November 30, 2009
This week brings us the confirmation hearings on President Obama’s nomination of Ben Bernanke to a second four-year term as chairman of the Federal Reserve. The recent progress in Congressional efforts to audit the Federal Reserve will certainly spice up the confirmation hearings. If that weren’t enough, Bernanke saw fit to write a commentary piece for Sunday’s edition of The Washington Post, expressing his opposition to any attempts to limit the Fed’s power and subject it to an audit. Here is some of what he had to say in that column:
These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States. The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.
Well, he should have known what would be coming next . . . the avalanche of criticism pointing out how the Fed played a major role in causing the crisis. As you will see below, that response was swift. Worse yet, Bernanke’s theme of “we learned our lesson” will surely inspire harsh interrogation at the confirmation hearings:
The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis. We have extensively reviewed our performance and moved aggressively to fix the problems.
Dean Baker did not waste any time before ripping into Bernanke’s essay. Baker’s Beat the Press blog at The American Prospect website regularly upbraids Bernanke for his responsibility in causing the economic crisis. Baker’s retort to the Washington Post piece was published at the Talking Points Memo website. The final paragraph of Baker’s essay reflected his outrage that the Post would publish Bernanke’s rant without an opposing response:
The arrogance of this column is almost beyond belief. This man is incredibly lucky to still have his job at time when millions of other workers have lost theirs as a direct result of his incompetence. A serious news outlet would not have printed such a ridiculously self-serving piece without at least securing an opposing opinion. Of course, Bernanke’s piece appeared in the Washington Post.
Dean Baker’s primary criticism of Bernanke is based on the Fed chair’s failure to control the 8-trillion-dollar housing bubble before it burst, nearly destroying the entire economy:
We had further losses in demand associated with the bursting of a bubble in non-residential real estate. In total, the loss in bubble-driven demand was well over $1 trillion a year. All of it an entirely predictable outcome of the collapse of a housing bubble.
The simple reality is that there is nothing in the Fed’s bag of tricks that will allow it to easily replace over $1 trillion in annual demand. In short, the bubble guaranteed the economic disaster that we are now experiencing, end of story.
At the Naked Capitalism website, Yves Smith dealt a hefty load of thorough criticism on the Bernanke article. She began with the verdict against Bernanke and built an impressive argument supporting her opinion:
What is interesting is how much the tables have turned. The Obama effort to make the Fed into the uber bank regulator has become a rout, with decent odds that the Fed will have its powers reduced, and an increasing possibility that Bernanke might not be reconfirmed (which is frankly the right outcome, no CEO who presided over a similar disaster would still be in charge).
Smith did not restrict her criticism to the Fed’s failure to control the housing bubble. Here are some of her points:
For instance, the Fed was the architect of the “let a thousand flowers bloom” policy towards derivatives, and made inadequate (one might say no) effort to understand new financial technology. Bernanke himself rationalized burgeoning consumer debt, claiming that consumer balance sheets were in good shape. Hun? This is Japan circa 1989 thinking.
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Yes, I am told the Fed is now making all the banks disclose their derivatives positions to them, but the Fed lacks the analytical capacity to do much with this information (and I am further told the Fed staff understands that too). So that does not fit my notion of “tougher oversight.” And the rest is just empty promises.
In response to Bernanke’s claim that Congressional efforts to rein-in the authority of the Fed are “very much out of step with the global consensus on the appropriate role of central banks,” Ms. Smith pounced:
Notice how Bernanke invokes a “global consensus,” which is wonderfully vague and ignores the fact that the pre-crisis “global consensus” of minimally regulated markets and financial institutions, is precisely what caused the crisis. Moreover, even if the Fed’s mandate in theory was appropriate, its governance structure is not. The Bank of England and the ECB are not peculiar largely private institutions, accountable to almost no one, as the Fed now is. The Fed’s insistence on secrecy regarding many of its emergency operations is unwarranted and deeply troubling. And “the Fed played a major role in arresting the crisis” ignores the fact that the Fed played a major role in creating it, namely, via negative real interest rates for a protracted period. And he is declaring the Fed’s policies to be successful when the jury is still out.
