Questions for Bernanke's Senate Confirmation Hearing

George Washington's picture

The Senate Banking Committee will be chatting with Ben Bernanke this Thursday to vote on his reappointment.

Demand that the Committee ask the following questions for our esteemed Esteemed Chairman (and contact your own Senators also and demand that they find out the answers to the following questions). If you are a Senate aide, please get these questions to your Senator.

High-Level Fed Officials Slam Bernanke

Fed Vice Chairman Donald Kohn conceded
that the government's actions "will reduce [companies'] incentive to be
careful in the future." In other words, he's admitting that the
government's actions will encourage financial companies to make even riskier gambles in the future.

Kansas City Fed President and veteran Fed official Thomas Hoenig said:

Too big has failed....

The
sequence of [the government's] actions, unfortunately, has added to
market uncertainty. Investors are understandably watching to see which
institutions will receive public money and survive as wards of the
state...

Any financial crisis leaves a stream of losses among
the various participants, and these losses must ultimately be borne by
someone. To start the resolution process, management responsible for
the problems must be replaced and the losses identified and taken. Until
these actions are taken, there is little chance to restore market
confidence and get credit markets flowing. It is not a question of
avoiding these losses, but one of how soon we will take them and get on
to the process of recovery
....

Many
of the [government's current policy revolves around the idea of] "too
big to fail" .... History, however, may show us a different experience
.
When examining previous financial crises, both in other countries as
well as the United States, large institutions have been allowed to
fail. Banking authorities have been successful in placing new and more
responsible managers and directions in charge and then reprivatizing
them. There is also evidence
suggesting that countries that have tried to avoid taking such steps
have been much slower to recover, and the ultimate cost to taxpayers
has been larger
...

The current head of the Philadelphia fed bank, Charles Plosser, disagrees with Bernanke's strategy of the endless printing-press and ever-increasing fed balance sheet:

Plosser
urged the Fed to "proceed with caution" with the new policy. Others
outside the Fed are much more strident and want plans in place
immediately to reverse it. They believe an inflation storm is already
in train.***

Bernanke
argued that focusing on the size of the balance sheet misses the point,
arguing the Fed's various asset purchase programs are not easily
summarized in a single number.

But Plosser said that the growth of the Fed's balance sheet was a key metric.
"It is not appropriate to ignore quantitative metrics in this new policy environment," Plosser said.***

Plosser is bringing the spotlight right back to the Fed's balance sheet.

"The size of the balance sheet does offer a possible nominal anchor for
monitoring the volume of our liquidity provisions," Plosser said.

The
former head of the Fed's Open Market Operations says the bailout might
make things worse. Specifically, the former head of the Fed's open
market operation - the key Fed agency which has been loaning hundreds
of billions of dollars to Wall Street companies and banks - was quoted in Bloomberg as saying:

"Every
time you tinker with this delicate system even small changes can create
big ripples,'' said Dino Kos, former head of the New York Fed's
open-market operations . . . "This is the impossible situation they are
in. The risks are that the government's $700 billion purchase of assets disturbs markets even more.''

And William Poole, who recently left his post as president of the St. Louis Fed, is essentially calling Bernanke a communist:

Poole said he was very concerned that the Fed could simply lend money to anyone, without constraint.
In the Soviet Union and Eastern Europe during the Cold War era,
economies were inefficient because they had a soft-budget constraint.
If a firm got into trouble, the banking system would give them more
money, Poole said.
The current situation at the Fed seems eerily similar, he said.

"What is discipline - where are the hard choices - when does Fed say our resources are exhausted?" Poole asked.

But the strongest criticism may be from the former Vice President of
Dallas Federal Reserve, who said that the failure of the government to
provide more information about the bailout could signal corruption. As
ABC writes:

Gerald
O'Driscoll, a former vice president at the Federal Reserve Bank of
Dallas and a senior fellow at the Cato Institute, a libertarian think
tank, said he worried that the failure of the government to provide
more information about its rescue spending could signal corruption.

"Nontransparency
in government programs is always associated with corruption in other
countries, so I don't see why it wouldn't be here," he said.

Of course, former Fed chairman Paul Volcker has also strongly criticized current Fed policies.

Given such harsh criticism from within the Fed, how can Bernanke justify his actions to date?

Global Agencies Slam Bernanke

The
Bank of International Settlements (BIS) - called "the central banks'
central bank" - has slammed the Fed for blowing bubbles and then "using
gimmicks and palliatives" which "will only make things worse".

