition, might leave the central bank without appropriate incentives to carry out its responsibilities. Therefore, independence has to be balanced with accountability–accountability of the central bank to the public and, specifically, to their elected representatives.
http://www.federalreserve.gov/boarddocs/speeches/2000/20001024.htm
Here is a graph depicting the political affiliations of Treasury secretaries and Fed chairmen and governors over time and under different U.S. Presidents:
http://fedviewer.com/Board_of_Governors_Chart
this kind of illustrates the problem of who is minding the FED and how much power they actually have:
http://www.youtube.com/watch?v=cJqM2tFOxLQ&eurl=http%3A%2F%2Fdailybail%2Ecom%2Fhome%2Fthere%2Dare%2Dno%2Dwords%2Dto%2Ddescribe%2Dthe%2Dfollowing%2Dpart%2Dii%2EHTML&feature=player_embedded
Alan Grayson rocks. “Who received the funds created by the $1t expansion of the Federal Reserve’s balance sheet?”
Answer: Dunno nothin’ about who received funds out of that $1t expansion…
How do I send him a campaign contribution?
Grayson: “I am shocked to find out that nobody at the Federal Reserve, including the Inspector General, is keeping track of this.”
Big V,
We were designed to be a republic, not a democracy, as commonly thought. Think about it: a true democracy is two wolves and one sheep voting on what’s for dinner. 
It’s untenable.
Yes but an important problem is that senators were originally supposed to be appointed, not elected, which upsets the checks and balances of the entire system. (Also, which is one of the reasons this country is flailing about on its death bed) Therefore, the Fed might be a blessing in disguise. Can you imagine the fully elected (By morons) Congress, setting monetary policy? You think *this* is bad?
“Did banks and Fed policy force people to buy property they couldn’t afford?”
You really need to let go of your bankrupt, morally corrupt thinking my friend.
I know. I think it goes without saying that banks and Fed policy strongly encouraged people to act the way they did. When the gubbmint goes around incentivizing certain behavior, then you can’t complain when ppl go around acting a certain way. Like, I mean, duh.
what part of fed policy encouraged this?
What part of fed policy dissuaded this behavior?
“force”
No.
Provide powerful incentives for households to make foolish choices?
Yes.
Marketing is a forceful incentivizing tool.
And the american public is the couch potato tool that is hoodwinked into thinking they are smarter, sexier, and better looking with their paunches, bad breath, and stupid jokes, fat families and tv shows that teach them nothing.
And don’t forget the obligatory SLOBurban, triple cheesburgers 3x/week, x-tra large cups of seething mugmoid from StarBux, 3 gargantuan nose picking children, etc etc
Fed policy created these powerful incentives? Clearly the Fed didn’t DISCOURAGE the behavior, but how did it ENCOURAGE it? Is it even the Fed’s job to discourage (or encourage, for that matter) individual behavior? The Fed has 2 mandates - price stability and full employment, and thus they conduct their monetary policy to influence those outcomes. But monetary policy is macro in nature. Given how out of control the credit/housing bubble became, and given the disastrous results of the aftermath, clearly things should have been done differently. But it’s too easy and simple to say loose monetary policy was to blame. It certainly contributed to the problem, but a much more effective solution would have been better regulation and targeted fiscal initiatives. I think blaming the Fed for this mess not only let’s way too many other guilty parties off the hook, but more importantly will do little to keep something like this from happening again.
“but how did it ENCOURAGE it?”
By not discouraging it. And yes…. it really is that simple.
okay alvin, are you related to Theodore and Simon or are you joey in disguise?
Alvin,
Do you think things would have turned out differently if Greenspan had been warning the banking industry about over-leverage and unsustainable home price increases?
Do you really believe the Fed wasn’t aware of NINJA loans and the like? If they knew about it, certainly they could have said or done something about it instead of encouraging it?
