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An Early Favorite For 2010

February 11th, 2010 Posted in Uncategorized

Feb, 11 2010

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February 11, 2010

It appears as though the runner-up for TheCenterLane.com’s 2009 Jackass of the Year Award is well on his way to winning the title for 2010. After reading an op-ed piece by Ross Douthat of The New York Times, I decided that as of December 31, 2009, it was too early to determine whether our new President was worthy of such a title.

Since Wednesday morning, we have been bombarded with reactions to a story from Bloomberg News, concerning an interview Obama had with Bloomberg BusinessWeek in the Oval Office. In case you haven’t seen it, here is the controversial passage from the beginning of that article:

President Barack Obama said he doesn’t “begrudge” the $17 million bonus awarded to JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon or the $9 million issued to Goldman Sachs Group Inc. CEO Lloyd Blankfein, noting that some athletes take home more pay.

The president, speaking in an interview, said in response to a question that while $17 million is “an extraordinary amount of money” for Main Street, “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

“I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free-market system.”

Many commentators have expounded upon what this tells us about our President. I’d like to quote the reactions from a couple of my favorite bloggers. Here’s what Yves Smith had to say at Naked Capitalism:

There are only two, not mutually exclusive, conclusions one can reach from reading this tripe: that Obama is a lackey of the financiers, and putting the best spin he can on their looting, or he is a fool.

The salient fact is that, their protests to the contrary, the wealth of those at the apex of the money machine was not the result of the operation of “free markets” or any neutral system. The banking industry for the better part of two decades has fought hard to create a playing field skewed in their favor, with it permissible to sell complex products with hidden bad features to customers often incapable of understanding them. By contrast, one of the factors that needs to be in place for markets to produce desirable outcomes is for buyers and sellers to have the same information about the product and the objectives of the seller.

Similarly, the concentrated capital flows, often too-low interest rates, and asymmetrical Federal Reserve actions (cutting rates fast when markets look rocky, being very slow to raise rates and telegraphing that intent well in advance) that are the most visible manifestations of two decades of bank-favoring policies, are the equivalent of massive subsidies.

And that’s before we get to the elephant in the room, the massive subsidies to the banksters that took place during the crisis and continue today.

We have just been through the greatest looting of the public purse in history, and Obama tries to pass it off as meritocracy in action.

Obama is beyond redemption.

At his Credit Writedowns website, Edward Harrison made this observation:

The problem is not that we have free markets in America, but rather that we have bailouts and crony capitalism. So Americans actually do begrudge people this kind of monetary reward. It has been obvious to me that the bailouts are a large part of why Obama’s poll numbers have been sinking. It’s not just the economy here — so unless the President can demonstrate he understands this, he is unlikely to win back a very large number of voters who see this issue as central to their loss of confidence in Obama.

Is it just me or does this sound like Obama just doesn’t get it?

Victoria McGrane of Politico gave us a little background on Obama’s longstanding relationship with The Dimon Dog:

Dimon is seen as one of the Wall Street executives who enjoys the closest relationship with the president, along with Robert Wolf, head of the American division of Swiss bank UBS. A longtime Democratic donor, Dimon first met Obama in Chicago, where Dimon lived and worked from the late 1990s until 2007.

And both Dimon and Blankfein have met with the president several times. In their most recent meeting, Obama invited Dimon to Washington for lunch right before the State of the Union, according to a source familiar with the meeting.

Some commentators have expressed the view that Obama is making a transparent attempt to curry favor with the banking lobby in time to get those contributions flowing to Democratic candidates in the mid-term elections. Nevertheless, for Obama, this latest example of trying to please both sides of a debate will prove to be yet another “lose/lose” situation. As Victoria McGrane pointed out:

But relations between most Democrats and Wall Street donors aren’t as warm this cycle as the financial industry chafes against the harsh rhetoric and policy prescriptions lawmakers have aimed at them.

As for those members of the electorate who usually vote Democratic, you can rest assured that a large percentage will see this as yet another act of betrayal. They saw it happen with the healthcare reform debacle and they’re watching it happen again in the Senate, as the badly-compromised financial reform bill passed by the House (HR 4173) is being completely defanged. A bad showing by the Democrats on November 2, 2010 will surely be blamed on Obama.

As of February 11, we already have a “favorite” in contention for the 2010 Jackass of the Year Award. It’s time for the competition to step forward!

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Senator Cantwell Stands Tough

February 8th, 2010 Posted in Uncategorized

Feb, 08 2010

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February 8, 2010

Back in June of 2008, when it became obvious that Hillary Clinton would not win the nomination as the Democratic Party’s Presidential candidate, Clinton’s despondent female supporters lamented that they would never see a woman elected President within their own lifetimes. At that point, I wrote a piece entitled, “Women To Watch”, reminding readers that “there are a number of women presently in the Senate, who got there without having been married to a former President (whose surname could be relied upon for recognition purposes).” One of those women, whom I discussed in that essay, was Senator Maria Cantwell of Washington. Since that time, Senator Cantwell has proven herself as a defender of her constituents and an opponent of Wall Street. Her bold criticism of the Obama administration’s handling of the economic crisis as well as her vocal opposition to the influence of lobbyists, motivated me to write a second piece about Senator Cantwell in November of 2009. More recently, she voted against the confirmation of Ben Bernanke’s nomination to a second term as Federal Reserve chair and on February 2, Reuters reported that she was taking a stand against loopholes in proposed financial reform legislation.

On February 7, Les Blumenthal of the McLatchy Newspapers saw fit to highlight Senator Cantwell’s efforts at backing-up with real action, her tough stand against Wall Street:

To hear Sen. Maria Cantwell talk, another economic bubble is building as Wall Street banks — backed by taxpayer bailouts — continue to play the high-risk derivatives markets rather than extend credit to struggling businesses on Main Street.

Cantwell says that Congress and the Obama administration are just watching it happen.

* * *

“We are trying to keep the focus on what needs to be done to get credit flowing and avoid another bubble,” Cantwell said in an interview. “Do I wish the White House team was more attuned to these issues? Yes.”

* * *

White House officials have, at least twice, backed off commitments they made to her that they’d push for tougher regulations, Cantwell said.

“Their economic team is not living up to what they said they would,” Cantwell said.

Her criticism of the financial regulatory reform bill passed by the House — as being “riddled with loopholes” — was reminiscent of the widespread reaction to the disappointing failure of the Democrats to pass any significant healthcare reform legislation:

If the bills emerging from committees aren’t tough enough, Cantwell vowed a floor fight. She said she had support from half a dozen senators, including Democrats Dianne Feinstein of California, Tom Harkin of Iowa, and Carl Levin of Michigan.

