Sunday, December 27, 2009

Rewarding Failure at the Fed (To Guide the US Middle Class Down the Path of Destruction - Bernanke - "He's BAAACKKK")

Economists like Dean Baker exist for a very good reason. If they didn't, we would have to invent them because without them we would have no idea how completely we were being played for fools - big fools at that - and we really do want to know that - not that we will do anything about it. By the way, we learn the facts (about this most devastatingly complex chicanery) from media in the UK - right - England! No paper in the U.S. runs this type of truth telling. Or would dare. (But will run it for flavor after it hits the intertubes.)

If Bernanke knew what he was doing, he should have been able to see as early as 2002 that there was a housing bubble and that its collapse would throw the economy into a recession. It was also entirely predictable that the collapse could lead to a financial crisis of the type we saw, since housing was always a highly leveraged asset, even before the flood of subprime, Alt-A and other nonsense loans that propelled the bubble to ever greater heights. Of course as the bubble expanded, and the financial sector became ever more highly leveraged, the risks to the economy increased enormously.

Through this all, Bernanke just looked the other way. The whole time he insisted that everything was just fine.

Professor Baker tells us everything that we don't want to know (apparently). If you don't believe me, write your Senatecritters who just voted him another term and ask them why (and then tell them to stop or you'll vote them O U T).

Rewarding Failure at the Fed

While millions of Americans have lost their jobs, Washington allows Federal Reserve chairman Ben Bernanke to keep his.

The Senate finance committee overwhelmingly voted to approve Ben Bernanke for another four-year term as Federal Reserve board chairman. This is a remarkable event since it is hard to imagine how Bernanke could have performed any worse during his last four-year term. By Bernanke's own assessment, his policies brought the US economy to the brink of another Great Depression. This sort of performance in any other job would get you fired in a second. But for the most important economic policymaker in the country it gets you high praise and another term.

There is no room for ambiguity in this story. Bernanke was at the Fed since the fall of 2002. (He had a brief stint in 2005 as chair of President Bush's council of economic advisors.) At a point when at least some economists recognised the housing bubble and began to warn of the damage that would result from its collapse, Bernanke insisted that everything was fine and that nothing should be done to rein in the bubble.

This is worth repeating. If Bernanke knew what he was doing, he should have been able to see as early as 2002 that there was a housing bubble and that its collapse would throw the economy into a recession. It was also entirely predictable that the collapse could lead to a financial crisis of the type we saw, since housing was always a highly leveraged asset, even before the flood of subprime, Alt-A and other nonsense loans that propelled the bubble to ever greater heights. Of course as the bubble expanded, and the financial sector became ever more highly leveraged, the risks to the economy increased enormously.

Through this all, Bernanke just looked the other way. The whole time he insisted that everything was just fine.

To be clear, there was plenty that the Fed could have done to deflate the bubble before it grew to such dangerous proportions. First and foremost the Fed could have used its extensive research capabilities to carefully document the evidence for a housing bubble and the risks that its collapse would pose to the economy.

It then should have used the enormous megaphone of the Fed chairman and the platform of the institution to publicise this research widely. The Fed could have ensured that every loan officer who issued a mortgage, as well as all the banks officers who set policy, clearly heard the warnings of a bubble in the housing market, backed up by reams of irrefutable research. The same warnings would have reached the ears of every potential homebuyer in the country. It's hard to believe that such warnings would have had no impact on the bubble, but it's near criminal that the Fed never tried this route.

The second tool that the Fed could have pursued was to crack down on the fraudulent loans that were being issued in massive numbers at the peak of the bubble. It is absurd to claim that the Fed didn't know about the abuses in the mortgage market. I was getting emails from all over the country telling me about loan officers filling in phony income and asset numbers so that borrowers would qualify for mortgages. If the Bernanke and his Fed colleagues did not know about these widespread abuses, it is because they deliberately avoided knowing.

Finally, the Fed could have had a policy of interest rate hikes explicitly targeted to burst the bubble. Specifically, it could have announced that it will raise rates by half a percentage point at every meeting, until house prices begin to fall and it will keep rates high until house prices approach their pre-bubble level.

