December 3, 2009 03:37 PM EST by Elizabeth MacDonald
Federal Reserve chairman Ben Bernanke faced withering criticism from Republican senators James Bunning and Richard Shelby, as well as Democratic Senator Christopher Dodd, today at his re-confirmation hearing for another four years as head of the U.S. Central Bank.
But Bernanke will likely get re-confirmed, despite the most serious and threatening attack on the Fed since the U.S. enacted a 1913 law creating the central bank.
Two pieces of legislation afoot in Congress would strip the Fed of its bank regulatory powers and would also subject the Fed's monetary policy to audits by the Government Accountability Office, as the central bank has gone full throttle with various lending programs in addition to keeping rates historically low in order to resuscitate the financial sector.
Sen. Shelby told Bernanke the Fed "failed" and has done a "horrible job" as a bank regulator, given the subprime crisis. Sen. Dodd questioned why the US should give the central bank "exclusive authority" to regulate banks, noting the central bank has too many distractions and that the country needs "a strong, focused central bank." Sen. Bunning said: "I will do everything I can to stop your nomination and drag out this process as long as I can."
Bernanke, in admitting the central bank's mistakes, said the Fed "certainly..had not done a perfect job" at bank regulation, but that the Fed needs to keep its bank regulatory powers since it is best equipped to monitor the financial system.
The criticism now is that the Fed, as the country's top banking and monetary regulator, did nothing to stop Wall Street's excesses, did nothing to stop the subprime crisis, did nothing to stop bubbles from inflating, and has gotten too close to Wall Street in its rescue plans -- a strikingly similar criticism that was made in the 19th century that stopped two attempts at enacting a U.S. central bank in the first place.
The Fed did stop the economy from enduring a national nervous breakdown, and the banking sector is no longer careening around in a hospital gown. But the credibility and independence of the central bank is now in danger with the Fed now entangled more than ever in the economy.
Bernanke also faced criticisms that the Fed let itself be buffaloed by Wall Street in the collapse of AIG, when the central bank handed over tens of billions of dollars to banks with open trades with the insurer.
Why does anyone think the Fed has the fortitude to regulate banks, why is Bernanke fighting to hold onto the Fed's bank regulatory powers when it so easily shot a ton of money out the central bank's back door in the collapse of AIG? Is this the kind of financial regulation taxpayers deserve?
The criticisms, too, are that the Fed is now too close to Wall Street when Main Street is suffering, unemployment is rising, seven million are out of work, and the government is trying to deficit spend its way out of the downturn.
But when it comes to the government's actions, the most pressing question for investors now is this: What is the next Black Swan event, an event no one can foresee or can stop, that will wreck the colossal run up in the Dow Jones Industrial Average and stop the economic recovery cold?
Answer: a crackup in the bond market, meaning, a collapse in bond prices and a massive spike higher in yields that will slam consumer borrowing rates (as rates are tied to Treasurys) and potentially create a double dip recession.
The crackup will happen suddenly, with one country igniting a chain reaction around the globe when it sits up and says, "enough, enough, we are not buying any more U.S. Treasurys, America has run amok."
It won't be China, because China needs to keep buying Treasurys in order to maintain the yuan's peg to the dollar. However, the flood of Treasurys into the global economy is enough to give any other country a transient stroke.
Today, Bernanke himself addressed the next Black Swan event. "If creditors lose confidence in the U.S.," the Fed "can't control interest rates, there's nothing you can do about it."
The Fed itself has hit the computer button and created about $1 trillion in reserves in the banking system. It has also bought hundreds of billions of dollars in mortgage-backed securities, putting more cash in the system.
To avoid rampant inflation, the Fed would have to remove that liquidity from the system in an orderly way. Essentially, to do that, the Fed needs to get the Treasury to issue even more bonds to replace that cash. And that would come as the White House and Congress are borrowing on a scale this country has never seen before. They have enacted a $3.6 trillion budget, a $787 billion stimulus and may pass a potential $1 trillion health care reform bill.
All of these Treasurys for all of this spending creates a bond glut, which means all of those bonds will have to compete for investors, driving yields higher to lure investors. That's a recipe for a bond crackup.
The Fed's attempts to exit out of its own massive economic stimulus plans will be the equivalent of trying to learn to drink water from a firehose.
Which is why you hear Bernanke now referring to his quantitative easing as "credit easing," which doesn't carry such negative overtones. Which is also why you hear Bernanke becoming more vocal about the massive deficit spending the U.S. has embarked upon.