“People are going to have to ask themselves what’s better — a weak bill or no bill?” she said.

At a time when her peers are busy selling out to lobbyists, Senator Cantwell is continuing to reinforce her image as a reformer. Her February 4 exchange with “Turbo” Tim Geithner, during his appearance before the Senate Finance Committee, was an example of the type of challenge that other Democrats are afraid to publicly vocalize when addressing members of the administration. Cantwell emphasized that the President has the authority to act on his own (by issuing an Executive Order) to make $30 billion available to community banks, rather than waiting for Congress to pass legislation for such a rescue. Her home state’s Lake Stevens Journal discussed that moment:

“If we don’t implement change right now, we are going to lose more jobs,” Cantwell told Geithner. “Do not wait for legislation. Come to terms with the community banks on reasonable terms that they can agree to — and I think that that we will be well on our way to getting Americans back to work.”

Maria Cantwell continues to exhibit a (sadly) unique toughness in standing up to those forces bent on preserving the destructive status quo. As disgruntled supporters of Hillary Clinton wonder whether her intention to step down as Secretary of State in 2012 could signal another opportunity to elect America’s first female President — they would be well-advised to consider Senator Cantwell as their best hope for reaching that historic milestone.

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Beyond The Banks

February 4th, 2010 Posted in Uncategorized

Feb, 04 2010

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February 4, 2010

I recently saw the movie Food, Inc. and was struck by the idea that there are some fundamental problems that span just about every situation where government corruption and ineptitude have facilitated an industry’s efforts to crush the interests of consumers. At approximately 36 minutes into the film, Michael Pollan explained how government efforts to prevent abuses in the food industry are undermined by the fact that the government always relies on the “quick fix” or “band-aid” approach, rather than a strategy addressed at solving a systemic problem. In other words: government prefers to treat the symptoms rather than the disease.

As I thought about Michael Pollan’s remark, I was immediately reminded of our financial crisis. In that case, the solution was to bail out the “too big to fail” financial institutions. As legislative proposals are introduced to address the systemic problems and prevent a recurrence of what happened in the fall of 2008, the lobbyists have stepped in to sabotage those efforts.

There were two other factors discussed in Food Inc. as presenting roadblocks to effective consumer-protective legislation: the revolving door between the industry and Washington, as well as “regulatory capture” — a situation where government regulators are beholden to those whom they regulate.

We have seen the impact of these two factors in the financial area and they have been well-documented. The “revolving door” was the subject of two recent essays by John Carney at The Business Insider website. Carney discussed “The Banking Blob” as a secret club of Senate staffers and Wall Street lobbyists:

Staffers on the powerful Senate banking committee are part of what is known as “The Banking Blob,” a person familiar with the matter told us. The Banking Blob is made up of current banking committee staffers and former staffers who are now bankers or lobbyists. They frequently socialize together, often organizing happy hours and parties.

“They move in a pack. They socialize together,” the person says. “Hell. They even inter-marry.”

The Blob is made up of both Republican and Democratic staffers. Outsiders tend to think the Blob members view themselves as “cooler” than other Capitol Hill staff members. Often a job on the banking committee leads to a well-paying job for a Wall Street firm or a position at a K-Street lobbyist law firm.

Carney had previously discussed the problem of Senate banking committee staffers who see their job as simply a stepping stone to a lucrative banking job:

The allure of banking is hardly a mystery. The money is better. Far better than the government wages paid to Capitol Hill staffers. After years of toiling in government service, many staffers dream of a better life in one of the leafy neighborhoods that are so posh you cannot get there on DC’s Metro. . . .

“Everyone talks about people going from Goldman to government. But the problem is the other way. Too many staffers go from Capitol Hill to banking. And even more aspire to make that move. It corrupts the process,” the staffer told us.

The third problem — “regulatory capture” — is best epitomized in the person of “Turbo” Tim Geithner. Joshua Rosner recently dissected Turbo Tim’s often-repeated claim that he has always worked in “public service”. Rosner demonstrated that the only sector that has been “serviced” by Geithner was the banking industry:

Secretary Geithner can keep repeating his assertion he has worked in public service his whole life. Never mind that this calls into question his tangible market experience, this claim begs the question: How does he define working in the public service?

Geithner’s last job, as the President of the New York Fed highlights that question.

* *   *

The New York Fed is not government-owned. Most people fail to recognize this fact. Simply, the Federal Reserve Board (responsible for monetary policy, with a dual mandate of full employment and price stability) is an independent part of the federal government, while the New York Fed is a shareholder-owned or private corporation. In other words, where the Federal Reserve Board is www.frb.gov, the District Bank is www.newyorkfed.org. Historically, the New York Fed has been among the most profitable shareholder-owned corporations in the world. Yet it keeps the details of its shareholders’ ownership information private. What we do know is that its owners include precisely those institutions it is tasked to regulate and supervise and those it has obviously failed to adequately supervise. Unlike the other District Banks of the Federal Reserve system, which have overseen their banks quite well, the New York Fed’s concentration of the largest banks, coupled with its unique role of managing the market operations of the entire Fed system, has built a culture where it sees itself as a market participant and peer to those firms it regulates.

The President of the NY Fed is chosen by, paid by and reports to the private shareholders of that private institution. Only three of the nine Directors of the Board of the New York Fed are chosen by the Federal Reserve Board and, until this year, the NY Fed’s Chair — chosen by the Federal Reserve Board in Washington — was a former Chairman of Goldman Sachs who still sits on Goldman’s Board.

*   *   *

In truth, Geithner’s ineffectiveness in his role as NY Fed President and his current political posturing — without any policy substance to directly address too-big-to-fail or the Fed’s flawed powers to bailout firms — seems to have resulted from design rather than accident.

*   *   *

If being a public servant is funneling unreasonable amounts of taxpayer capital, without market discipline, to the largest and most poorly managed banks, then Geithner’s selection as Secretary of Treasury makes sense.

One important lesson to be learned from our government’s inability to do its job regulating the financial sector, is that this failure is primarily caused by three problems:

An unwillingness to address a systemic problem by choosing, instead, to focus on “quick fixes”;
A revolving door between government and industry;
Regulatory capture.

Legislators, consumer advocates and commentators should focus on these three problem areas when addressing any situation where our government proves itself ineffective in preventing abuses by a particular industry.