As the Telegraph wrote in June 2007:

The
Bank for International Settlements, the world's most prestigious
financial body, has warned that years of loose monetary policy has
fuelled a dangerous credit bubble, leaving the global economy more
vulnerable to another 1930s-style slump than generally understood...

 

The
BIS, the ultimate bank of central bankers, pointed to a confluence a
worrying signs, citing mass issuance of new-fangled credit instruments,
soaring levels of household debt, extreme appetite for risk shown by
investors, and entrenched imbalances in the world currency system...

 

The bank said it was far from clear whether the US would be able to shrug off the consequences of its latest imbalances ...

 

"Sooner or later the credit cycle will turn and default rates will begin to rise," said the bank.

A year later, in June 2008, the Telegraph wrote:

 

A
year ago, the Bank for International Settlements startled the financial
world by warning that we might soon face challenges last seen during
the onset of the Great Depression. This has proved frighteningly
accurate...

 

[BIS economist] Dr White says the US sub-prime crisis was the "trigger", not the cause of the disaster.

Indeed,
BIS slammed the Fed and other central banks for blowing the bubble,
failing to regulate the shadow banking system, and then using gimmicks
which will only make things worse. As the 2008 Telegraph article notes:

In
a pointed attack on the US Federal Reserve, it said central banks would
not find it easy to "clean up" once property bubbles have burst...

 

Nor
does it exonerate the watchdogs. "How could such a huge shadow banking
system emerge without provoking clear statements of official concern?"

 

"The
fundamental cause of today's emerging problems was excessive and
imprudent credit growth over a long period. Policy interest rates in
the advanced industrial countries have been unusually low," he said.

 

The
Fed and fellow central banks instinctively cut rates lower with each
cycle to avoid facing the pain. The effect has been to put off the day
of reckoning...

 

"Should governments feel it necessary to take
direct actions to alleviate debt burdens, it is crucial that they
understand one thing beforehand. If asset prices are unrealistically
high, they must fall. If savings rates are unrealistically low, they
must rise. If debts cannot be serviced, they must be written off.

 

"To deny this through the use of gimmicks and palliatives will only make things worse in the end," he said.

In
other words, BIS slammed the easy credit policy of the Fed and other
central banks, and the failure to regulate the shadow banking system.

More
dramatically, BIS slammed "the use of gimmicks and palliatives", and
said that anything other than (1) letting asset prices fall to their
true market value, (2) increasing savings rates, and (3) forcing
companies to write off bad debts "will only make things worse".

But
Bernanke and the other central bankers (as well as Treasury and the
Council of Economic Advisors and Barney Frank and Chris Dodd and the
others in control of American and British and French and Japanese and
German and virtually every other country's economic policy) ignored
BIS' advice in 2007 and 2008, and they are still ignoring it today.

Instead,
they are doing everything they can to (2) prop up asset prices by
trying to blow a new bubble by giving banks trillions, (2) re-write
accounting and reporting rules to let the big banks and other giants
keep bad debts on their books (or in sivs or other "second sets of
books") and to hide the fact that they are bad debts, and (3) encourage consumers to spend spend spend!

"The
world's most prestigious financial body", "the ultimate bank of central
bankers" has condemned Bernanke and all of the other G-8 central banks,
and stripped bare their false claims that the crash wasn't their fault
or that they are now doing the right thing to turn the economy around.

As Spiegel wrote in July of this year:

 

White
and his team of experts observed the real estate bubble developing in
the United States. They criticized the increasingly impenetrable
securitization business, vehemently pointed out the perils of risky
loans and provided evidence of the lack of credibility of the rating
agencies. In their view, the reason for the lack of restraint in the
financial markets was that there was simply too much cheap money
available on the market...

As far back as 2003, White implored
central bankers to rethink their strategies, noting that instability in
the financial markets had triggered inflation, the "villain" in the
global economy...

In the restrained world of central bankers, it would have been difficult for White to express himself more clearly...

It
was probably the biggest failure of the world's central bankers since
the founding of the BIS in 1930. They knew everything and did nothing.
Their gigantic machinery of analysis kept spitting out new scenarios of
doom, but they might as well have been transmitted directly into
space...

 

In their report, the BIS experts derisively described the
techniques of rating agencies like Moody's and Standard & Poor's as
"relatively crude" and noted that "some caution is in order in relation
to the reliability of the results."...

 

In January 2005, the BIS's
Committee on the Global Financial System sounded the alarm once again,
noting that the risks associated with structured financial products
were not being "fully appreciated by market participants." Extreme
market events, the experts argued, could "have unanticipated systemic
consequences."