Sorry exeter, but i disagree that the Fed was encouraging behavior by not specifically discouraging it. is the Fed also responsible for everything else it didn’t specifically discourage over the past 96 years (both good and bad)??? to me, encouraging behavior would involve providing incentives for such behavior. i don’t think the fed is guilty of that. Deductible mortgage interest specifically ENCOURAGES home ownership. Loose monetary policy does not, at least not anymore than it encourages banks to lend in general allowing small business to grow, big businesses to hire, upstarts to innovate, etc etc.
hey gal! the former of course!
hi renter. yeah, i do think it could have turned out differently if Greenspan had done things differently (or for that matter if the president, or congress, or the FDIC, or the OCC, or the OTS, etc etc). But Greenspan was on record as having stated he doesn’t believe it’s the Fed’s job to identify and destroy asset bubbles. He made that very clear with the stock bubble. And even when he tried to warn about that one, it did little good - as the bubble continued on for years after. And i think it kind of makes sense that the Fed shouldn’t be trying to pop specific bubbles, because the primary tool they have to influence monetary policy is way to broad to target such specific imbalances. It’s like asking a doctor to perform surgery with a chain-saw. Instead of raising rates and prematurely bringing a fragile economy back into recession because of froth in the housing market, why not target specific initiatives to deflate the bubble. Regulate leverage. Change generous tax laws aimed at home owners. Tighten mortgage lending rules.
exeter, i disagree that the Fed was encouraging behavior by not specifically discouraging it. is the Fed also responsible for everything else it didn’t specifically discourage over the past 96 years (both good and bad)??? to me, encouraging behavior would involve providing incentives for such behavior. i don’t think the fed is guilty of that. Deductible mortgage interest specifically ENCOURAGES home ownership. Loose monetary policy does not, at least not anymore than it encourages banks to lend in general allowing small business to grow, big businesses to hire, upstarts to innovate, etc etc.
hey gal! the former of course!
hi renter. yeah, i do think it could have turned out differently if Greenspan had done things differently (or for that matter if the president, or congress, or the FDIC, or the OCC, or the OTS, etc etc). But Greenspan was on record as having stated he doesn’t believe it’s the Fed’s job to identify and destroy asset bubbles. He made that clear with the stock bubble. And even when he tried to warn about that one, it did little good - as the bubble continued on for years after. And i think it kind of makes sense that the Fed shouldn’t be trying to pop specific bubbles, because the primary tool they have to influence monetary policy is way to broad to target such specific imbalances. It’s like asking a doctor to perform by-pass surgery with a chain-saw. Instead of raising rates and prematurely bringing a fragile economy back into recession because of froth in the housing market, why not target specific initiatives to deflate the bubble. Regulate leverage. Change generous tax laws aimed at home owners. Tighten mortgage lending rules. Any of those initiatives would have been a lot more effective AND with a lot less collateral damage than restricting money supply too quickly.
“Did banks willingly and knowingly destroy their own industry?”
Which banks? You certainly aren’t talking about the guys who collected billions and billions of TARP-funded bonuses, are you?
It is critically important to distinguish the banks in the too-big-to-fail club from others in order to have any kind of a meaningful discussion.
PB.. how many banks got TARP money? about 50? How does that compare to the number failed or doomed to fail?
And what has happened to the remainder of the industry? It’s been sucked dry for the foreseeable future.
And don’t forget that TARP money is just a loan..
The industry supposedly threw itself onto the tracks while the train’s horn is blasting away, willingly sacrificing everything they’d built in order to pick up a few dollars.. i’ll never believe it.
“PB.. how many banks got TARP money? about 50? How does that compare to the number failed or doomed to fail?”
Better analysis:
1) Rank the banks by their net asset value as a shares of the total asset value of the banking sector.
2) Sum the asset shares of banks that got TARP money (the “too-big-to-fail” club members).
What is that sum in 2)? 80%? 90%? 95%? More???
Key points:
- Big banks get bail
- Small banks get to bail
- Small banks get to
bailfailJudge by results. You know the tree by the fruit.