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The Outrage Continues

February 1st, 2010 Posted in Uncategorized

Feb, 01 2010

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February 1, 2010

The news reports of the past few days have brought us enough fuel to keep us outraged for the next decade. Let’s just hope that some of this lasts long enough for the November elections. I will touch on just three of the latest stories that should get the pitchfork-wielding mobs off their asses and into the streets. Nevertheless, we have to be realistic about these things. With the Super Bowl coming up, it’s going to be tough to pry those butts off the couches.

The first effrontery should not come as too much of a surprise. The Times of London has reported that Goldman Sachs CEO, Lloyd Blankfein (a/k/a Lloyd Bankfiend) is expecting to receive a $100 million bonus this year:

Bankers in Davos for the World Economic Forum (WEF) told The Times yesterday they understood that Lloyd Blankfein and other top Goldman bankers outside Britain were set to receive some of the bank’s biggest-ever payouts. “This is Lloyd thumbing his nose at Obama,” said a banker at one of Goldman’s rivals.

Blankfein is also thumbing his nose at the American taxpayers. Despite widespread media insistence that Goldman Sachs “paid back the government” there is a bit of unfinished business arising from something called Maiden Lane III — for which Goldman should owe us billions.

That matter brings us to our second item: the recently-released Quarterly Report from SIGTARP (the Special Investigator General for TARP — Neil Barofsky). The report is 224 pages long, so I’ll refer you to the handy summary prepared by Michael Shedlock (“Mish”). Mish’s headline drove home the point that there are currently 77 ongoing investigations of fraud, money laundering and insider trading as a result of the TARP bank bailout program. Here are a few more of his points, used as introductions to numerous quoted passages from the SIGTARP report:

The Report Blasts Geithner and the NY Fed. I seriously doubt Geithner survives this but the sad thing is Geithner will not end up in prison where he belongs.

*   *   *

Please consider a prime conflict of interest example in regards to PPIP, the Public-Private-Investment-Plan, specifically designed to allow banks to dump their worst assets onto the public (taxpayers) shielding banks from the risk.

*   *   *

Note the refutation of the preposterous claims that taxpayers will be made whole.

*   *   *

TARP Tutorial: How Taxpayers Lose Money When Banks Fail

My favorite comment from Mish appears near the conclusion of his summary:

Clearly TARP was a complete failure, that is assuming the goals of TARP were as stated.

My belief is the benefits of TARP and the entire alphabet soup of lending facilities was not as stated by Bernanke and Geithner, but rather to shift as much responsibility as quickly as possible on to the backs of taxpayers while trumping up nonsensical benefits of doing so. This was done to bail out the banks at any and all cost to the taxpayers.

Was this a huge conspiracy by the Fed and Treasury to benefit the banks at taxpayer expense? Of course it was, and the conspiracy is unraveling as documented in this report and as documented in AIG Coverup Conspiracy Unravels.

Mish’s last remark (and his link to an earlier posting) brings us to the third disgrace to be covered in this piece: The AIG bailout cover-up. On January 29, David Reilly wrote an article for Bloomberg News (and Business Week) concerning last Wednesday’s hearing before the House Committee on Oversight and Government Reform. After quoting from Reilly’s article, Mish made this observation:

Most know I am not a big believer in conspiracies. I regularly dismiss them. However, this one was clear from the beginning and like all massive conspiracies, it is now in the light of day.

David Reilly began the Bloomberg/Business Week piece this way:

The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water and peanut butter. After this week’s congressional hearing into the bailout of American International Group Inc., you have to wonder if those folks are crazy after all.

Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.

That “secretive group” is The Federal Reserve of New York, whose president at the time of the AIG bailout was “Turbo” Tim Geithner. David Reilly’s disgust at the hearing’s revelations became apparent from the tone of his article:

By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.

This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs. It’s as though the New York Fed was a black-ops outfit for the nation’s central bank.

* * *

The New York Fed is one of 12 Federal Reserve Banks that operate under the supervision of the Federal Reserve’s board of governors, chaired by Ben Bernanke. Member-bank presidents are appointed by nine-member boards, who themselves are appointed largely by other bankers.

As Representative Marcy Kaptur told Geithner at the hearing: “A lot of people think that the president of the New York Fed works for the U.S. government. But in fact you work for the private banks that elected you.”

The “cover-up” aspect to this caper involved intervention by the New York Fed that included editing AIG’s communications to investors and pressuring the Securities and Exchange Commission to keep secret the details of the bailouts of AIG’s counterparties (Maiden Lane III). The Fed’s opposition to disclosure of such documentation to Congress was the subject of a New York Times opinion piece in December. The recent SIGTARP report emphasized the disingenuous nature of the Fed’s explanation for keeping this information hidden:

SIGTARP’s audit also noted that the now familiar argument from Government officials about the dire consequences of basic transparency, as advocated by the Federal Reserve in connection with Maiden Lane III, once again simply does not withstand scrutiny. Federal Reserve officials initially refused to disclose the identities of the counterparties or the details of the payments, warning that disclosure of the names would undermine AIG’s stability, the privacy and business interests of the counterparties, and the stability of the markets. After public and Congressional pressure, AIG disclosed the identities of its counterparties, including its eight largest: Societe Generale, Goldman Sachs Group Inc., Merrill Lynch, Deutsche Bank AG, UBS, Calyon Corporate and Investment Banking (a subsidiary of Credit Agricole S.A.), Barclays PLC, and Bank of America.

Notwithstanding the Federal Reserve’s warnings, the sky did not fall; there is no indication that AIG’s disclosure undermined the stability of AIG or the market or damaged legitimate interests of the counterparties.

The SIGTARP investigation has revealed some activity that most people would never have imagined possible given the enormous amounts of money involved in these bailouts and the degree of oversight (that should have been) in place. The bigger question becomes: Will any criminal charges be brought against those officials who breached the public trust by facilitating this monumental theft of taxpayer dollars?

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The Dishonesty Behind The Bernanke Vote

January 28th, 2010 Posted in Uncategorized

Jan, 28 2010

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January 28. 2010

While reading a recent Huffington Post piece by Jason Linkins, wherein he criticized President Obama’s proposed spending freeze, I was struck by Linkins’ emphasis on the notion that this proposal signaled a return to “institutionalized infantilism”:

One of the most significant things that Obama promised to do during the campaign was to simply level with the American people — deal with them in straightforward fashion, tell the hard truths, make the tough choices, and go about explaining his decisions as if he were talking to adults.

Linkins referred to a recent essay about the freeze, written by Ryan Avent of The Economist, which underscored the greater, underlying problem motivating politicians such as Obama to believe they can “slip one by” the gullible public:

This is yet another move toward the infantilisation of the electorate; whatever the gamesmanship behind the proposal, Mr. Obama has apparently concluded that the electorate can’t be expected to handle anything like a real description of the tough decisions which must be made.

