Monday, December 13, 2010
Is Ben Bernanke a Liar, an Abettor, or Just Wildly Incompetent?
Last week, 60 Minutes conducted an interview with Federal Reserve Chairman Ben Bernanke. At the outset, correspondent Scott Pelley noted that this is the worst recovery the nation has ever seen.
Perhaps that's the reason that Bernanke, who is charged with finding a way out of this mess, decided to do a prime-time interview on national television. It was an unusual event.
As Pelley noted, Fed Chairmen rarely do interviews. But Pelley said that Bernanke feels the need to speak out because he believes his critics may not understand how much trouble the economy is in.
Oh, I think they know, Ben. I think everyone knows.
Bernanke felt the need to get in front of the camera and provide the Fed's spin in order to counter all of the resistance the central bank is simultaneously facing from seemingly all quarters.
It's reasonable to assume that Bernanke never gives an honest assessment of anything, and that the Fed keeps all of its most harrowing data to itself. Whatever dire economic numbers the Fed reveals, it's safe to assume the real numbers are even worse. That's because the Fed, like the government, lies.
For that reason, some of Bernanke's assessments were rather sobering.
"Between the peak and the end of last year, we lost eight and a half million jobs", said Bernanke. "We've only gotten about a million of them back so far. And that doesn't even account the new people coming into the labor force. At the rate we're going, it could be four, five years before we are back to a more normal unemployment rate. Somewhere in the vicinity of say five or six percent."
Got that? The Federal Reserve Chairman was willing to admit on a nationally-televised, prime-time news show that it may take as long as five years before unemployment comes back down to six percent.
It was a stark and stunning revelation. But to readers of The Independent Report, it's not the least bit surprising.
In an effort to jump start the economy, the Fed plans to buy $600 billion in US Treasury securities, with the intention of lowering rates on long term loans for things like cars and homes.
Bernanke wanted to emphasize that this $600 billion quantitative easing program comes from the Fed's own reserves. "It's not tax money. It does not add to the federal deficit."
Bernanke never bothered to mention where the Fed gets those reserves. That was pretty convenient.
"One myth that's out there is that what we're doing is printing money. We're not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way."
That's technically true. The Fed doesn't actually need to print any paper currency. It simply extends credit to various banks by electronic transfer. It all amounts to nothing more than key strokes on computers, in which billions in credit are instantly conjured and then moved from the Fed's balance sheet to the balance sheets of numerous banks. It's like magic.
When asked if there was a scenario in which the Fed would commit to more than $600 billion in quantitative easing, Bernanke replied, "Oh, it's certainly possible. And again, it depends on the efficacy of the program. It depends on inflation. And, finally, it depends on how the economy looks."
That surely spooked Treasury markets. The notion of the Fed buying Treasuries and propping up the market with conjured money is certainly unsettling.
Bernanke went on to say that what passes for a 'recovery' may not be self-sustaining.
"It takes about two and a half percent growth just to keep unemployment stable. And that's about what we're getting. We're not very far from the level where the economy is not self-sustaining."
Notice that he said nothing about actually reducing the unemployment rate? Current GDP growth will merely serve to maintain the current unemployment rate and keep it from rising. That's hardly reassuring.
Most disturbingly, this economic collapse occurred right under the noses of Bernanke and his comrades at the Fed. And now they are being entrusted with managing a recovery. It's hardly reassuring.
Even though the Fed was the regulatory watchdog of the largest banks when outrageously risky lending led to a worldwide financial crisis, Bernanke doesn't assume any responsibility or blame.
When asked if there is anything he wishes he'd done differently over these last two and a half years or so, Bernanke replied, "Well, I wish I'd been omniscient and seen the crisis coming, the way you asked me about. I didn't."
In Bernanke's estimation, seeing the oncoming crisis, which was rushing at him like a financial freight train, required the sort of omniscience that only a genie or wizard might possess.
How did the Fed miss the looming financial crisis?
"There were large portions of the financial system that were not adequately covered by the regulatory oversight," said Bernanke. "So, for example, AIG was not overseen by the Fed... Neither [was] Lehman Brothers, the company that failed. Now, I'm not saying the Fed should not have seen some of these things. One of things that I most regret is that we weren't strong enough in putting in consumer protections to try to cut down on the subprime lending problem. That was an area where I think we could have done more."
What a joke.
Bernanke is not committed to consumer protection. In fact, he lobbied against the Consumer Financial Protection Agency.
In 2008, federal regulators had the power to supervise Citigroup, Bank of America, Wachovia, Washington Mutual, Lehman Brothers, Bear Stearns, and Countrywide and force them to pare back their risky activities – and yet they didn’t.