I have seen very few articles affirming the Bernanke reappointment decision which discuss in any depth the question of the Fed’s central role in the credit bubble and bust. Also noteworthy: Bernanke sat in FOMC meetings when the credit bubble was inflated to gargantuan proportions (which the Fed somehow could not see) in the early 2000s.
The Federal Reserve
Right man, rough job
Aug 27th 2009
From The Economist print edition
Ben Bernanke’s renomination as Fed chairman is good news. But his hardest work lies ahead
HAVING endured weeks of criticism over his plans to reform American health care, Barack Obama urgently needs some friendly headlines. That helps to explain why, on August 25th, the president nominated Ben Bernanke to a second term as chairman of the Federal Reserve, even though Mr Bernanke’s first one does not expire until next January. The decision was widely hailed on Wall Street and in Washington, DC. With few exceptions, politicians and economists lined up to praise Mr Bernanke and to laud Mr Obama for keeping him.
The decision was a good one, for two important reasons. The first, on which most commentators have dwelt, is that Mr Bernanke has done a sterling job of dealing with the worst financial crisis since the 1930s. Some of the breathless praise about how this former student of the Depression saved the world from a repeat is overdone. It ignores the fact that Mr Bernanke was complicit in creating the loose monetary conditions which fuelled the financial frenzy in the first place. As a governor of the Fed earlier this decade, he was even more convinced than Alan Greenspan that central banks had no business raising interest rates to head off asset bubbles. Reappointing Mr Bernanke might thus appear akin to paying a plumber all over again for repairing pipes that he fitted after they have flooded your home. Nor, once the crisis struck, was he the only central banker to prove handy with monetary plunger and wrench. The leaders of several other rich-world central banks have also acted boldly.
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Okay, so I’m confused. He’s good, he’s bad, he’s the bad plumber that caused the home (US) to flood, and now he’s being reward for the damage he’s caused.
George W. Bush appointed him. Isn’t that enough to have him packing his bags.
You’d think so, wouldn’t you? But there is this argument out there now that you shouldn’t change horses in mid-stream or something… or is it that you shouldn’t change houses when you are underwater? I dunno…
I’m liking you already……. lmao.
“You can fool all of the people some of the time, and some of the people all of the time, and those are pretty good odds”
James Garner… as Jim Rockford in “The Rockford Files”
Jack- link doesn’t work, but good quote.
You’re not related to Jack Jones the singer are you?
Always, ALWAYS remember this is one giant confidence game. The fed, the politicians, the endless better than expected wall street analyst expectations, social-security, the smoke, the mirrors, interest rates, the confetti, the SEC, the pumping and dumping, the baa .. baa. booyahs! — all of it. It’s all designed to get the herd to gleefully fly off cliffs.
With that said, I’ve got my housing tax credit check in one hand and my down payment assistance check in the other, I’m going house shopping. I’ve been pre-approved for a 97 pct FHA loan. The bidding starts bright and early Monday morning. This time I’m much better prepared; I’ve got a tent. It came with my clunker trade.
“The fed, the politicians, the endless better than expected wall street analyst expectations, social-security, the smoke, the mirrors, interest rates, the confetti, the SEC, the pumping and dumping, the baa .. baa. booyahs! — all of it. It’s all designed to get the herd to gleefully fly off cliffs.”
Are all these ‘indicators of success’ by Joey’s standards? Or is it better to always just assume we are in the best of all Panglossian universes, never question anything the ‘experts’ tell us, and hope for the best?
“With that said, I’ve got my housing tax credit check in one hand and my down payment assistance check in the other, I’m going house shopping.”
If you live in the best of all possible worlds, you have to play the hand that G0d dealt you.
Here’s my thing about the PTB:
Bernanke did not cause this mess, and, Kingdom come, there’s nothing he can do to stop the consequences of it. Same thing with Obama. Same thing with all the new Congresscritters we’ll be getting after the current ones lose their seats.
This is all just a matter of political tenability. Whoever’s in office has to “do something”, even though they must know their efforts are bound to fall short of expectations. Allowing a swift, painful Depression (and accompanying “redistribution of wealth”) would have been political suicide, which in turn would have really forced in a new wave of PTBs, all strongly pro-government-intervention, to give the ppl what they wanted.