Matt Taibbi made a similar observation about our President, while pondering whether the announced reliance on the wisdom of Paul Volcker meant an end to Tim Geithner’s days as Treasury Secretary:

Obama, as is his nature I think, tried to take the fork in the road all year, making nice to his base while actually delivering to his money people, not realizing the two were perpetually in conflict. His failure to make a clear choice, or rather to make the right choice, is what has doomed him everywhere politically.

It will be interesting to see what comes next, whether this is just for show or not.

We are now witnessing another example of this “infantilisation of the electorate” as it takes place with the dishonest maneuvering to get Ben Bernanke’s nomination to a second term past a filibuster. Here’s how this scam was exposed by Josh Rosner at The Big Picture website:

Sources have suggested that Senator Barbara Boxer (D-CA) intends to vote “yes” on Chairman Bernanke’s cloture vote and “no” on the floor. The cloture vote requires 60 “yes” votes to approve and really is THE vote to confirm. The floor vote only requires a simple majority to pass and therefore is a less important vote requiring fewer “yes” votes.

Get it? These Senators believe they can go back to their constituents with a straight face and tell the chumps that they voted against Bernanke’s confirmation when, in fact, they facilitated his confirmation by voting for cloture to give Bernanke a boost over the potentially insurmountable, 60-vote hurdle. This sleight-of-hand comes along at the precise moment when we are learning about Bernanke’s true role in the AIG bailout. As Ryan Grim reported for The Huffington Post:

A Republican senator said Tuesday that documents showing Federal Reserve Board Chairman Ben Bernake covered up the fact that his staff recommended he not bailout AIG are being kept from the public. And a House Republican charged that a whistleblower had alerted Congress to specific documents provide “troubling details” of Bernanke’s role in the AIG bailout.

Sen. Jim Bunning (R-Ky.), a Bernanke critic, said on CNBC that he has seen documents showing that Bernanke overruled such a recommendation. If that’s the case, it raises questions about whether bailing out AIG was actually necessary, and what Bernanke’s motives were.

Yves Smith of Naked Capitalism disclosed that Congressman Darrell Issa, who has been investigating the AIG bailout in his role as ranking Republican on the House Oversight and Government Reform Committee, “believes there is evidence that says Bernanke overruled his staff and authorized the rescue”. Ms. Smith explained how Issa is pushing ahead to investigate:

Rep. Darrell Issa of the House Oversight Committee has asked to Committee Chairman Towns to subpoena more documents from the Fed regarding its decision-making process in the AIG bailout.

* * *

In addition, Issa has noted that the Fed had failed to comply in full with previous subpoenas, and has not released any documents relative to AIG prior to September 2008 or after May 2009, even though they fall within the scope of previous subpoenas.

Congressman Issa’s letter can be viewed in its entirety here.

You may recall that the fight against the Fed for release of the AIG bailout documents became the subject of an opinion piece in the December 19 edition of The New York Times, written by Eliot Spitzer, Frank Partnoy and William Black.

There are plenty of reasons to oppose confirmation of Ben Bernanke to a second term as Fed chair. Senator Jim Bunning did a fantastic job articulating many of those points during the confirmation hearing on December 3. Beyond that, economist Randall Wray gave us “3 Reasons to Fear Bernanke’s Reappointment” at the Roosevelt Institute’s New Deal 2.0 website. Dr. Wray concluded his essay with this statement:

To be clear, I would prefer to replace Bernanke with someone who actually understands monetary policy and who advocates regulation and supervision of financial institutions.

The really pressing issue at this point is whether the withheld AIG bailout documents, which are the subject of Congressman Issa’s latest inquiry, might actually reveal some malefaction on the part of Bernanke himself. A revelation of that magnitude would certainly kill the confirmation effort. If Bernanke is confirmed prior to the release of documents indicating malfeasance on his part, I’ll be wishing I had a dollar for every time a Senator would say: “I just voted for cloture –but I voted against confirmation.”

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The Battle Over Bernanke

January 25th, 2010 Posted in Uncategorized

Jan, 25 2010

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January 25, 2010

Ben Bernanke’s four-year term as chairman of the Federal Reserve ends on January 31. There is presently no vote scheduled to confirm President Obama’s nomination of Bernanke to that post because four Senators (Bernie Sanders, D-Vt.; Jim Bunning, R-Ky.; Jim DeMint, R-S.C. and David Vitter, R-La.) have placed holds on Bernanke’s nomination. In order for the Senate to proceed to a vote on the nomination, 60 votes will be required. At this point, there is a serious question as to whether the pro-Bernanke faction can produce those 60 votes. A number of commentators have described last week’s win by Scott Brown as a “chill factor” for those Senators considering whether to vote for confirmation. Ryan Grim of The Huffington Post put it this way:

Opposition to the reconfirmation of Federal Reserve Chairman Ben Bernanke is growing in the Senate in the wake of a Republican Scott Brown’s victory, fueled by populist rage, in the Massachusetts Senate race.

James Pethokoukis of Reuters explained the situation in these terms:

Liberals in Congress want him gone. Then again, they want pretty much the whole Obama economic team gone. But Geithner and Summers aren’t up for a Senate vote. Bernanke is. And if Dems start bailing, don’t expect Republicans to save him. No politician in America gains anything by voting for Bernanke. A “no” vote is a free vote. Wall Street still loves him, though. Geithner, too.

At The Hill, Tony Romm reported:

Bernanke has taken heat as Wall Street’s profits have soared while unemployment has become stuck in double digits, and the wave of economic populism soaring through Washington in the wake of a stunning Democratic loss in the Massachusetts Senate races comes at a bad time for his confirmation.

If Bernanke is not confirmed, he will continue to sit on the Federal Reserve Board of Governors because each Fed Governor is appointed to a 14-year term. Donald Kohn, the vice chairman, would serve as the interim chairman until Bernanke’s successor is nominated and confirmed.

The forces pushing for Bernanke’s confirmation have now resorted to scare tactics, warning that dire consequences will result from a failure to re-confirm Bernanke. Senator “Countrywide Chris” Dodd warned that if Bernanke is not confirmed, the economy will go into a “tailspin”. An Associated Press report, written by Jennine Aversa and carried by The Washington Post, warned that a failure to confirm Bernanke could raise the risk of a double-dip recession. At The Atlantic, Megan McArdle exploited widespread concern over already-depleted retirement savings:

Spiking his nomination may have grim effects on 401(k)s throughout the land.

