Bernanke STILL Not Man of Year (The Details) - Deja Vu: Will the U.S. Undergo a Reprise of 1937? - Roubini

Bad Tux has presented all the regular (good) arguments for letting Ben Bernanke be Ben Bernanke in response to my essay yesterday, and he's exactly right. Benjamin Shalom Bernanke (a homeboy from South Carolina!) does not have the express responsibility for creating a climate conducive to creating jobs or health care or home ownership.

Ben Bernanke has done exactly what a central banker is supposed to do in this kind of crisis. The other stuff - legislating more oversight, taking over banks and running them to benefit the people, etc. - isn't something he has any power over, that's those dipshits in Congress. All he has power over is the money supply and doing what's necessary to prevent a deflationary spiral, and he's done that, and done that well.

And I agree with everything else he said, especially about his cats, although Investopedia, a Forbes Digital Company, explains it this way:

The Fed's mandate is "to promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar and moderate long-term interest rates." In other words, the Fed's job is to foster a sound banking system and a healthy economy. To accomplish its mission, the Fed serves as the banker's bank, the government's bank, the regulator of financial institutions and as the nation's money manager.

A little personal history may be needed here. I actually was a pretty good student in my many Economics courses when I was studying Business Administration in grad school at Hopkins so I know the easy answers too. As a matter of fact, the Director of the Economics faculty asked me once "Where did I want her to send the letter?" (a question I "poo-pooed" at the time as I thought I had a great career ahead of me in software engineering (and how little I could see the future of professionals outside of government in the early 80's is another story) and couldn't imagine getting more training in another technical field - especially after the treatment I received in the engineering world up to then.)

I was pretty good at it though so imagine my surprise as I followed Alan Greenspan's (appointed in '87 by Raygun) planned trajectory for the economy straight downhill as he created bubble after bubble to benefit himself and his buddies (and "the world," he intoned solemnly), and then witnessing the victimization of the silly American consumer who thought s/he was "gonna be rich too" from cashing in from the ever-increasingly valuable home. Later, I was treated to Bernanke's Buddies' Bungle by the same movers-and-shakers. So you can see that it did not paint a pretty picture in my mind, and when I saw Time Magazine's choice of Bernanke for Man of the Year, I blanched (although Michael Shedlock (Mish) points out that this may be a contra-indicator as it usually means it's the end of the wunderkind). "Time Magazine is wrong of course. Bernanke did not save the world. Moreover Bernanke is a poor student of the great depression. He understands neither the cause nor the cure of depressions. It is equally clear Time Magazine doesn't either."

Sorry for going on for so long, but it may shed some light on my subsequent opinions. (I know this reads like an old New Yorker article - and nobody likes that anymore but me.)

Barry Ritholtz at The Big Picture speaks for me and many others about those duties not being performed by Bernanke who should not have a second term as Chair of the Board of Governors of the Federal Reserve System. And he predicted that Brian Moynihan would be named CEO of BAC just because he was an insider (and knows where the bones are buried!). (Emphasis marks added - Ed.)

. . . we have three reasons for this view: First is the law. The bailout of American International Group (AIG) was clearly a violation of the Federal Reserve Act, both in terms of the “loans” made to the insolvent insurer and the hideous process whereby the loans were approved, after the fact, by Chairman Bernanke and the Fed Board. The loans were not adequately collateralized. This is publicly evidenced by the fact that the Fed of New York (FRBNY) exchanged debt claims on AIG itself for equity stakes in two insolvent insurance underwriting units. What more need be said?

As we’ve noted . . . previously, we think the AIG insurance operations are more problematic than the infamous financial products unit where the credit default swaps pyramid scheme resided. And we doubt that any diligence was performed by Geither and/or the FRBNY staff on AIG prior to the decision taken by Tim Geithner to make the loan. We’ll be talking further about AIG in a future comment.

Of interest, members of the Senate Banking Committee who want more background on the AIG fiasco, particularly who did what and when, need to read the paper by Phillip Swagel, “The Financial Crisis: An Inside View,” Brookings Papers on Economic Activity, Spring 2009, The Brookings Institution. We hear in the channel that Fed officials were furious when Swagel, who served at the US Treasury with former Secretary Hank Paulson, published his all-to-detailed apology. We understand that several prominent members of the trial bar also are interested in the Swagel document.