I agree with you. But what about the plan going forward. Is it pretty much to put the bad crisis genie back in the bottle and get back to business as usual, circa 2005? If not, what is the plan?
Should Americans have a say in our collective financial destiny? Or is it best to just leave it all up to the experts, and be good little economic sheep and act on whatever advice comes down from the mountain top by way of the MSM bully pulpit?
No, we shouldn’t be sheep. That’s kinda the whole point of having a Republic, where we vote for the ppl to represent us. There was a time when most Americans really believed in deregulation and globalization. As you pointed out, most Americans didn’t know who the Federal Reserve was until recently. But now ppl are starting to change their mind. The beast has reared its ugly head (cue daunting string instruments), so I’m sure it won’t be long until Congress is forced to either take back the reins or be replaced.
Right on, V.
I read a really grim article yesterday about how major tax hikes are inevitable for everyone, except for real poverty cases, given the size of the deficit.
Yes, but the Senate was originally supposed to be appointed, not elected. That’s where the republic went off track. That’s why the senate is dominated by idiots. It’s one of the ways the republic has been downgraded to a democracy. ( A true democracy consists of two wolves and one sheep voting on what’s for dinner!)
OK, OK.
I just realized you all are going to come back and say “But, he did cause this mess. He was aligned with Greenspan the entire time. He voted on the rates, etc.
I should clarify: He didn’t decide to disarm the regulatory agencies that should have prevented irresponsible underwriting. He didn’t decide to farm all our jobs off to other countries, thereby creating the wealth vacuum that was subsequently filled with debt. He was definitely wrong in believing that bubbles can only be detected in hindsight, but that was a mere technical error.
Greenspan was the yahoo who appeared on national TV and encouraged everyone to take out an “innovative, inexpensive ARM”. He was the chairman, so yeah, he was culpable.
Fair enough. But consider to what extent BB has gone to distance himself from his predecessor’s policy regime (has he at all?).
By contrast, OBwan did not waste an instant distancing himself from W’s policies.
Yep, it took how long, a couple of days to repeal the Patriot Act? And close Gitmo? And repeal Paulson’s TARP program? And pull the troops out of Afghanistan? And pull the plug on AIG?
I could go on.
LOL, Bill. In the journal Counterspin, Alexander Cockburn wrote that Obama is one of the finest Republican presidents ever. So far, anyway.
Really. Where exactly is the change we could believe in?
Speaking of no-nothing economists who live in ivory towers:
http://news.yahoo.com/s/nm/20090828/bs_nm/us_usa_economy_ecri_1
“U.S. double-dip recession “out of the question”: ECRI”
There are various ways this statement could be made bullet proof:
1) Retrospectively define the end of the current recession as the point in time when true recovery is underway (no matter how far off in the future that may be);
2) Split up a sufficiently long recession into two parts, separated by a sufficiently-long interval between the parts to claim they were different episodes in business cycle history;
3) Respike the punchbowl to blow yet another bubble, producing a break in the downward trajectory in RGDP.
My take: The onset of the current economic malaise could be dated to the 1997 Thai baht crisis, but ginormous Fed-engineered bubbles in tech stocks and housing clouded the picture.
First he complains about ‘financial weapons of mass destruction;’ now it’s ‘greenback pollution.’ Some people are difficult to please.
On a serious note, thank our stars for Op-Ed contributors who are sufficiently wealthy and candid to honestly share what is on their minds.
Op-Ed Contributor
The Greenback Effect
By WARREN E. BUFFETT
Published: August 18, 2009
IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.
The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.
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From the recent NY Times Op-Ed by the Oracle of Omaha:
“Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.”
Was there a misprint in that last sentence? Did he mean to say ‘lies’ or ‘dies’?
But are they really printing dollars? The Federal Reserve is just loaning money in spades, right? What happens when the money doesn’t get paid back?
That’s what caused the Depression. When the money didn’t get paid back.