Not to be outdone, Judge Richard Posner issued this warning from his perch at The Atlantic:

If he is not confirmed, the independence of the Fed will take a terrible hit, because the next nominee will have to make outright promises to Congress of bank bashing, and of keeping interest rates way down regardless of inflation risk, in order to be confirmed.

I guess that these people forgot to mention that if Bernanke is not confirmed:

A plague of locusts shall be visited upon us,

The earth will be struck by a Texas-sized asteroid,

An incurable venereal disease will be spread via toilet seats,

The Internet will vanish, and . . .

Osama bin Laden will become the next Justice of the United States Supreme Court.

At the Think Progress website, Matthew Yglesias pondered the issue:

What happens if Ben Bernanke isn’t reconfirmed? Well, some folks seem to think it will send markets into a tailspin. But it’s worth emphasizing that in literal terms almost nothing will happen.

Beyond that, as Sudeep Reddy and Damian Paletta explained in The Wall Street Journal:

The Federal Open Market Committee — which consists of the presidentially appointed Fed governors in Washington and the presidents of the regional Fed banks — meets Jan. 26-27 and traditionally elects a chairman and vice chairman at its first meeting of the year. The committee, which makes monetary policy decisions, is set to elect Mr. Bernanke as its chairman at that meeting, a move that doesn’t require approval of the White House or the Senate.

Min Zeng of The Wall Street Journal filled us in as to what else we can expect from the FOMC this week:

Next week, the two-day FOMC meeting will end Wednesday afternoon with a statement on an interest-rate decision and policymakers’ latest outlook on the economy and inflation.

The FOMC is widely expected by market participants to keep its main policy rate — the fed-funds target rate — at ultra-low levels near zero as recent data haven’t demonstrated a persistent and strong economic recovery, with a jobless rate still hovering around the highest level in more than two decades.

Fed policymakers are also likely to stick to their plan to end the $1.25 trillion mortgage-backed securities purchases program at the end of March. The central bank should also reiterate its plan to let some emergency lending programs expire Feb. 1.

The Fed could soon hike the rate it charges on emergency loans, known as the discount rate, but that would largely be symbolic now that banks have been borrowing less and less from it as financial markets stabilized.

Meanwhile, the battle against the Bernanke confirmation continues. Mike Shedlock (a/k/a Mish) has urged his readers to contact the “undecided” Senators and voice opposition to Bernanke. Mish has also provided the names and contact information for those Senators, as well as the names of those Senators who are currently on record as either supporting or opposing Bernanke.

I’d like to see Bernanke lose, regardless of the consequences. The rationale for this opinion was superbly articulated by Senator Jim Bunning during the confirmation hearing on December 3. If you’re not familiar with it — give it a read. Here is Senator Bunning’s conclusion to those remarks, delivered directly to Bernanke:

From monetary policy to regulation, consumer protection, transparency, and independence, your time as Fed Chairman has been a failure. You stated time and again during the housing bubble that there was no bubble. After the bubble burst, you repeatedly claimed the fallout would be small. And you clearly did not spot the systemic risks that you claim the Fed was supposed to be looking out for. Where I come from we punish failure, not reward it. That is certainly the way it was when I played baseball, and the way it is all across America. Judging by the current Treasury Secretary, some may think Washington does reward failure, but that should not be the case. I will do everything I can to stop your nomination and drag out the process as long as possible. We must put an end to your and the Fed’s failures, and there is no better time than now.

Amen.

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Taking The Suckers For Granted

January 21st, 2010 Posted in Uncategorized

Jan, 21 2010

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January 21. 2010

In the aftermath of Coakley Dokeley’s failed quest to replace Teddy Kennedy as Senator of Massachusetts, the airwaves and the blogosphere have been filled with an assortment of explanations for how and why the Bay State elected a Republican senator for the first time in 38 years. I saw the reason as a simple formula: One candidate made 66 campaign appearances while the other made 19. The rationale behind the candidate’s lack of effort was simple: she took the voters for granted. This was the wrong moment to be taking the voters for chumps. At a time when Democrats were vested with a “supermajority” in the Senate, an overwhelming majority in the House and with control over the Executive branch, they overtly sold out the interests of their constituents in favor of payoffs from lobbyists. Obama’s centerpiece legislative effort, the healthcare bill, turned out to be another “crap sandwich” of loopholes, exceptions, escape clauses and an effective date after the Mayan-prophesized end of the world. Obama’s giveaway to Big Pharma was outdone by Congressional giveaways to the healthcare lobby.

The Democrats’ efforts to bring about financial reform are now widely viewed as just another opportunity to rake in money and favors from lobbyists, leaving the suckers who voted for them to suffer worse than before. Coakley Dokeley made the same mistake that Obama and most politicians of all stripes are making right now: They’re taking the suckers for granted. That narrative seems to be another important reason why the Massachusetts senatorial election has become such a big deal. There is a lesson to be learned by the politicians, who are likely to ignore it.

Paul Farrell recently wrote an open letter to President Obama for MarketWatch, entitled: “10 reasons Obama is now failing 95 million investors”. In his discussion of reason number five, “Failing to pick a cast of characters that could have changed history”, Farrell made this point:

Last year many voted for you fearing McCain might pick Phil Gramm as Treasury secretary. Unfortunately, Mr. President, your picks not only revived Reaganomics under the guise of Keynesian economics, you sidelined a real change-agent, Paul Volcker, and picked Paulson-clones like Geithner and Summers. But worst of all, you’re reappointing Bernanke, a Greenspan clone, as Fed chairman, an economist who, as Taleb put it, “doesn’t even know he doesn’t understand how things work.” And with that pick, you proved you also don’t understand how things work.

Another former Obama supporter, Mort Zuckerman, editor-in-chief of U.S. News and World Report and publisher of the New York Daily News, wrote a piece for The Daily Beast, examining Obama’s leadership shortcomings:

In the campaign, he said he would change politics as usual. He did change them. It’s now worse than it was. I’ve now seen the kind of buying off of politicians that I’ve never seen before. It’s politically corrupt and it’s starting at the top. It’s revolting.

* * *

I hope there are changes. I think he’s already laid in huge problems for the country. The fiscal program was a disaster. You have to get the money as quickly as possible into the economy. They didn’t do that. By end of the first year, only one-third of the money was spent. Why is that?

He should have jammed a stimulus plan into Congress and said, “This is it. No changes. Don’t give me that bullshit. We have a national emergency.” Instead they turned it over to Harry Reid and Nancy Pelosi who can run circles around him.