This is what a responsible Fed policy would have looked like. But Ben Bernanke did not pursue a responsible Fed policy. He insisted that everything was just fine until he had to run to Congress last September, saying that if it didn't immediately give $700bn to the banks through the Tarp programme then the economy would collapse.

How on earth can you do worse in your job as Fed chair than bring the economy to the brink of a total collapse? If this is success, what does failure look like?

But, in Washington no one is ever held accountable for their performance. The economic collapse is treated like a fluke of nature – a hurricane or an earthquake – and not the result of enormous policy failures.

So, it is the 15 million unemployed that go without work, not Ben Bernanke. Instead, many of the senators praise Bernanke to the sky and thank him for his service. The running line in the Senate is: "It could have been worse."

That is the way Washington works these days. And, everyone should be very very disgusted.

(Dean Baker, co-director of the Center for Economic and Policy Research, is the author of "The United States Since 1980" (Cambridge University Press); "Social Security: The Phony Crisis" (with Mark Weisbrot); "The Benefits of Full Employment" (with Jared Bernstein); "Getting Prices Right: The Battle Over the Consumer Price Index;" and "The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer."

He appears frequently on TV and radio programs, including CNN, CBS News, PBS NewsHour, and National Public Radio. His blog, Beat the Press, features commentary on economic reporting. He received his B.A. from Swarthmore College and his Ph.D. in economics from the University of Michigan.)

His article in the Guardian has some wise commenters:

nottaclue1 - The economic crisis was intentionally generated by the financial aristocracy in order to fill their coffers on the backs of the working class while serving as an excuse to layoff millions and cut benefits in order to boost profits. This is all part and parcel of their plan to permanently reduce living standards for he majority of the population. The same pattern can be seen in many countries across the world. Bernanke has done exactly what they wanted him to do, why would they get rid of him?

grumpy766 - Great story. Where is the U.S. news media? Why do I have to find out what is happening in the U.S. from the U.K. news? Guardian, keep up the good work.

Mr. Shigemitsu - To all of those who still persist in thinking this was all some kind of terrible "mistake" or "failure", and those responsible are all somehow floundering helplessly in the aftermath, you are wrong.

These people knew exactly what they were doing, and in bailing them out at taxpayers' expense, the circle has been completed, and they have got away with robbing us blind.

We are now slaves to the banks, as our living standards decline in order to service the gigantic debts that our nations owe them, as our taxes increase at the same time as our pubic services decline, and as they laugh at us from their yachts.

He seems to have said it all.

Hell, they probably would make a deal to be gods (and goddesses) after their deaths as their every other gambit has worked so well.

Suzan

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11 comments:

Lisa G. said...

Hell, my bunny could have done a better job! And he doesn't even make a sound!

Oso said...

Obama pursued his usual middle course which pleases Wall St and indicates to his campaign contributors that his ship won't be changing course.

Lisa G your bunny probably has too much integrity for the job.

Suzan said...

Thanks, OSO and Lisa!

Everybody's bunny has too much integrity. In fact, outside of Congress, there is plenty to be found.

But if you're looking for outrage . . . .

Maybe after the icecaps and all the mountaintops melt.

S

TomCat said...

Well done, as usual, Suzan.

If Bernanke knew what he was doing, he should have been able to see as early as 2002 that there was a housing bubble and that its collapse would throw the economy into a recession.

Stating in 2004, a close friend, who is also a Realtor, suggested that she could get me out of my slum apartment into a place of my own with no down and use 'creative financing' to get me a nice low payment for several years, after which appreciation of the property's value would enable me to refinance easily, before the balloon payment became due or sell and keep the profit. Each time she suggested it,I declined and told her that I believed real estate prices were rising faster than the underlying value could support, and that the bottom would drop out, probably in 2009. I advised her to stop leveraging her equity to purchase more and more investment property. She thought I was being silly, that real estate values would never go down. I still live in my slum apartment, but I am free of debt. She still lives in her fancy house, but she is trying to renegotiate five separate loans simultaneously, and staring bankruptcy in the face, because she has negative equity on all five.

My point is, figuring this out was not rocket science. If a disabled blogger with a lousy AA degree could do it, why couldn't Bush Buddy Ben?

Suzan said...