I don’t think it matters whether it’s farmers not paying back banks, or banks not paying back bigger banks. The result is the same.
“Before Alan Greenspan assumed the position back in 1987,”
I would say we’re the one who have had to assume the position.
(Palmy rubs posterior gingerly)
Addressing one of “Under Fed” ’s other questions:
What is a risk premium?
Well, a risk premium SHOULD be paid by those who are trying to raise capital by peddling assets of questionable value. Thus, buyers of common stocks SHOULD get a lot of cash-flow for their money, since the assets they are buying are unsecured. But nope, the world is a big casino, and stock buyers are still betting on inflation, even though Gary Shilling and others are NOT. In that arena, the low risk-premium persists.
On the other hand, in the bond arena, risk premiums are now high IMO. The example I gave last week was Genworth Financial, 5 yr bonds yield more than 12%. Comparable yields available on Hartford and Prudential.
I suppose the difference is, the stock buyers all plan to bail out when their crystal ball tells them the bear mkt is about to resume.
The buyer of a house is still not receiving ANY risk premium from the seller, in the sense that buying is STILL more expensive than renting. In this case, I suppose you could say the renter is getting a risk premium because he is taking a risk of being Priced Out Forever. Swell, I’ll play.
“The buyer of a house is still not receiving ANY risk premium from the seller, in the sense that buying is STILL more expensive than renting.”
I guess that explains why we are still renting?
- What is a “risk premium”?!
Hey. Wait a minute. You trying to get us to do your homework?
I think that was your homework assignment.
I want to throw an idea out there … The current efforts to mop up the aftermath of the bubble are not the problem. The problem occurred over the past 9 years. Where was Fed chairman Greenspan all that time?
Oh year I remember - free market and deregulation and all that tripe!
Any of you southerners and westcoasters seeing the massive raft of bank commercials on TV attempting to break bread with the public and imply that they are there to help?
The poor banks!!!! So misunderstood!!
Please correct me if I am wrong.
The largest lenders and banks were bailed out and engineered to become larger. Freddie/Fannie, Goldman sacks, BOA, CITI,
AIG was bailed out because they are insuring the assets of Goldman Sacks, BOA, CITI, and probably FREDIE/Fannie.
Lehman bros, was allowed to fail because they were competition for Goldman Sacks. Thus more market share for Goldman sacks.
Freddie/Fannie are still in place because Goldman sacks, BOA and CITi still need someone to pawn off any of their newly generated mortgages.
Goldman sacks, BOA and CITI were engineered to come out on top, although they were just as guilty and lost more money than Wamu, and Indy mac and country wide. Thanks to uncle sam, they were encouraged to buy them up, with Gov. insured assets and losses, 0 % perfered loan rates from the Federal Reserve. Competitors were allowed to go under, thus giving preferance to the bailed out bunch listed above, whom I will now call the “Big three”.
It seems to me the Fed and OBama/Bush used the current crisis to engineer the supremacy of the big three. The Gov. chose their survival and has now growen them larger.
For the elite group listed above, their loses were socialized and their profits privitized. Their growth engineered and organized by the Federal Reserve and U.S. Congress and two US Presidents.
If I have missed something or I am wrong somewhere please correct me.
This had to be as close to a coup as we have seen in the United States. The power shift to a few large banks and the Fed has been astonishing.
Michael Hirsh
Lecturing Bernanke
The Fed chairman’s old teacher worries that Washington isn’t fixing the too-big-to-fail issue.
Aug 28, 2009
Economist Stanley Fischer was Ben Bernanke’s thesis advisor at MIT; he knew better than most that his former student had the right stuff to avert a depression. Bernanke was an “expert” at injecting liquidity into a sinking economy, Fischer said last year before the markets took their frightening plunge. Fischer had no doubt that Ben would do what it took (Ben did, earning himself a second term as Fed chairman this week). But serious questions remain in the minds of Fischer and other critics whether the most serious problem of the financial crisis—the too-big-to-fail issue—is proving too big for Bernanke and Washington’s power elites to handle.