As for the Democrats’ pre-sabotaged excuse for “financial reform”, the fate of the Consumer Financial Protection Agency is now in the hands of “Countrywide Chris” Dodd, who is being forced into retirement because the people of Connecticut are fed up with him. As a result, this is his last chance to get some more “perks” from his position as Senate Banking Committee chairman. Elizabeth Warren, the person likely to be appointed to head the CFPA, explained to Reuters that banking lobbyists might succeed in “gutting” the proposed agency:

“The CFPA is the best indicator of whether Congress will reform Wall Street or whether it will continue to give Wall Street whatever it wants,” she told Reuters in an interview.

* * *

Consumer protection is relatively simple and could easily be fixed, she said. The statutes, for the most part, already exist, but enforcement is in the hands of the wrong people, such as the Federal Reserve, which does not consider it central to its main task of maintaining economic stability, she said.

Setting up the CFPA is largely a matter of stripping the Fed and other agencies of their consumer protection duties and relocating them into a new agency.

With all the coverage and expressed anticipation that the Massachusetts election will serve as a “wake-up call” to Obama and Congressional Democrats, not all of us are so convinced. Edward Harrison of Credit Writedowns put it this way:

But, I don’t think the President gets it. He is holed up in the echo chamber called the White House. If the catastrophic loss in Massachusetts’ Senate race and the likely defeat of his health care reform bill doesn’t wake Obama up to the realities that he is not in Roosevelt’s position but in Hoover’s, he will end as a failed one-term President.

I agree. I also believe that the hubris will continue. Why would any of these politicians change their behavior? The “little people” never did matter. They exist solely to be played as fools. They are powerless against the plutocracy. Right?

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Lev Is The Drug

January 14th, 2010 Posted in Uncategorized

Jan, 14 2010

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January 14, 2010

The first day of hearings conducted by the Financial Crisis Inquiry Commission (FCIC) was as entertaining as I expected. The stars of the show: Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, “The Dimon Dog” of JP Morgan Chase and Brian Moynihan from Bank of America presented themselves as likeable guys. However, in the case of Blankfein, whenever he wasn’t talking he would sit there with that squinting, perplexed look on his face that seemed to mime the question: “WTF?” A large segment of the viewing public has already been primed to view these gentlemen as “The Four Horsemen of The Financial Apocalypse”. Nevertheless, there were four more Horsemen absent from the “stage” on Wednesday: Messrs. Greenspan, Bernanke, Paulson and Geithner. Beyond that, Brian Moynihan didn’t really belong there, since he was not such a significant “player” as the other panel members, in events of 2008. In fact, history may yet view his predecessor, Ken Lewis, as more of a victim in this drama, due to the fact that he was apparently coerced by Hank Paulson and Ben Bernanke into buying Merrill Lynch with instructions to remain silent about Merrill’s shabby financial status. I would have preferred to see Vikram Pandit of Citigroup in that seat.

As I watched the show, I tried to imagine what actors would be cast to play which characters on the panel in a movie about the financial crisis. Mike Myers would be the obvious choice to portray Lloyd Blankfein. Myers could simply don his Dr. Evil regalia and it would be an easy gig. The Dimon Dog should be played by George Clooney because he came off as a “regular guy”, lacking the highly-polished, slick presentation one might expect from someone in that position. Brian Moynihan could be portrayed by Robin Williams, in one of his rare, serious roles. John Mack should be portrayed by Nicholas Cage, if only because Cage needs the money.

Although many reports have described their demeanor as “contrite”, the four members of the first panel gave largely self-serving presentations, characterizing their firms in the most favorable light. Blankfein emphasized that Goldman Sachs still believes in marking its assets to market. As expected, his theme of “if we knew then what we knew now . . .” got heavier rotation than a Donna Summer record at a party for Richard Simmons. John Mack, who was more candid and perhaps the most contrite panel member, made a point of mentioning that some assets cannot be “marked to market” because there really is no market for them. Excuse me . . . but isn’t that the definition of the term, “worthless”?

Throughout the session, the panel discussed the myriad causes that contributed to the onset of the financial crisis. Despite that, nobody seemed interested in implicating the Federal Reserve’s monetary policy as a factor. “Don’t bite the hand that feeds you” was the order of the day. All four panelists described the primary cause of the crisis as excessive leverage. They acted as a chorus, singing “Lev Is The Drug”. Lloyd Blankfein repeatedly expressed pride in the fact that Goldman Sachs has always been leveraged to “only” a 23-to-1 ratio. The Dimon Dog’s theme was something like: “We did everything right . . . except that we were overleveraged”. Dimon went on to make the specious claim that overleveraging by consumers was a contributing element in causing the crisis. Although many commentators whom I respect have made the same point, I just don’t buy it. Why blame people who were led to believe that their homes would continue to print money for them until they died? Dimon himself admitted at the hearing that no consideration was ever given to the possibility that home values would slump. Worse yet, for a producer or purveyor of the so-called “financial weapons of mass-destruction” to implicate overleveraged consumers as sharing a role in precipitating this mess is simply absurd.

The second panel from Wednesday’s hearing was equally, if not more entertaining. Michael Mayo of Calyon Securities seemed awfully proud of himself. After all, he did a great job on his opening statement and he knew it. Later on, he refocused his pride with an homage to his brother, who is currently serving in Iraq. Nevertheless, the star witness from the second panel was Kyle Bass of Hayman Advisors, who gave the most impressive performance of the day. Bass made a point of emphasizing (in so many words) that Lloyd Blankfein’s 23-to-1 leverage ratio was nearly 100 percent higher than what prudence should allow. If you choose to watch the testimony of just one witness from Wednesday’s hearing, make sure it’s Kyle Bass.

I didn’t bother to watch the third panel for much longer than a few minutes. The first two acts were tough to follow. Shortly into the opening statement by Mark Zandy of Moody’s, I decided that I had seen enough for the day. Besides, Thursday’s show would hold the promise of some excitement with the testimony of Sheila Bair of the FDIC. I wondered whether someone might ask her: “Any hints as to what banks are going to fail tomorrow?” On the other hand, I had been expecting the testimony of Attorney General Eric Hold-harmless to help cure me of the insomnia caused by too much Cuban coffee.

The Commissioners themselves have done great work with all of the witnesses. Phil Angelides has a great style, combining a pleasant affect with incisive questioning and good witness control. Doug Holtz-Eakin and Brooksley Born have been batting 1000. Heather Murren is more than a little easy on the eyes, bringing another element of “star quality” to the show.