 

They also cautioned against putting too much faith
in the rating agencies, which suffered from a fatal flaw. Because the
rating agencies were being paid by the companies they rated, the
committee argued, there was a risk that they might rate some companies
too highly and be reluctant to lower the ratings of others that should
have been downgraded.

 

These comments show that the
central bankers knew exactly what was going on, a full two-and-a-half
years before the big bang. All the ingredients of the looming disaster
had been neatly laid out on the table in front of them: defective
rating agencies, loans repackaged to the point of being unrecognizable,
dubious practices of American mortgage lenders, the risks of
low-interest policies. But no action was taken. Meanwhile, the Fed
continued to raise interest rates in nothing more than tiny
increments...

 

The Fed chairman was not even impressed by a
letter the Mortgage Insurance Companies of America (MICA), a trade
association of US mortgage providers, sent to the Fed on Sept. 23,
2005. In the letter, MICA warned that it was "very concerned" about
some of the risky lending practices being applied in the US real estate
market. The experts even speculated that the Fed might be operating on
the basis of incorrect data. Despite a sharp increase in mortgages
being approved for low-income borrowers, most banks were reporting to
the Fed that they had not lowered their lending standards. According to
a study MICA cited entitled "This Powder Keg Is Going to Blow," there
was no secondary market for these "nuclear mortgages."...

 

William White and his Basel team were dumbstruck. The
central bankers were simply ignoring their warnings. Didn't they
understand what they were being told? Or was it that they simply didn't
want to understand?

 

The head of the World Bank also says:

Central
banks [including the Fed] failed to address risks building in the new
economy. They seemingly mastered product price inflation in the 1980s,
but most decided that asset price bubbles were difficult to identify and to restrain with monetary policy. They argued that damage to the 'real economy' of jobs, production, savings, and consumption could be contained once bubbles burst, through aggressive easing of interest rates. They turned out to be wrong.

Given such piercing criticism from BIS and the World Bank, how can Mr. Bernanke justify his actions to date?

Economists Slam Bernanke

Stephen
Roach (former chief economist for Morgan Stanley, and now director of
Morgan Stanley Asia) is one of the most influential and respected
American economists. Roach told Charlie Rose recently that we have had
terrible Federal Reserve policy for the past 12 years under Greenspan
and Bernanke, that they concocted hair-brained theories (for example,
that we should let the boom and bust cycle occur, but then "clean up
the mess" once things fall apart), and that we really need to reform
the Fed.

Specifically, here's the must-read portion of the interview:

STEPHEN
ROACH: And what’s missing in the debate that drives me nuts is going
back to the very function of central banking that’s at the core of our
financial system. Do we have the right model for the Fed to go forward?
And, you know, I think we’ve minimized the role that the custodians,
the stewards of our financial
system, the Federal Reserve, played in
leading to this crisis and in making sure that we will never have this
again. I think we’ve had horrible central banking in the United States
for the past dozen of years. I mean, we elevate our central bankers, we
probably .

CHARLIE ROSE: From Greenspan to Bernanke.

STEPHEN ROACH: Yeah.

CHARLIE ROSE: Both.

STEPHEN ROACH: We call them maestro, and, you know, we make them
sound larger than life. And, you know, and the fact is, they condoned
policies that took us from one bubble to another. They failed to live up
to their regulatory responsibility granted them by law. They concocted new
theories to explain why these things could go on forever, and they harbored
the belief, mistakenly in my view, that monetary policy is too big and
blunt an instrument, and so you just bring it in to clean up the mess
afterwards rather than prevent a mess ahead of time. Well, look at the
mess we’re in right now. We need a different approach here. We really do.

Leading economist Anna Schwartz, co-author of the leading book on the Great Depression with Milton Friedman, told the Wall Street journal that the Fed's entire strategy in dealing with the financial crisis is wrong. Specifically, the Fed is treating it as a liquidity problem, when it is really an insolvency crisis.

Moreover, prominent Wall Street economist Henry Kaufman says that the Federal Reserve is primarily to blame for the financial crisis:

"I
am convinced that the misbehavior of some would have been much rarer --
and far less damaging to our economy -- if the Federal Reserve and, to
a lesser extent, other supervisory authorities, had measured up to
their responsibilities ...

 

Kaufman directly criticized former
Federal Reserve Chairman Alan Greenspan for not using his position to
dissuade big banks and others from taking big risks.