Last week the Senate Banking Committee spent a lot of time talking with Chairman Bernanke about why payouts were made to AIG counterparties like Goldman Sachs (GS) and Deutsche Bank (DB), but the real issue is why Tim Geithner and the GS-controlled board of directors of the FRBNY were permitted to make the supposed “loans” to AIG in the first place. The primary legal duty of the Fed Board is to supervise the activities of the Reserve Banks. In this case, Chairman Bernanke and the rest of the Board seemingly got rolled by Tim Geithner and GS, to the detriment of the Fed’s reputation, the financial interests of all taxpayers and due process of law.

Martin Mayer reminded us last week that the Fed is meant to be “independent” from the White House, not the Congress from which its legal authority comes by way of the Constitution. Nor does Fed independence mean that the officers of the Federal Reserve Banks or the Board are allowed to make laws. None of the officials of the Fed are officers of the United States. No Fed official has any power to make commitments on behalf of the Treasury, unless and except when directed by the Secretary. Given the losses to the Treasury due to the Fed’s own losses, this is an important point that members of the Senate need to investigate further.

The FRBNY not only used but abused the Fed’s power’s under Section 13(3) of the Federal Reserve Act. In AIG, the FRBNY under Tim Geithner invoked the “unusual and exigent” clause again and again, but there is a serious legal question whether the then-FRBNY President and the FRBNY’s board had the right to commit trillions without any due diligence process or deliberate, prior approval of the Fed Board in Washington, as required by law.

The financial commitments to GS and other dealers regarding AIG were made always on a weekend with Geithner “negotiating” alone in New York, while Chairman Bernanke, Vice Chairman Donald Kohn and the rest of the BOG were sitting in DC without any real financial understanding of the substance of the transactions or the relationships between the people involved in the negotiations.

Was Tim Geithner technically qualified or legally empowered to “make deals’ without the prior consent of the Fed Board? We don’t think so. Shouldn’t there have been financial fairness opinions re: the transactions? Yes.

We understand that the first order of business in any Fed audit sought by members of the Senate opposed to Chairman Bernanke’s re-appointment is to review the internal Fed legal memoranda and FRBNY board minutes supporting the AIG bailout. These documents, if they exist at all, should be provided to the Senate before a vote on the Bernanke nomination. Indeed, if the panel established to review the AIG bailout and related events investigates the issue of how and when certain commitments were made by the FRBNY, we wouldn’t be surprised if they find that Geithner acted illegally and that Bernanke and the Fed Board were negligent in not stopping this looting of the national patrimony by Geithner, acting as de facto agent for the largest dealer banks in New York and London.

The second strike against Chairman Bernanke is leadership. In an exchange with SBC Chairman Christopher Dodd (D-CT), Bernanke said that he could not force the counterparties of AIG to take a haircuts on their CDS positions because he had “no leverage.” Again, this goes back to the issue of why the loan to AIG was made at all.

Having made the first error, Bernanke and other Fed officials seek to use it as justification for further acts of idiocy. Chairman Dodd look incredulous and replied “you are the Chairman of the Federal Reserve,” to which Bernanke replied that he did not want to abuse his “supervisory powers.” Dodd replied “apparently not” in seeming disgust.

We have been privileged to know Fed chairmen going back to Arthur Burns. Regardless of their politics or views on economic policies, Fed Chairmen like Burns, Paul Volcker and even Alan Greenspan all knew that the Fed’s power is as much about moral suasion as explicit legal authority. After all, the Chairman of the Fed is essentially the Treasury’s investment banker. In the financial markets, there are times when Fed Chairmen have to exercise leadership and, yes, occasionally raise their voices and intimidate bank executives in the name of the greater public good. AIG was such as test and Chairman Bernanke failed, in our view.

Chairman Bernanke does not seem to understand that leadership is a basic part of the Fed Chairman’s job description and the wellspring from which independence comes. The handling of AIG by Chairman Bernanke and the Fed Board seems to us proof, again, that Washington needs to stop populating the Fed’s board with academic economists who have no real world leadership skills, nor operational or financial experience. Just as we need to end the de facto political control of the banksters over America’s central bank, we need also to end the institutional tyranny of the academic economists at the Federal Reserve Board.