Who knows? This commission could really end up making a difference in effectuating financial reform. They’re certainly headed in that direction.

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More Fun Hearings

January 11th, 2010 Posted in Uncategorized

Jan, 11 2010

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January 11, 2010

In my last posting, I discussed the need for a 9/11-type of commission to investigate and provide an accounting of the Federal Reserve’s role in causing the financial crisis. A more broad-based inquiry into the causes of the financial crisis is being conducted by the Financial Crisis Inquiry Commission, led by former California State Treasurer, Phil Angelides. The Financial Crisis Inquiry Commission (FCIC) was created by section 5 of the Fraud Enforcement and Recovery Act (or FERA) which was signed into law on May 20, 2009. The ten-member Commission has been modeled after the Pecora Commission of the early 1930s, which investigated the causes of the Great Depression, and ultimately provided a basis for reforms of Wall Street and the banking industry. Like the Pecora Commission, the FCIC has subpoena power.

On Wednesday, January 13, the FCIC will hold its first public hearing which will include testimony from some interesting witnesses. The witnesses will appear in panels, with three panels being heard on Wednesday and two more panels appearing on Thursday. The witness list and schedule appear at The Huffington Post website. Wednesday’s first panel is comprised of the following financial institution CEOs: Lloyd Blankfein of Goldman Sachs (who unknowingly appeared as Dr. Evil on several humorous, internet-based Christmas cards), Jamie Dimon (a/k/a “The Dimon Dog”) of JP Morgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America. Curiously, Vikram Pandit of Citigroup was not invited.

Frank Rich of The New York Times spoke highly of FCIC chairman Phil Angelides in his most recent column. Nevertheless, as Mr. Rich pointed out, given the fact that the banking lobby has so much influence over both political parties, there is a serious question as to whether the FCIC will have as much impact on banking reform as did the Pecora Commission:

Though bad history shows every sign of repeating itself on Wall Street, it will take a near-miracle for Angelides to repeat Pecora’s triumph. Our zoo of financial skullduggery is far more complex, with many more moving pieces, than that of the 1920s. The new inquiry does have subpoena power, but its entire budget, a mere $8 million, doesn’t even match the lobbying expenditures for just three banks (Citi, Morgan Stanley, Bank of America) in the first nine months of 2009. The firms under scrutiny can pay for as many lawyers as they need to stall between now and Dec. 15, deadline day for the commission’s report.

More daunting still is the inquiry’s duty to reach into high places in the public sector as well as the private. The mystery of exactly what happened as TARP fell into place in the fateful fall of 2008 thickens by the day — especially the behind-closed-door machinations surrounding the government rescue of A.I.G. and its counterparties.

A similar degree of skepticism was apparent in a recent article by Binyamin Appelbaum of The Washington Post. Mr. Appelbaum also made note of the fact that the relatively small, $8 million budget — for an investigation that has until December 15 to prepare its report — will likely be much less than the amount spent by the banks under investigation. Appelbaum pointed out that FCIC vice chairman, William Thomas, a retired Republican congressman from California, felt that the commission would benefit from its instructions to focus on understanding the crisis rather than providing policy recommendations. Nevertheless, both Angelides and Thomas expressed concern about the December 15 deadline:

The tight timetable also makes it impossible to produce a comprehensive account of the crisis, both men said. Instead, the commission will focus its work on particular topics, perhaps producing a series of case studies, Angelides said.

* * *

Both Angelides and Thomas acknowledged that the commission is off to a slow start, having waited more than a year since the peak of the crisis to hold its first hearing. Thomas said that a lot of work already was happening behind the scenes and that the hearing next week could be compared to a rocket lifting off after a lengthy construction process.

Even as books and speeches about the crisis pile up, Thomas expressed confidence that the committee’s work could still make a difference.

“There are a lot of people who still haven’t learned the lessons,” he said.

One of those people who still has not learned his lesson is Treasury Secretary “Turbo” Tim Geithner, who is currently facing a chorus of calls for his resignation or firing. Economist Randall Wray, in a piece entitled, “Fire Geithner Now!” shared my sentiment that Turbo Tim is not the only one who needs to go:

There is a growing consensus that it is time for President Obama to fire Treasury Secretary Timothy Geithner. While he is at it, he needs to clean house by firing Larry Summers, by banning Robert Rubin from Washington, and by appointing a replacement for Chairman Bernanke. It is time for a fresh start.

Geithner is facing renewed scrutiny due to his questionable actions while at the NYFed. As reported on Bloomberg and in the NYT, secret emails show that the NYFed under Geithner’s command prohibited AIG from reporting that it was passing government bail-out funds directly to counterparties, including Goldman Sachs.

Beyond that, Professor Wray emphasized that Obama’s new economic team should be able to recognize the following four principles (which I have abbreviated):

1. Banks do not face a liquidity crisis, rather they are massively insolvent. Reported profits are due entirely to trading activities – which amount to nothing more than a game of Old Maid, with institutions selling bad assets to each other at inflated prices on a quid-pro-quo basis. As such, they need to be shut down and resolved. …

2. Saving financial institutions does not save the economy. …

3. As such, all of the bail-outs and guarantees provided to financial institutions (over $20 trillion) need to be unwound. Not because we cannot “afford” them but because they are dangerous. Unfortunately, Congress has come to see all of these trillions of dollars committed to Wall Street as a barrier to spending more on Main street. …

4. Finally, we need an economic team that understands government finance. The current team is hopelessly confused, led and misguided by Robert Rubin. …

At The Business Insider website, Henry Blodget gave a four-minute, video presentation, citing five reasons why Geithner should resign. The text version of this discussion appears at The Huffington Post. Nevertheless, at The Business Insider’s Clusterstock blog, John Carney expressed his belief that Geithner would not quit or be forced to leave office until after the mid-term elections in November:

We would like to see Geithner go now.

* * *

But there’s little chance this will happen. The Obama administration cannot afford to show weakness. If it caved to Congressional critics of Geithner, lawmakers would be further emboldened to chip away at the president’s authority. Senate Republicans would likely turn the confirmation hearing of Geithner’s replacement into a brawl — one that would not reflect well on the White House or Democrat Congressional leadership.

There’s also little political upside to getting rid of Geithner now. It will not save Congressional Democrats any seats in the mid-term election. Obama’s popularity ratings won’t rise. None of the administration’s priorities will be furthered by firing Geithner.

All of this changes following the midterm elections, when Democrats will likely lose seats in Congress. At that point, the administration will be looking for a fall guy. Geithner will make an attractive fall guy.