 

"Alan
Greenspan spoke about irrational exuberance only as a theoretical
concept, not as a warning to the market to curb excessive behavior,"
Kaufman said. "It is difficult to believe that recourse to moral
suasion by a Fed chairman would be ineffective."

 

Partly
because the Fed did not strongly oppose the repeal in 1999 of the
Depression-era Glass-Steagall Act, more large financial conglomerates
that were "too big to fail" have formed, Kaufman said, citing a factor
that has made the global credit crisis especially acute.

 

"Financial
conglomerates have become more and more opaque, especially about their
massive off-balance-sheet activities," he said. "The Fed failed to rein
in the problem."...

 

"Much of the recent extreme financial
behavior is rooted in faulty monetary policies," he said. "Poor
policies encourage excessive risk taking."

Economist Marc Faber says
that central bankers are money printers who create bubbles, and that
the system would be much better now if the Fed hadn't intervened.
Specifically, Faber says that - if the Fed hadn't intervened - the
system would be cleaned out, the system would be healthier because debt
load and burden on taxpayers would be reduced.

Economist Jane D'Arista has shown
that the Fed has failed miserably at its main task: providing a
"counter-cyclical" influence (that is, taking the punch bowl away
before the party gets too wild).

The Fed has also failed miserably in its role as regulator of banks and their affiliates. As well-known economist James Galbraith says:

The
Federal Reserve has never been an effective regulator for the
straightforward reason that it is dominated by economists and bankers
and not by dedicated skeptics who make bank regulation a full-time
profession.

As PhD economist Steve Keen has pointed out, the Fed (along with Treasury) has also given money to the wrong people to kick-start the economy.

Given such devastating criticism from prominent economists, how can Mr. Bernanke justify his actions to date?

Unemployment

The Federal Reserve is mandated by law to maximize employment.  The relevant statute states:

The Board of Governors of the Federal Reserve System and the
Federal Open Market Committee shall maintain long run growth of the
monetary and credit aggregates commensurate with the economy's long run
potential to increase production, so as to promote effectively the
goals of maximum employment, stable prices, and moderate long-term
interest rates.

However, PhD economist Dean Baker says:

The
country now has almost 25 million people who are unemployed or
underemployed as a result of the Fed's disastrous policies. Millions of
people are losing their homes and tens of millions are losing their
life savings. The country is likely to lose more than $6 trillion in
output ($20,000 per person) due to the Fed's inept job performance.

The Fed could have stemmed the unemployment crisis by demanding that banks lend more as a condition to the various government assistance programs, but Mr. Bernanke failed to do so.

Ryan Grim argues that the Fed might have broken the law by letting unemployment rise in order to keep inflation low:

The Fed is mandated by law to maximize employment, but focuses on
inflation -- and "expected inflation" -- at the expense of job
creation. At its most recent meeting, board members bluntly stated that they feared banks might increase lending, which they worried could lead to inflation.

 

Board members expressed concern "that banks might seek to reduce
appreciably their excess reserves as the economy improves by purchasing
securities or by easing credit standards and expanding their lending
substantially. Such a development, if not offset by Federal Reserve
actions, could give additional impetus to spending and, potentially, to
actual and expected inflation." That summary was spotted by Naked Capitalism and is included in a summary of the minutes of the most recent meeting...

 

Suffering high unemployment in order to keep inflation low cuts
against the Fed's legal mandate. Or, to put it more bluntly, it may be
illegal.

In fact, the unemployment situation is getting worse, and many leading economists say that - under Mr. Bernanke's leadership - America is suffering a permanent destruction of jobs.

For example, JPMorgan Chase’s Chief Economist Bruce Kasman told Bloomberg:

[We've had a] permanent destruction of hundreds of thousands of jobs in industries from housing to finance.

The chief economists for Wells Fargo Securities, John Silvia, says:

Companies
“really have diminished their willingness to hire labor for any
production level,” Silvia said. “It’s really a strategic change,” where
companies will be keeping fewer employees for any particular level of
sales, in good times and bad, he said.

And former Merrill Lynch chief economist David Rosenberg writes:

The
number of people not on temporary layoff surged 220,000 in August and
the level continues to reach new highs, now at 8.1 million. This
accounts for 53.9% of the unemployed — again a record high — and this
is a proxy for permanent job loss, in other words, these jobs are not
coming back. Against that backdrop, the number of people who have been
looking for a job for at least six months with no success rose a
further half-percent in August, to stand at 5 million — the long-term
unemployed now represent a record 33% of the total pool of joblessness.

And see this.