Fischer was not only Bernanke’s teacher; he was also one of the preeminent economic officials of the ’90s, the era of the “Washington consensus” bias in favor of deregulation. After leaving the IMF he became vice chairman of Citigroup—the corporate embodiment of the too-big-to-fail problem. So it was all the more remarkable to hear Fischer apparently jumping to the other side of the issue and chiding his former student at the annual Jackson Hole, Wyo., conference for central bankers last week. Fischer also seemed to take aim at his former allies from the deregulatory ’90s, Larry Summers and Tim Geithner. “We seem to be taking it for granted that we should go back to the structure of the financial system as it was on the eve of the crisis,” said Fischer, who is now the governor of the Bank of Israel.
This is still the central pathology of our economic era. We have a free-market system dominated by institutions so huge and “systemically important” that they don’t have to play by free-market rules. Excessive risk-taking is built into the system because bailouts are; the promise of the latter begets the former. And as The Washington Post reported Friday, the problem is getting worse rather than better: nurtured by government bailouts and a hands-off approach to their size, the biggest banks are getting even bigger and, therefore, harder to control. Both Bernanke and the Obama administration are acutely aware of this “moral hazard” problem and have sought to address it. But the biggest undercurrent of worry at Jackson Hole was that reform efforts were getting bogged down in political bickering, and nothing would happen this year. With each passing month—it’s nearly the first anniversary of the Lehman Brothers collapse—the memory of how close we came to the abyss recedes and the impetus for radical change loses force. “I think the concern was that the administration was focusing on too many different things at once and [regulatory reform] was getting pushed to the bottom,” says Mark Gertler of New York University, Bernanke’s longtime academic collaborator.
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Bailouts are one thing, but the corporate leaders in these organizations should have been held accountable for massive fraud. I would have used some of the bailout money to buy a tanker of tar and all the feathers I could get my hands on. Thus while the organizations might believe they would be bailed out, those absolutely responsible would suffer another fate. Remember a large organization is simply a group of individual people, and not one of them individually is necessary for the survival of the greater organization.
So perhaps the answer is not new regulation, but simply application of criminal laws which are already on the books.
August 28, 2009, 5:34 pm
‘The Obamarita’
David Letterman
Monologue | Aired Thursday night on CBS: Federal Reserve Chairman Ben Bernanke will serve four more years, or until the United States becomes a colony of China.
Bernanke looks like a guy you see at the airport holding a sign that reads “Dr. Rothman.”
He looks like a guy who ran a Madoff feeder fund.
He looks like a personal physician to a pop star.
He looks like a medical examiner on “Kojak.”
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Is chairman of the fed more than just a figurehead position? It looks to me like the available courses of action, without being blocked or effectively overriden, are so narrow that fed policy would remain the same regardless of who is appointed chair. I like BB because he does not do that whole talking-in-codespeak cult-of-personality nonesense act of Greenspan’s, and because he has a beard like mine (which my boss says is a “terrorist beard”). Otherwise, I think he is a worthless puppet like all the other potential chairs.
Also, how is raising taxes going to fund anything? My income is dead (strange to apply for low-income assistance when I still have so much money in the bank), and I have more than a decade of rolling-forward capital losses on my tax returns in my future, which I suspect is not uncommon. I think taxing at any multiple of my zero or negative tax base will still result in zero tax revenue. Or have economists worked out a way to redefine zero as a positive value?
I’m certainly not going to try very hard to generate new income when I know it will all be taxed away to bail out crooks again. I have lived and will continue to live with far less luxury than the average American, but how will they live without people like me to work and consume? I told my co-workers that we will never see hyper-inflation nor hyper-deflation because either one would create a survival-of-the-fittest scenario that would kill off everyone with any wealth or power today, and they would never let that happen. So I think we will see a decades-long steady decline to oblivion.
“Is chairman of the fed more than just a figurehead position?”
You clearly have not paid very much attention over the past two years. Please read some archived blog threads over the period from December 2006 to the present and get back to us.