It is absurd to say that regulators didn’t have the authority to manage systemic risk. It was simply a lack of interest.
William K. Black, a former bank regulator and now an associate professor of Economics and Law at University of Missouri as Kansas City, says the Fed was completely derelict in its duties as a regulator.
"The most severe failure was at the Federal Reserve," said Black. "The Fed’s failure was the most harmful because it had unique authority to prevent the fraud epidemic and the resulting economic crisis. The Fed refused to exercise that authority despite knowing of the fraud epidemic and potential for crisis."
The Fed is entirely and completely against regulation. In fact, it can accurately be described as an anti-regulatory, regulating agency.
As Mr. Black further notes, "The anti-regulator policies that Bernanke championed were the principal drivers of the fraud epidemic that have produced recurrent, intensifying crises."
It is true that the Fed wasn't the regulator in charge of insurance giant AIG. That distinction belonged to the Office of Thrift Supervision, which — like the Fed — showed a complete dereliction of duty. Like other US federal bank regulators, the OTS is paid by the banks it regulates. How's that for conflict of interest?
However, Bernanke was a member of the board of governors of the Federal Reserve system for most of the period from 2002 to 2006, when historically low interest rates set by the central bank sparked the housing bubble, the resulting financial crisis, and subsequent recession.
Bernanke, and others like him, prefer to blame the whole financial disaster on sub-prime lending. But the reality is that many perfectly conventional mortgages went bust. And commercial real estate was at least as overblown as housing, and it went bust too.
It's simply stunning to hear the man who failed to supervise regulation blame weak regulation for the financial crisis, but Bernanke did just that while speaking to the American Economic Association in January. And, in his view, low interest rates were not to blame.
“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,” said Bernanke.
However, Bernanke's predecessor, Alan Greenspan, rejected advice about the risks of subprime lending. And Bernanke followed the same lax regulatory course when he was appointed to head the Fed. The reality is that the Fed had the authority to regulate in many ways; it simply chose not to.
Bernanke, like Greenspan, believes that self-regulatory mechanisms are inherent in free markets. Both men believe in the "free hand" of the market, which makes outside regulation unnecessary.
In 2006, Chairman Bernanke professed, "Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”
All along, Bernanke has displayed a continual propensity for getting it wrong.
While speaking at the Federal Reserve Bank of Chicago's annual conference in May 2007, Bernanke famously stated, “Importantly, we see no serious broader spillover to banks or thift institutions from problems in the subprime market; the troubled lenders, for the most part, have not been institutions with federally insured deposits”
That was absolutely, positively, untrue. Five of the 10 largest subprime lenders during the previous year were banks regulated by the Fed.
And the fallout has continued to be brutal; so far this year, 151 US banks have failed. Yet, the Fed hasn't shown the same mercy to small local and regional banks that it has to the mega banks.
Of particular concern is the recent revelation that the Fed made 21,000 transactions, stretching from December 2007 to July 2010, that totaled $3.3 trillion. These transactions included loans and purchases with financial firms including Citigroup, Morgan Stanley, Goldman Sachs, major industrials companies including GE, and even to foreign corporations and foreign banks, including the Bank of England.
The loans were nearly interest-free. And the revelations of these secret transactions make the Federal Reserve appear to be the Central Bank of the World. None of this would have been known if Congress had not forced the Fed to reveal these transactions. Yet, we now know that the Fed has been acting as a sort of global bailout machine.
So Bernanke is either a liar, an abettor, or just wildly incompetent. And yet he was reappointed as Fed Chairman by President Obama in January of this year.
However, Bernanke received stiff opposition on the way to confirmation for his second term. The full Senate voted 70–30 in his favor, the narrowest margin for any Fed Chairman in history.
Even before he went on national TV to plead his case, all eyes were on Bernanke, and they will continue to be. The American public is on to him. Before this crisis most Americans had no clue what the Fed was, or what it did. Now nearly everyone knows. The opposition is vast. The doubt and mistrust are massive, and perhaps even historic.
According to a new Bloomberg Poll, a majority of Americans are dissatisfied with the Federal Reserve and say it should either be brought under tighter political control or abolished outright.
Perhaps Congressman Ron Paul put it best when he said, referring to Bernanke:
"There is something fishy about the head of the world’s most powerful government bureaucracy, one that is involved in a full-time counterfeiting operation to sustain monopolistic financial cartels, and the world’s most powerful central planner, who sets the price of money worldwide, proclaiming the glories of capitalism."