Given
that the law mandates that the Fed maximize employment, but that
unemployment is instead becoming catastrophic under Mr. Bernanke's
watch, how can Mr. Bernanke justify his actions to date?

Leverage

The Fed says that we should reduce leverage, but is doing everything in its power to increase leverage.

Specifically, the New York Federal published a report in July entitled "The Shadow Banking System: Implications for Financial Regulation".

One of the main conclusions of the report is that leverage undermines financial stability:

Securitization
was intended as a way to transfer credit risk to those better able to
absorb losses, but instead it increased the fragility of the entire
financial system by allowing banks and other intermediaries to
“leverage up” by buying one another’s securities. In the new,
post-crisis financial system, the role of securitization will likely be
held in check by more stringent financial regulation and by the
recognition that it is important to prevent excessive leverage and
maturity mismatch, both of which can undermine financial stability.

And as a former economist at the New York Fed, Richard Alford, wrote recently:

On Friday, William Dudley, President of FRBNY, gave an excellent presentation
on the financial crisis. The speech was a logically-structured,
tightly-reasoned, and succinct retrospective of the crisis. It took one
step back from the details and proved a very useful financial
sector-wide perspective. The speech should be read by everyone with an
interest in the crisis. It highlights the often overlooked role of
leverage and maturity mismatches even as its stated purpose was
examining the role of liquidity.

While most analysts attributed the crisis to either specific instruments, or elements of the de-regulation, or policy action, Dudley correctly identified the causes of the crisis as the excessive use of leverage
and maturity mismatches embedded in financial activities carried out
off the balance sheets of the traditional banking system. The body of
the speech opens with: “..this crisis was caused by the rapid growth of the so-called shadow banking system over the past few decades and its remarkable collapse over the past two years.”

In fact, every independent economist has said that too much leverage was one of the main causes of the current economic crisis.

Federal Reserve Bank of San Francisco President Janet Yellen said
recently that it’s “far from clear” whether the Fed should use interest
rates to stem a surge in financial leverage, and urged further research
into the issue.“Higher rates than called for based on purely
macroeconomic conditions may help forestall a potentially damaging
buildup of leverage and an asset-price boom”.

And on September 24th, Congressman Keith Ellison wrote a letter to Mr. Bernanke and Geithner stating:

As
you know, excessive leverage was a key component of the financial
crisis. Investment banks leveraged their balance sheets to
stratospheric levels by using short-term wholesale financing (like
repurchase agreements and commercial paper). Meanwhile, some entities
regulated as bank holding companies (BHCs) used off-balance-sheet
entities to warehouse risky assets, thereby evading their regulatory
capital requirements. These entities’ reliance on short-term debt to
fund the purchase of oftentimes illiquid and risky assets made them
susceptible to a classic bank panic. The key difference was that this
panic wasn’t a run on deposits by scared individuals, but a run on
collateral by sophisticated counterparties.

The Treasury
highlights this very problem in its policy statement before the recent
summit of G-20 finance ministers in London. To address this problem,
the Treasury advocates stronger capital and liquidity standards for
banking firms, including “a simple, non-risk-based leverage
constraint.” The U.S. is one of only a few countries that already has
leverage requirements for banks. Leverage requirements supplement
risk-based capital requirements that federal banking regulators have in
place pursuant to the Basel II Accord, an international capital
agreement. While important features of our system of financial
regulation, leverage requirements only apply to banks and bank holding
companies and therefore have not covered a wide array of financial
institutions, including many that are systemically important. Moreover,
leverage requirements have generally not captured the considerable
risks associated with off-balance-sheet activities.

Of course,
the Administration looks to address the shortcomings in the existing
regulatory system through a proposal to regulate large,
systemically-significant financial institutions as Tier 1 Financial
Holding Companies (FHCs). Building upon its existing authority as the
consolidated supervisor of all BHCs (which includes FHCs), the Federal
Reserve would be responsible for overseeing and regulating the Tier 1
FHCs under the plan. In the legislative draft of the proposal, the
Federal Reserve would have the authority to prescribe capital
requirements and other prudential standards for these institutions that
are stronger than those for all other BHCs. To that point, the text
specifically says, “The prudential standards shall be more stringent
than the standards applicable to bank holding companies to reflect the
potential risk posed to financial stability by United States Tier 1
financial holding companies and shall include, but not be limited
to—(A) risk-based capital requirements; (B) leverage limits; (C)
liquidity requirements; and (D) overall risk management requirements.”