The third reason that the Senate should vote no on Chairman Bernanke’s second four-year term as Fed Chairman is independence. While Bernanke publicly frets about the Fed losing its political independence as a result of greater congressional scrutiny of its operations, the central bank shows no independence or ability to supervise the largest banks for which it has legal responsibility. And Chairman Bernanke has the unmitigated gall to ask the Congress to increase the Fed’s supervisory responsibilities. As we wrote in The IRA Advisory Service last week:

“Indeed, if you want a very tangible example of why the Fed should be taken out of the business of bank supervision, it is precisely the TARP repayment by Bank of America (BAC). The responsible position for the Fed and OCC to take in this transaction is to make BAC raise more capital now, when the equity markets are receptive, but wait on TARP repayment until we are through Q2 2010 and have a better idea on loss severity for on balance sheet and OBS exposures, HELOCs and second lien mortgages, to name a few issues. Apparently allowing outgoing CEO Ken Lewis to take a victory lap via TARP repayment is more important to the Fed than ensuring the safety and soundness of BAC.”

One close observer of the mortgage channel, who we hope to interview soon in The IRA, says that given the recent deterioration of mortgage credit, it is impossible that BAC has not gotten its pari passu portion of the losses which are hitting the FHA. The same source says that using conservative math, FHA has another $75 billion in losses to take, with zero left in the FHA insurance fund. Worst case for FHA is double that number, we’re told. How could the Fed believe that BAC, which is the biggest owner of mortgages and HELOCs, is immune from this approaching storm?

Because the Fed is cooking the books of the largest banks.

The observer confirms our view that trading gains on the books of banks such as BAC are due to the Fed’s open market purchases, which drove up prices for MBS and other types of toxic waste. In effect, the Fed’s manipulation of the prices of various toxic securities is giving the largest US banks and their auditors a “pass” on accounting write-downs in Q4 2009 and for the full year – assuming that MBS prices do not drop sharply before the end of the month.

Question: Is not the Fed’s manipulation of securities prices and the window-dressing of bank financial statements not a violation of securities laws and SEC regulations?

Of note, in her column on Sunday about the widely overlooked issue of second lien mortgages, “Why Treasury Needs a Plan B for Mortgages,” Gretchen Morgenson of The New York Times writes that “Unfortunately, there is a $442 billion reason that wiping out second liens is not high on the government’s agenda: that is the amount of second mortgages and home equity lines of credit on the balance sheets of Bank of America, Wells Fargo, JPMorgan Chase and Citigroup. These banks – the very same companies the Treasury is urging to modify loans that they service – have zero interest in writing down second liens they hold because it would mean further damage to their balance sheets.”

Thus the Fed is not only allowing insolvent zombie banks to repay TARP funds before the worst of the credit crisis is past, but the “independent” central bank is engaged in a massive act of accounting fraud to prop up prices for illiquid securities and thereby help banks avoid another round of year-end write downs, the banks the Fed supposedly regulates. This act of deliberate market manipulation suggests that the Fed’s bank stress tests were a complete fabrication. Only by artificially propping up prices for illiquid securities can the Fed make the banks look good enough to close their books in 2009 and, most important, attract private equity investors back to the table.

. . . What is really funny, to us at least, is that we hear in the channel that BAC is ultimately going to give the CEO slot to a BAC insider, consumer banking head Brian Moynihan, who testified before Congress on the Merrill Lynch transaction in November. Just imagine how the Fed Board, Chairman Bernanke and the Fed’s Division of Supervision & Regulation are going to look when, after all the hand wringing about aiding BAC’s CEO search by allowing the TARP repayment, the post is finally given to an insider!

Former colleagues describe Moynihan as a close associate of Ken Lewis. If the objective of forcing Lewis’ departure was change in the culture in the CSUITE at BAC, installing one of his trusted henchmen, in this case left over from the Fleet Bank acquisition, seems a retrograde step.