Of course they had it all figured out.

They planned it.

Precisely.

And got out just ahead of the expected crash with all the money.

And are now making money on the bankruptcies (but I'm sure you've followed this angle too).

The saddest part is that the taxpayers will end up paying all the shysters off and she will have been proved right.

The bankruptcies can only go on for so long before causing too much embarrassment.

S

but she is trying to renegotiate five separate loans simultaneously, and staring bankruptcy in the face, because she has negative equity on all five.

Greendayman said...

Great article Suzan.
It seems that the transgressions are more obvious and less "clandestine" every year. Almost like the general public has been systematically de-sensitized to the massive corruption of the Financial Industrial Complex. I remember when analysts were hired to watch Greenspan's body language for clues to the health of the economy during his tenure as Fed Chair, raising his individual importance to god-like status. Capitalism needs a governor (regulation) or the end result (by design) is slaves and masters. With the corporate media - Fox News/Hate radio propaganda machine at full messaging strength, the masses are entertained and misinformed at the same time, distracted from where the real blame lies for their economic woes. It really is truly amazing. I don't see any correction of this anywhere in the near future. Corporate media spews corporate propaganda to a de-sensitized and misinformed public.

Suzan said...

Pretty soon they'll be bragging about them and expecting praise for the ease with which they've been able to use the citizens' ignorance to enrich themselves, huh?

Thanks, GDM, your site rocks.

S

It seems that the transgressions are more obvious and less "clandestine" every year.

. . . Almost like the general public has been systematically de-sensitized to the massive corruption of the Financial Industrial Complex.

. . . With the corporate media - Fox News/Hate radio propaganda machine at full messaging strength, the masses are entertained and misinformed at the same time, distracted from where the real blame lies for their economic woes. It really is truly amazing. I don't see any correction of this anywhere in the near future. Corporate media spews corporate propaganda to a de-sensitized and misinformed public.

Oso said...

Suzan,
I think what Greendayman wrote is very valid, kinda like Bread 'n Circuses for us idiots (present company excepted including Lisa's bunny).

Suzan said...

I agree, OSO.

He's always right.

Love ya,

S

Beach Bum said...

Tomcat wrote:

...a Realtor, suggested that she could get me out of my slum apartment into a place of my own with no down and use 'creative financing' to get me a nice low payment for several years...

My wife is a tax attorney who in the late eighties worked for the ginormous accounting firm Arthur Anderson. She left for reasons unrelated to the job but while we were dating and once the Arthur Anderson ship began to sink in the nineties she introduced me to the term "Cowboy Accounting" which even to my simple, uneducated, ears did not sound right. These sanctimonious idiots have been taking advantage of us for decades and the general middle class public doesn't care as long as it doesn't affect them.

No matter what short term recovery we may have, in the long run this shit ain't going to get any better and in my opinion will just get worse. You know the ultimate endgame in all this will be the rich and powerful leaving the country permanently with their wealth like rats leaving a sinking ship.

Suzan said...

I love your writing style, BB.

Not to mention your exquisitely en pointe stories.

I had a neighbor in the '80's who worked for a mortgage company and was raking in the bucks. He urged me quite a lot (over a two-year or so timeframe) to quit my position at Westinghouse and come to where the big money lived.

He was right as the big money in the '80's began to flow away from real production sites to financial production sites (of fantasies (excepting those collecting the fees at the top)).

I've thought dozens of times how "lucky" I would have been if I'd been able to attach my wagon to that gravy train (mainly because my own gravy train was running dry and was scheduled to disappear altogether with the end of the Cold War).

Only the desire not to take advantage of desperate people saved me from that fate.

Of course, my family still wishes I had less integrity.

Thanks for the stories!

S

P.S. Anyone who would like to make a holiday donation to a needy person should visit my PalPal button as I'm in dire need right now: tires bald, brakes nonexistent, overdrawn checking account (and not even my fault as BB&T has started subtracting charges from my account before counting the new deposit - the opposite used to be their policy but has been changed in the last month or so without notice (and no, they tell me that they will not credit me for the two overdrafts totaling $70!)).

So, I have no idea how I'll make it through this week.

Thanks so much for your prior support!
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