The
application of leverage limits – as advanced by the Treasury’s G-20
policy statement and by the Administration’s financial regulatory
reform plan – is a simple and elegant way to limit risk at specific
financial institutions (and within the overall financial system). The
financial crisis has underscored the importance of leverage
requirements and manifested the problems associated with relying upon
risk-based capital requirements alone ...

Nevertheless, there
are some open questions regarding exactly how a leverage requirement
should be applied. Some scholars and policy experts have advocated
putting in place a leverage requirement for banks and other financial
institutions that is set in statute. As Congress moves forward on
comprehensive financial regulatory reform, it may consider such a
requirement. I would therefore be interested to hear your views
regarding the wisdom of such an approach.
As you know, setting
capital standards requires decisions regarding what institutions would
be covered, how capital would be defined, and what levels the
requirements would be set. In light of that, what specific difficulties
would you anticipate Congress facing with respect to specifying such a
requirement? In addition, would a statutory requirement be too
inflexible and place too many constraints on regulators with respect to
refining regulatory capital requirements and negotiating with bank
regulators from other countries?

On November 13th, Mr. Bernanke responded to Ellison (I received a copy of the letter from a Congressional source):

The
Board's authority and flexibility in establishing capital requirements,
including leverage requirements, have been key to the Board's ability
to require additional capital where needed based on a banking
organization's risk profile. One of the lessons learned in the recent
financial crisis is the need for financial supervisors to have the
ability to react quickly to changing circumstances, as in the capital
assessments conducted in the Supervisory Capital Assessment Program.
The Board and other federal banking agencies initiated this program to
conduct a comprehensive, forward-looking assessment of the capital
positions ofthe nation's 19 largest bank holding companies (BHCs). The
Board's authority to mandate specific levels of capital was critical to
this exercise because each BHC had a unique set of risks and
circumstances that demanded careful supervisory scrutiny and evaluation
in order to identify the amount of capital appropriate for its safe and
sound operation. The Board required corrective actions on a
case-by-case basis and continues to assess the capital positions
ofthese institutions as well as all others under its supervision.

We
note that in other contexts, statutorily prescribed minimum leverage
ratios have not necessarily served prudential regulators of financial
institutions well. Previously, the minimum capital requirements for the
housing government-sponsored enterprises Fannie Mae and Freddie Mac
(collectively, "GSEs") were fixed in statute; the risk-based capital
requirement for the GSEs was based on a stress test that was also set
forth in statute; and the GSE's regulator, the Director ofthe Office of
Financial Housing Enterprise Oversight (the predecessor agency to the
Federal Housing Finance Authority) did not have the authority to
establish additional capital requirements for the GSEs. This limitation
was different from the authority that the federal banking agencies have
to set the leverage and risk-based capital requirements for banking
organizations. In 2008, Congress enacted the Housing and Economic
Recovery Act of 2008, which created FHFA and empowered it to establish
additional minimum leverage and risk-based capital requirements for the
GSEs.

With regard to the Board and other U.S. banking agencies'
efforts to join with international supervisors to strengthen capital
requirements for internationally active banking organizations, the
Basel Committee is working on proposals for an international supplement
to minimum risk-based capital ratios. While this work is in process, it
is likely that these efforts will take the form of a minimum leverage
ratio. It will be important for the international regulatory community
to carefully calibrate the aggregate effect ofthis initiative, along
with other efforts underway that are intended to strengthen capital
requirements, to ensure that they protect against future financial
crises while not raising capital requirements to such a degree that the
availability of credit to support economic growth is unduly
constrained. The current authority and flexibility the Board has to
establish and modify leverage ratios as a banking organization
regulator is very important to the successful participation of the
Board in the process of establishing and calibrating an international
leverage ratio.

The Supervisory Capital Assessment Program Mr. Bernanke refers to were the infamous "stress tests". There's just one little problem: the stress tests were a complete complete sham.

In reality, the Fed has been one the biggest enablers for
increased leverage. As anyone who has looked at Mr. Bernanke and
Geithner's actions will tell you, many of the government's programs are
aimed at trying to re-start securitization and the "shadow banking system", and to prop up asset prices for highly-leveraged financial products.

Indeed, Mr. Bernanke said in February:

In an effort to restart securitization markets
to support the extension of credit to consumers and small businesses,
we joined with the Treasury to announce the Term Asset-Backed
Securities Loan Facility (TALF).

And he said it again in September:

The
Term Asset-Backed Securities Loan Facility, or TALF ... has helped
restart the securitization markets for various types of consumer and
small business credit. Securitization markets are an important source
of credit, and their virtual shutdown during the crisis has reduced
credit availability for many borrowers.