All we can say about the treatment of the BAC TARP repayment issue and the Fed’s handling of the supervision of large banks generally is that it is high time for the Congress to revisit the McFadden Act of 1927. In particular, we need to look again at making further changes to the Fed to ensure that it is entirely subordinate to the public interest and that never again will private financial institutions such as GS or BAC be in a position to dictate terms to the central bank. Whether you are talking about the loans to AIG or the mishandling of BAC’s TARP repayments, the Fed under Chairman Bernanke seems to have acted irresponsibly and contrary to the law.

For all of the above reasons, we think that the Senate should reject the renomination of Ben Bernanke and ask the President to nominate a new candidate as Chairman and also nominate two additional candidates for Fed governor to fill the other two long vacant seats.

Paul Volcker has been saying for a while that we should re-enact Glass-Steagall. My question is "Why is this news?" Who thinks we shouldn't? Oh, right, teh money that controls Wall Street, the Congress and the Presidency (and Greenspan and Bernanke?). Silly me. I just read the news. But this is one more knife in the back to a real recovery for the common taxpaying citizen who would just like to get back to the glory of living in the American Empire (whoops - shouldn't have opened that can of worms here). And Bernanke has so many other questions he should answer before being reconfirmed at his Senate hearing today. I'm actually hoping (along with Michael Shedlock (Mish)) that his being named by Time is another contra-indicator ("Kiss of Death").

Dean Baker, economic guru par excellence IMHO, wrote a brilliant dissection some time ago in The Guardian of the bubbles and Greenspan's and Bernanke's responsibility with whick I concur wholeheartedly. (Emphasis marks added - Ed.)

It would be an insult to the tens of millions of people who have lost their jobs, their homes and their life savings to see Bernanke reappointed. Failure should have consequences even for central bank chairmen.

. . . The world's central bankers met in Jackson Hole last weekend for their annual gathering. Undoubtedly one of the main topics of discussion was the reappointment of Ben Bernanke as Federal Reserve board chairman. His reappointment would almost certainly win the support of the vast majority of attendees. This should raise serious concerns.

This is the same group that in 2005 devoted their meeting to an Alan Greenspan retrospective (seriously). The world's leading thinkers and practitioners of monetary policy debated whether Greenspan was the greatest central banker of all time.

I'm not sure how the polling on this question turned out, but four years later the world is facing the worst economic downturn since the Great Depression because of Greenspan's failed monetary policy. Greenspan either did not recognise an $8tn housing bubble or did not think it was a big enough deal to demand his attention. The collapse of this bubble gave us the financial panics of 2008 and more importantly led to the falloff in demand that produced the downturn.

None of this should have been a surprise to people who understand monetary policy. The housing bubble should have been easy to recognise. There was a 100-year-long trend in which nationwide house prices in the United States had just tracked the overall rate of inflation. At the peak of the bubble in 2006, house prices had risen by more than 70% after adjusting for inflation. There were no changes in the fundamentals of the supply or demand of housing that could provide a remotely plausible explanation for this unprecedented run-up in prices. Furthermore, rents were not outpacing inflation. If the run-up in house prices was being driven by fundamentals, then there should have been at least some upward pressure on prices in the rental market.

The bubble was very evidently driving the economy by the time of GreenspanFest 2005. The residential construction sector had expanded to more than 6% of GDP, an increase of more than two percentage points (approximately $300bn a year) from its normal level.

The $8tn in housing bubble wealth was also propelling consumption. Assuming a wealth effect of six cents on the dollar, the bubble wealth was generating close to $500bn a year in increased consumption.

It was inevitable that both the construction and consumption demand would disappear when the bubble burst. What did Greenspan and his acolytes think would make up this lost demand?

Even the financial crisis was entirely predictable, although the exact course of events could not be known to someone who lacked access to the information held by central bankers. Housing is always a highly leveraged asset, and it was no secret that it had become much more so during the bubble years.

Down payment requirements were thrown out the door, as homebuyers often purchased homes with no money down – in many cases even borrowing more than the appraised value of a bubble-inflated house price. The explosion of subprime and Alt-A loans was also not classified information. How could any economist have been surprised by the flood of defaults and the resulting stress on banks following the collapse of the bubble? This was as predictable as the sunset at the end of the day.

