Friday, August 28, 2009

The No Accountability Bernanke Era Continues

Earlier this week, lost among the torture and then Kennedy news:

OAK BLUFFS, Mass. – President Barack Obama announced Tuesday he wants to keep Ben Bernanke on as Fed chairman, saying he shepherded America through the worst economic crisis since the Great Depression.

"Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and out-of-the-box thinking that has helped put the brakes on our economic freefall," said Obama, with Bernanke standing by his side. "Almost none of the decisions he or any of us made have been easy."


In sticking with a Republican for the nation's top banker, the Democratic president was aiming for stability at a time of continuing, though easing, crisis. The move was designed to reassure the U.S. financial sector as well as foreign central banks that the Obama administration isn't changing course on its largely well-received approaches to the financial meltdown and overall monetary policy.

Man, this guy is awesome. Just for the hell of it, I wonder what he was up to before the crash in 2008? Jason Linkins gives us the rundown:

Days before President George W. Bush nominated him to take the reins at the Fed, Bernanke was already fitting his neck for albatrosses, insisting that the housing boom was not a bubble.

"House prices are unlikely to continue rising at current rates," said Bernanke, who served on the Fed board from 2002 until June. However, he added, "a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year."

As Stephen Roach points out in today's Financial Times, Bernanke is a big enthusiast of the bubble economy, and that enthusiasm led to our collective undoing:

On this count, he stood with his predecessor - serial bubble-blowing Alan Greenspan - who argued that monetary authorities are best positioned to clean up the mess after the bursting of asset bubbles rather than to pre-empt the damage. As a corollary to this approach, both Mr Bernanke and Mr Greenspan drew the wrong conclusions from post-bubble strategies earlier in this decade put in place after the bursting of the equity bubble in 2000. In retrospect, the Fed's injection of excess liquidity in 2001-2003, which Mr Bernanke endorsed with fervour, played a key role in setting the stage for the lethal mix of property and credit bubbles.
. . .

Back in March of 2007, Bernanke faced the Joint Economic Committee, with a rosy projection on the housing crisis that was a wee bit more focused on the petals than the thorns.

Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.
. . .

Dean Baker, writing for TPM, said that, "The problem in the current situation was not that the Fed did not have the responsibility to prevent the $8 trillion housing bubble that caused this crisis. The problem was that the Fed either did not see the bubble or somehow did not think there would be serious consequences from its collapse."

Just to be clear, this was not a minor error. It was as bad a mistake as you could possibly make on the job. This is like the cook who leaves the stove on and causes the restaurant to burn down. It's comparable to a nurse administering the wrong medicine, not once or twice but hundreds of times, leaving a lengthy trail of illness and death in his wake. The Fed's performance is like a school bus driver who drunkenly heads into oncoming traffic, causing the death of all of his passengers. In short, this is really serious.
. . .

Bernanke continually attempted to portray Wall Street's collapse as an unforeseeable set of circumstances. This week, at the Jackson Hole symposium, Bernanke's story was that in August of 2008, "there was little to suggest that market participants saw the financial situation as about to take a sharp turn for the worse. For example, although indicators of default risk such as interest rate spreads and quotes on credit default swaps remained well above historical norms, most such measures had declined from earlier peaks, in some cases by substantial amounts."

Seeking Alpha's Paul Amery takes issue:

Although Bernanke is correct to say that in August 2008, counterparty risk levels had not yet breached the March peak reached when Bear Stearns nearly failed (although they did very soon afterwards), it's pretty evident to anyone, looking at this chart, that financial market strains had been on a general uptrend since the beginning of 2007. Indeed, the average credit default swap spread on these dealer banks was 13 times higher in August 2008 than it had been in January 2007.

Has the Fed lent "freely against good collateral"? Hardly. Here's Econbrowser's pictorial representation of the Fed's balance sheet from a few months ago, showing a dramatic shift from holdings concentrated in US Treasuries to a mish-mash of mortgage-backed and asset-backed debt, taken on from Bear Stearns and AIG, on which it has already suffered losses of up to US$5 billion.

Not really the foresight you want from someone tasked with getting us out of this economic crisis. His help covering up AIG's bailout and confusion over the disappearance of 500 billion dollars doesn't exactly fill you with confidence either.

Dean Baker:

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.

The attendees of GreenspanFest 2009 may not want to be so rude as to discuss their culpability for this disaster, but that should not prevent the rest of us from raising the topic. 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.

At Netroots Nation Dean Baker was asked how he felt about Bernanke's reappointment. He confused the audience by saying his feelings were "mixed" as he proceeded to rattle off a list of Bernanke's failures similar to the one laid out in Linkins' post.

Just when he could sense the moderator was going to ask a follow up, he finished by stating that the only reason his feelings were mixed was that if Bernanke wasn't renominated, he worried that Obama would choose Larry Summers, someone who he feared even more.

Just to recap: Given a choice between someone who's been as consistently wrong as Ben Bernanke and Obama's chief economic advisory Larry Summers, he would pick Bernanke.

We live in scary, scary times.

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