Brenanke’s claim that the idiotic bank stress tests “marked a turning point in public confidence in the banking system” invited a well-deserved attack. Here’s how Yves Smith handled it:
The worst is the folks at the Fed clearly believe the bogus stress tests were a meaningful exercise. That alone should disqualify them from getting a bigger role in bank supervision. And if you read their pronouncements, they plan to continue to use them, and have the process run by … monetary economists! Pray tell, what do they know about bank operations? Help me! And some of the help the Fed has enlisted in the stress test exercise includes the consulting firm McKinsey, which has the biggest banking practice in the consulting industry. Think McKinsey is going to devise anything that might be rough on its biggest meal tickets?
Remember that these negative reactions to the Bernanke article are just what appeared on Sunday. By the time the confirmation hearings begin on December 3, you can be sure that Bernanke’s own words from the Post column will be used against him. We may find that his decision to write this piece was a crucial turning point leading to a decision against his confirmation.
Damage Control
December 17, 2009
Matt Taibbi hit another grand slam with his recent Rolling Stone article: “Obama’s Big Sellout”. It was another classic work in his unique style. The ugly truth it drove home was that Barack Obama used a “bait and switch” tactic in his Presidential campaign: promising to reform Wall Street — until the day after he got elected — at which time he immediately jumped into bed with the culprits of the financial crisis. The reaction of the Obama apologists to the Rolling Stone piece involved the usual tactic of attacking the messenger (in this case: Taibbi himself). It didn’t work. The best way to see how this played out should begin with a reading of Taibbi’s retort to a critique appearing in The American Prospect — a feeble attempt to demonstrate that Taibbi got his facts wrong. A neutral judge, Felix Salmon of Reuters, then stepped in and ruled in favor of Taibbi. The online responses to Felix Salmon’s essay are a great read. At the Open Left website, David Sirota upbraided Taibbi’s critics, who spanned the political spectrum — many of whom expressed condescension at the “naïve” decision of an outside-the-beltway reporter to expose the breach of a campaign promise:
Matt Taibbi’s article immediately forced the White House into a damage control mode. Another softball interview was immediately set up with Steve Croft of 60 Minutes, wherein Obama attempted to redeem his false image as an adversary of the Wall Street investment banks. The President took advantage of that opportunity to present himself as an antagonist of those he described as “fat cats”. On the following day, Obama held a meeting in the White House cabinet room with some banking representatives who found the event important enough to attend. Immediately afterward, Charlie Gasparino revealed the backstory behind Obama’s meeting with the bankers. After informing us that the administration provided the bankers with Obama’s “talking points” in advance of the meeting, Gasparino disclosed this:
Many commentators were quick to point out that by the time Obama started talking tough about “fat cats”, he had already given them all they wanted by allowing them to pay back their TARP loans on an expedited basis. As Henry Blodget explained for The Business Insider:
At The Washington Post, Steven Pearlstein bemoaned the fact that the TARP beneficiaries had been “let off their leash”. Pearlstein expressed concern that this move created the potential for more problems in the future:
The administration’s damage control effort turned out to be worthless. With his centerpiece healthcare reform effort floundering in the Senate, Obama the President is appearing to be significantly less effective than Obama the candidate. The President’s critics have been quick to pounce. George Will noted that Obama has “seen his job approval vary inversely with his ubiquity”. The New York Post’s Michael Goodwin alleged that Obama “doesn’t look like he cares that big chunks of the country, left, right and center, are giving up on him.” However, the best analysis of the confidence crisis afflicting the Obama Presidency came from Dan Gerstein of Forbes.com. Gerstein observed that the new Preisdent’s leadership style was to blame — something Gerstein described as “the Reverse Roosevelt: Talk boldly and carry a toothpick.” While debunking the administration’s claim that it had lost the leverage it had over Wall Street with the TARP paybacks, Gerstein argued that such an excuse “doesn’t pass the laugh test” because the banking industry is the most regulated industry in the country. The task Obama faces is to cultivate a leadership style that will be useful in confronting the challenges he undertook when he assumed office:
It appears as though we are back to the themes of “hope” and “change”. This time we’re hoping that Obama will change.