But the attendees of GreenspanFest 2005, most of whom are back to attend GreenspanFest 2009, apparently were surprised. Remarkably, almost none of the attendees suffered any consequences from the failure to see the largest financial bubble in the history of the world. In the US alone, 25 million people are either unemployed or underemployed in large part because of the failure of the GreenspanFest attendees to do their job. Yet, the GreenspanFest attendees are not among those fearing unemployment. The official slogan of GreenspanFest 2009 is: "Who could have known?"

Ben Bernanke has moved very effectively in the last year to prevent the collapse of the financial system. However, even in this area there have been serious issues of unnecessary secrecy and failed regulation. (Isn't Goldman Sachs supposed to be a bank holding company now?)

But more importantly, Bernanke is waist deep in responsibility for this mess. Before becoming Fed chairman in January of 2006 he had served on the board of governors since 2002, and had been head of George Bush's council of economic advisers from June of 2005. After Greenspan, there was probably no one else better positioned to combat the bubble.

Although this is Nouriel Roubini's subscription site, his words (at the beginning of his current essay) are so important to our continuing plight today that I thought I would share them with you - and remember, Obama said some time ago that he thought we might be coming onto a Double Dip. (Emphasis marks added - Ed.)

Today we look at the links between the current economic conditions and those of the 1930s, another era where the threats of sovereign defaults and inflation worries loomed large. A lengthy recent analysis by RGE’s Mikka Pineda identifies striking similarities in U.S. inflation attitudes between the mid-1930s, when the U.S. began to show signs of recovery from the Depression, and 2009. Americans during the Great Depression voiced the same concerns about excess bank reserves, budget deficits, competitive devaluations and commodities speculation as they do today. Even dissenting arguments followed the same script in both eras. The eerie resemblance in the psychological and economic backdrop of the mid-1930s and 2009 — both historic junctures when recovery was thought to have begun — raises concerns that the U.S. could be on the edge of a double-dip.

A stroll through the archives of TIME magazine and The New York Times reveals other similarities in the reactions of Americans today to fiscal and monetary easing and the reactions of their forebears of the mid-1930s. When the U.S. economy began to recover from the Great Depression, widespread fear of credit inflation, currency inflation and public debt inflation drove the Federal Reserve Board to hike reserve requirements by 50% and prompted Congress to slash spending.

A premature retraction of economic stimulus, among other things, pushed the U.S. back into recession. In terms of GDP growth, there was a brief recession lasting only about a year from autumn 1937. Business leaders at the time called it a mere “business recession” to whittle down excess capacity and high inventories built up in response to rising commodity prices. To everyone else, particularly those laborers considered “excess capacity,” the economy's fragile recovery took a big step back. Deflation took hold of the country for another two years and unemployment spiked to 20% and didn't drop below 15% until 1940. Property prices and stock markets languished below their pre-1929 levels until World War II shocked production back to life. Today the U.S. is experiencing a similar situation with hawks calling for the immediate exit from both loose fiscal and monetary policy even amid high unemployment. Though past is not prologue, learning from past mistakes can make a considerable difference.

My friend Top Cat at Politics Plus brings me some interesting news this morning on Senator Jeff Merkeley's (D-OR) decision to vote "No" on the Bernanke renomination this morning. I hope it's a foretelling of events to come:

Jeff Merkley, a member of the Senate Committee on Banking, Housing and Urban Development, issued the following statement on his intention to vote against Ben Bernanke's nomination to a second term as Chairman of the Board of Governors of the Federal Reserve System:

"Tomorrow, I will vote against confirming Ben Bernanke as Chairman of the Federal Reserve. The reason, in short, is that as Chairman, Dr. Bernanke failed to recognize or remedy the factors that paved the road to this dark and difficult recession. Following our economic collapse, it is also apparent that he has not changed his overall approach to prioritizing Wall Street over American families.

"My decision is based on my fundamental belief that our economy cannot recover if we do not put Main Street first."

David Sirota at Open Left also echoes my concerns:

Check the committee membership here - and call your senators and tell them to vote down Bernanke tomorrow. Reappointing the guy who admits he fell down on the job in the lead-up to the economic meltdown will create a moral hazard that says to every other federal regulator that there is no consequences for failure.