Given that the Fed
admits that too much leverage is destabilizing to our financial system,
how can Mr. Bernanke justify his actions to date in increasing leverage?

Has the Fed Manipulated any Markets?

There are allegations that the Fed has manipulated the markets.

Has
the Fed - directly or as part of the President's Working Group on
Financial Markets or any other group or organization - manipulated any
markets?

Trillions in Unnecessary Interest to the American People

Many people - including former analyst for the U.S. Treasury Richard Cook - argue that credit is too important a function to be left to the private banks. AFL-CIO president Richard Trumka told Congress recently:

If the Federal Reserve were made a fully public body, it would be an acceptable alternative.

Bloomberg News columnist Matthew Lynn writes:

The
U.K. government needs to start thinking about what it will do with all
the banks it now owns. The answer is simple: Hand them to the people...

Instead
of selling the stakes it acquired in the financial system to other
banks, or listing the shares on the stock market, it could create
mutually owned societies. Royal Bank of Scotland Group Plc could be a
people’s bank, owned by everyone.That would ensure more diversity,
competition and stability, all goals just as worthy as getting back the
money Prime Minister Gordon Brown’s government spent on bank rescues...

Michael Moore recommends that the American people demand:

Each of the 50 states must create a state-owned public bank like they have in North Dakota.
Then congress MUST reinstate all the strict pre-Reagan regulations on
all commercial banks, investment firms, insurance companies -- and all
the other industries that have been savaged by deregulation: Airlines,
the food industry, pharmaceutical companies -- you name it. If a
company's primary motive to exist is to make a profit, then it needs a
set of stringent rules to live by -- and the first rule is "Do no
harm." The second rule: The question must always be asked -- "Is this
for the common good?" (Click here for some info about the state-owned Bank of North Dakota.)

As Moore notes, the state of North Dakota already has such a bank, and - because of that - North Dakota is just about the only state which is not running a huge deficit.

PhD economist and candidate for Florida governor Farid Khavari wants to create a Bank of the State of Florida, to create credit without burdening the state and its citizens with high interest charges by private banks.

If the power to create credit were taken away from the Federal Reserve
system and its private banks and given back to the government (as the
Constitution envisioned), then American taxpayers would save hundreds of billions or trillions of
dollars in unnecessary interest charges in paying off the national
debt, as the government would not have to pay interest to finance its
debt 
  (sovereign nations such as the U.S. and England have the power to create credit and money; see this, this, this, and this).

Given
that America is already deeply in debt, how can Mr. Bernanke justify
the ongoing mountain of interest debts placed on the backs of the
American people by the private credit-creation system of which the Fed
is a part?

Failure to Disclose Who Received Bailout Money


The whole issue of the Fed's failure
to disclose who received bailout money and other emergency largess
courtesy of the American taxpayer is another important line of
questioning.  Many others have already written extensively on this
issue, so I will not reinvent the wheel here.

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Anonymous's picture

Who are the MBTC? What men and women are really the brains and guts behind the Federal Reserve?

Could we have a list of all the conversations you have had, everyone you have met with, talked with, were interviewed by, received one-way communication from since you entered university, with particular emphasis on the ones you have 'dialogued' with since you were considered a candidate for Alan Greenspan's replacement?

Why do you have beard? Is it to compensate for being bald, tubby, and short and therefore feeling inadequate in yourself, and how does that feed a Napoleonic complex?

Would you have liked to be a bully in high school? Do you play team sports? What is your favorite color? Do pictures of murdered puppies repel you or are you compelled to watch them every day, have their web sites among your Favorites in Explorer?

Were you molested as a child? Are you being molested now by Lord Blankfein?

exportbank's picture

For success to exist you must also allow failure. The greatest threat to the future is calling failure success. The greatest success is truth and equal justice for all. Balance sheets are the great hiding place of failed companies and economies - do not allow the theft of our future by balance sheet. 

Privatus's picture

It's not that Bernanke is incompetent. It's that the alleged objectives of the Fed are unattainable no matter who is at the helm. From individual citizens' point of view, the Fed is a manifest failure. From the banks' point of view, it's a magnificent success. Lately we are debating whether or not Bernanke's re-appointment should be confirmed when we should be discussing how to end the Fed. Anything else is deck-chair rearrangement.

theadr's picture

Ben:

Who are you going to sell all the mortgage bonds for which you paid 80 to 90 cents on the dollar, that are never going to be worth more than 20 to 30 cents?