Although there may not be much hope that the hard work of the Financial Crisis Inquiry Commission will result in any significant financial reform legislation, at least we can look forward to the resignations of Turbo Tim and Larry Summers before the commission’s report is due on December 15.

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A 9-11 Commission For The Federal Reserve

January 7th, 2010 Posted in Uncategorized

Jan, 07 2010

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January 7, 2010

After the terrorist attacks of September 11, 2001, Congress passed Public Law 107-306, establishing The National Commission on Terrorist Attacks Upon the United States (also known as the 9-11 Commission). The Commission was chartered to create a full and complete account of the circumstances surrounding the September 11, 2001 terrorist attacks, including preparedness for and the immediate response to the attacks. The Commission was also mandated to provide recommendations designed to guard against future attacks. The Commission eventually published a report with those recommendations. The failure to implement and adhere to those recommendations is now being discussed as a crucial factor in the nearly-successful attempt by The Undiebomber to crash a jetliner headed to Detroit on Christmas Day.

On January 3, 2010, Federal Reserve Chairman Ben Bernanke gave a speech at the Annual Meeting of the American Economic Association in Atlanta, entitled: “Monetary Policy and the Housing Bubble”. The speech was a transparent attempt to absolve the Federal Reserve from culpability for causing the financial crisis, due to its policy of maintaining low interest rates during Bernanke’s tenure as Fed chair as well as during the regime of his predecessor, Alan Greenspan. Bernanke chose instead, to focus on a lack of regulation of the mortgage industry as being the primary reason for the crisis.

Critical reaction to Bernanke’s speech was swift and widespread. Scott Lanman of Bloomberg News discussed the reaction of an economist who was unimpressed:

“It sounds a little bit like a mea culpa,” said Randall Wray, an economics professor at the University of Missouri in Kansas City, who was in Atlanta and didn’t attend Bernanke’s speech. “The Fed played a role by promoting the most dangerous financial innovations used by institutions to fuel the housing bubble.”

Nomi Prins attended the speech and had this to say about it for The Daily Beast:

But having watched his entire 10-slide presentation (think: Economics 101 with a political twist), I had a different reaction: fear.

My concern is straightforward: Bernanke doesn’t seem to have learned the lessons of the very recent past. The flip side of Bernanke’s conclusion — we need stronger regulation to avoid future crises — is that the Fed’s monetary, or interest-rate, policy was just fine. That the crisis that brewed for most of the decade was merely a mistake of refereeing, versus the systemic issue of mega-bank holding companies engaged in reckless practices, many under the Fed’s jurisdiction.

* * *

Meanwhile, justifying past monetary policy rather than acknowledging the real-world link between Wall Street practices and general economic troubles suggests that Bernanke will power the Fed down the path of the same old mistakes. Focusing on lending problems is important, but leaving goliath, complex banks to their worst practices (albeit with some regulatory tweaks) is to miss the world as it is.

As the Senate takes on the task of further neutering the badly compromised financial reform bill passed by the House (HR 4173) — supposedly drafted to prevent another financial crisis — the need for a better remedy is becoming obvious. Instead of authorizing nearly $4 trillion for the next round of bailouts which will be necessitated as a result of the continued risky speculation by those “too big to fail” financial institutions, Congress should take a different approach. What we really need is another 9/11-type of commission, to clarify the causes of the financial catastrophe of September 2008 (which manifested itself as a credit crisis) and to make recommendations for preventing another such event.

David Leonhardt of The New York Times explained that Greenspan and Bernanke failed to realize that they were inflating a housing bubble because they had become “trapped in an echo chamber of conventional wisdom” that home prices would never drop. Leonhardt expressed concern that allowing the Fed chair to remain in such an echo chamber for the next bubble could result in another crisis:

What’s missing from the debate over financial re-regulation is a serious discussion of how to reduce the odds that the Fed — however much authority it has — will listen to the echo chamber when the next bubble comes along. A simple first step would be for Mr. Bernanke to discuss the Fed’s recent failures, in detail. If he doesn’t volunteer such an accounting, Congress could request one.

In the future, a review process like this could become a standard response to a financial crisis. Andrew Lo, an M.I.T. economist, has proposed a financial version of the National Transportation Safety Board — an independent body to issue a fact-finding report after a crash or a bust. If such a board had existed after the savings and loan crisis, notes Paul Romer, the Stanford economist and expert on economic growth, it might have done some good.

Barry Ritholtz, author of Bailout Nation, argued that Bernanke’s failure to understand what really caused the credit crisis is just another reason for a proper investigation addressing the genesis of that event:

Unfortunately, it appears to me that the Fed Chief is defending his institution and the judgment of his immediate predecessor, rather than making an honest appraisal of what went wrong.

As I have argued in this space for nearly 2 years, one cannot fix what’s broken until there is a full understanding of what went wrong and how. In the case of systemic failure, a proper diagnosis requires a full understanding of more than what a healthy system should look like. It also requires recognition of all of the causative factors — what is significant, what is incidental, the elements that enabled other factors, the “but fors” that the crisis could not have occurred without.

Ritholtz contended that an honest assessment of the events leading up to the credit crisis would likely reveal a sequence resembling the following time line:

1. Ultra low interest rates led to a scramble for yield by fund managers;

2. Not coincidentally, there was a massive push into subprime lending by unregulated NONBANKS who existed solely to sell these mortgages to securitizers;

3. Since they were writing mortgages for resale (and held them only briefly) these non-bank lenders collapsed their lending standards; this allowed them to write many more mortgages;

4. These poorly underwritten loans — essentially junk paper — was sold to Wall Street for securitization in huge numbers.

5. Massive ratings fraud of these securities by Fitch, Moody’s and S&P led to a rating of this junk as Triple AAA.

6. That investment grade rating of junk paper allowed those scrambling bond managers (see #1) to purchase higher yield paper that they would not otherwise have been able to.

7. Increased leverage of investment houses allowed a huge securitization manufacturing process; Some iBanks also purchased this paper in enormous numbers;

8. More leverage took place in the shadow derivatives market. That allowed firms like AIG to write $3 trillion in derivative exposure, much of it in mortgage and credit related areas.

9. Compensation packages in the financial sector were asymmetrical, where employees had huge upside but shareholders (and eventually taxpayers) had huge downside. This (logically) led to increasingly aggressive and risky activity.

10. Once home prices began to fall, all of the above fell apart.

As long as the Federal Reserve chairman keeps his head buried in the sand, in a state of denial or delusion about the true cause of the financial crisis, while Congress continues to facilitate a system of socialized risk for privatized gain, we face the dreadful possibility that history will repeat itself.

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