Defining both moral and political hazards, Sirota has this to say (and I'm running it in its entirety because it may be the only way to get the point across before we rebuy the "pig in a poke"). (Emphasis marks added - Ed.)

By rewarding rather than punishing Wall Street for losing irresponsibly risky bets and by holding out the promise of similar bailout rewards in the future, politicians have incentivized even more irresponsible risk-taking for years to come.

But financial moral hazard is only half the story. The other half is political moral hazard - the mother of all other moral hazards. Consider, for instance, Federal Reserve Chairman Ben Bernanke. He's the top regulator who not only sowed financial moral hazard with the Fed's post-meltdown bailouts, but openly admits that as the crisis developed, his Federal Reserve "should have done more - we should have required more capital, more liquidity (and) we should have required tougher risk-management controls."

Firing Bernanke would tell other regulators that there are consequences for negligence. Instead, President Barack Obama rewarded Bernanke with renomination and thus manufactured a pernicious problem. As economist Dean Baker says, just as bailouts create a financial moral hazard giving speculators no incentive to avoid excessive risk, Bernanke's renomination creates a political moral hazard whereby regulators "will not have an incentive to do their jobs properly (because) there are no consequences" for failure.

You gotta admit there haven't been any so far.

Suzan ______________________

Extra! (Yeah, who needs extra?)

From Eye on Miami we read an amazing and inspiring tough-love editorial on the "surge" truly needed that gives a historical look at our current financial (and corollary political) situation:

the lead editorial in the Miami Herald today (as it issues its own mea culpa) . . . comments . . . about the selection of Ben Bernanke as Time Magazine's "Person of the Year 2009." The Herald concludes, " . . . if we have learned anything from the current crisis it's that self-regulation doesn't work." But the Herald is guilty - along with its brethren in the mainstream press - for ignoring the many ways in which the failure of self-regulation by industry was visible long before the collapse of the economy.

. . . in case you think this is just a partisan tirade, I have plenty of anger for the Obama team: Larry Summers, Tim Geithner, and Ben Bernanke. On Day One, what this group should have done is demonstrated to taxpayers that it was going to forcefully put law enforcement and criminal investigations at the heart of the financial and economic crisis. That is where the first surge was needed.

If they had done that, at the same time that they committed trillions to bailing out failed banking and insurance companies and executives who kept billions for themselves - much the way Congress investigated Wall Street as the Great Depression unwound - Obama would not appear to be so vulnerable today to charges that nothing has changed on Wall Street.

Obama had a problem, though, that he might have anticipated and forcefully addressed from the first. This is not backseat driving or 20.20 hindsight: the worst legacy of the Bush years was visible from Day One: how white collar crime investigation and enforcement, especially in the area of complex trading of derivatives, didn't exist. The Bush appointee, Christopher Cox, ran the SEC like a lazy white man's country club.

And it wasn't just the SEC. I recall a "60 Minutes" episode showing the entire department to conduct safety analysis for imported toys was manned by one federal investigator in an office converted from a closet. Across the board, the Bush legacy of "shrinking the size of government so it could fit in a bathtub" was effective in one area and one area only: regulation. That's why when Obama came to office, there was scarcely anyone at Treasury or the Department of Justice who could summon the resources or capacity, quickly, to investigate what happened on Wall Street and the proliferation of fraud that allowed, for instance, one banker in Florida - R. Allen Stanford - to take duffel loads of cash from Miami to his Caribbean retreat. Billions and billions.

The surge Obama needed to fund was a surge of law enforcement and talent and capacity to root out the systemic corruption on Wall Street that lead to this ongoing financial crisis. Where was the clamor building up to this moment, from the Miami Herald and its brethren in the mainstream media? Nada. Its executives were themselves caught up in the Wall Street game.

The president was persuaded, apparently, that it was more important to avert a Depression than throw cold water on a sputtering economy - but he was mislead. Today, public opinion polls tell the results. A year later, there are no results, no strike forces, no fire under Congress to weed out the crooks and either put them in jail or define exactly how we will avoid finding ourselves in the same situation a year or two from now. That is the surge we needed. _________________