Were those the bonds in the money center banks off-balance sheet, structured investment vehicles that you bought, or the one's that are actually shown on the balance sheet without the implementaton of FAS 166/167?

When a snake eats its own tail, how long before it reaches its head, assuming that the snake is the current Federal Reserve Chair?

 

 

ghostfaceinvestah's picture

There are plenty of other points that could be made, but one important one: waaayyy back in 2004, the FBI was warning of an epidemic of mortgage fraud, that is could become worse than the S&L crisis, but yet the regulators, including the Fed, did NOTHING.

http://www.cnn.com/2004/LAW/09/17/mortgage.fraud/

 

ghostfaceinvestah's picture

"The central bankers were simply ignoring their warnings. Didn't they understand what they were being told? Or was it that they simply didn't want to understand?"

Or maybe an economic collapse was part of the agenda?

jturner's picture

thank you so much for aggregating together all of these views on the Fed, it is much appreciated.  I am surprised though that given all of these smart influential people who are against Bernanke, that there is not more political influence to try to make sure he doesn't get reappointed again.

Anonymous's picture

Mr. Bernanke,

Why have you done everything possible to enrich the very people who caused the problems while fucking over america? Why are you such a fucking asshole?

mock turtle's picture

Mr Bernanke, you and the Federal Reserve chose to rescue our financial system from the top down...or by trickle down so to speak, accepting securities, of questionable value from financial institutions at the fed window in exchange for triple A US Gov securities. You apparently hoped the system would liquefy and banks would lend.  However many of the financial institutions you have propped up are financially unsound and are hoarding capital, and holding the country back.

 

Why did you not choose the opposite approach, taking failed institutions into receivership, letting equity holders go bust and using remaining value if any to pay bond holders below par and then capitalize a a new lender of first resort,  "Bank of the United States of America" Thus saving the economy from the bottom up and allowing zomby financial institutions to pay the price for their miscreant behavior?

Tic tock's picture

Yes, an insolvency issue..and that's where the funds have gone. It wouldn't be cricket to come through one fine morning and say that five out the remaining six merchant banks were insolvent! Though, if today that happened it would be a sore relief. Think of the counterparties! Think of the implied pallour cast upon banking circles in other countries. It's all very distasteful. ..the question remains..whether Bernake did or didn't screw up..how does employment get going again?

I feel that policy ought to shift to the wider economy, if the Banks make it through the year by trading shells all well and good. We have five billion tons of greenhouse gases to prevent getting into the atmosphere every year for the next twenty years or the Ocean current shuts down. ..Scientific American.

I don't think anyone will swallow that any artificially set pricing system introduced by the government could be at all credible at this point. That means massive re-tooling in the so-called sustainable materials (see poly-actic acid), reforming the power we use and other strategic issues. I expect the Stock market to virtually disappear as a result, currencies to become a temporary anachronism (?!) and pervasive part-nationalisation. 

Have a nice day

 

 

 

Anonymous's picture

lst question, are you comfortable, or is the polygraph too tight?

Brother can you spare a dime's picture

With all the love out there for BB, how again does he keep his job? Oh that's right TBTF's want him there.... nevermind.

 

Excellent compilation.

 

 

 

 

vmpyr calamari's picture

its funny - here i am as an animal looking through the farmers window in Animal Farm, 50 years ago I saw the pigs turn into humans.

But as i'm staring, they're turning back into pigs

Anonymous's picture

mr. bernanke

what advice would you give to an enterprising young american intersted in starting up his own too big to fail company? what steps should i take to ensure that no matter how collosal my fuck ups may be that i will be ensured a profit while any outstanding debts i may have incurred during my reign are somehow off-loaded onto the shoulders of some other poor bastard? i've tried the "saving and hard work" method but those seem outdated and thus part of the old economy. any advice would be greatly appreciated by not only myself but by other americans who are also eager to learn how to fuck people over for their own self benefit on a massive, like 300 million fucked over people type of massive scale.

ghostfaceinvestah's picture

go to Harvard

join Goldman for 5 years

set for life.

TheGoodDoctor's picture

Where'd The Cheese Go?

And by cheese I mean money. :)

http://www.youtube.com/watch?v=N1zL13LvxS8&feature=related

 

 

Rainman's picture

The Fed says there is a liquidity problem. But it is really an insolvency problem.

That about sums it up. And all the little devils are present in those two sentences. Liquidity is about solving temporary capital disruption. Insolvency is about encouraging the creation of lasting capital reconstruction.

It's a missed call that will haunt the economy for many more years.

Nice contribution, GW.