However, an audit of the Fed would involve more political meddling and Congressional interference. It would hurt the Fed's efforts to not only contain inflation as the dollar threatens to buckle and collapse from Congress's massive deficit spending. But it could also hurt its efforts to cut back its quantitative easing programs supporting the economy, as politicians could hammer it not to when they face re-election.
Bernanke pointed out that former Fed chairman Paul Volcker could not have successfully contained inflation in the early "?80s by hiking rates if Congress was allowed to audit Volcker's monetary decisions.
"Volcker conquered inflation [in the early "?80s] for the very reason that Congress stopped the GAO from auditing the Fed's monetary actions when it passed a law in 1978 restricting those audits," Bernanke testified.
Former Fed chairman Arthur Burns, who ran the central bank during the "?70s, has noted that even the GAO's circumscribed examinations of the Fed and potential Congressional meddling did hurt his efforts to fight soaring inflation.
To date, the Fed's balance sheet has doubled in size, by about $1 trillion, a sum that equates to the economy of Australia, an amount that is enough to buy the Toronto Stock Exchange or to buy every home foreclosed upon in 2007 and 2008.
And its independence is in question not because it has purchased sizable amounts of U.S. Treasurys to keep borrowing rates low. But also because the Fed has selectively chosen which companies survive and which don't, as it is now the world's largest junk investor, with an increasingly idiosyncratic balance sheet as it has taken on AIG and Bear Stearns assets to rescue those two companies while letting Lehman Brothers fail, and as it has taken on all sorts of mortgage-backed securities and other bonds.
Bunning was most condemning of the Fed. "You are the definition of moral hazard," he told Bernanke, adding that the Fed's handling of the bailout of AIG is "enough to send you back to Princeton."
The New York Federal Reserve, then run by Treasury Secretary Timothy Geithner, made 100% whole more than $60 billion in trades that banks had with AIG when it collapsed.
Those banks included Goldman Sachs (GS) and UBS, even though UBS had asked for a 2% haircut in the trades, even though those trades did not pose a systemic risk to the U.S. economy, and even though the Fed could have used its power and asked for a haircut of 60 cents on the dollar (as AIG itself was negotiating with these companies prior to the rescue.)
With its triple-A-rating, why did the U.S. have to settle these trades at all, given that it was backing AIG's balance sheet at the time?
In reply, Bernanke said a failure of AIG would have posed "enormous systemic risk," but that he had "no power" and "no leverage" to create substantial discounts on these AIG trades, noting that the most of the firms trading with AIG "were foreign," meaning, he had no supervisory powers over them.
The TARP inspector general, Neil Barofsky, has since issued a report that says the New York Fed actually put it to the eight banks sitting across from AIG, essentially asking, will you settle your trades for less than 100 cents on the dollar? All of the banks except UBS refused, and Bernanke said at his reconfirmation hearing that UBS actually only wanted a haircut of "2%."
Why didn't Bernanke and Geithner, who at other times played hardball with the banks, not hang tough when it came to taxpayers' money?
Sen. Dodd was baffled. "I don't understand that, you are the U.S. central banker," he said. Bernanke replied that he did not want to abuse his supervisory power, to which Dodd said caustically, "apparently not."
Next up: A New Take on Whether the Fed Creates Bubbles
Does the Federal Reserve have authority over Freddie Mac and Fannie Mae? Who has authority over the 'suitability' of mortgage loans and what criteria is suitable for lending money to borrowers where payments double, triple, quadruple in 2-5 years? And, why doesn't Bernanke just ask Dodd a few questions about the fallactious lending practices creating fictitious home ownership market.
With enoough money to buy up all the foreclosures in 2007 and 2008, hmmm? So isnt that what they did in buying all the toxic assets, so now they own all that property, just like a private bank does when it has a foreclosure on it's books. So who will the Federal reserve auction all that propety to in the World banking industry, I think I know.
Plato said Democracy would never work. The average voter is too stupid and apathetic to really research political candidates, thus, they are easily manipulated into electing corrupt politicians, and our economy is plundered close to collapse. A mensunion.org, is a possible solution. Abolish Congress, test out 7 million of the smartest Americans, and let them approve or reject the Senates spending bills.
This might seem a bit radical, and I know it's kinda far fetched... but what if the banking industry was run my free market principles? What if "the fed" didn't set interest rates, but banks had to negotiate for the rates on the money they got? What if the FDIC didn't insure banks? If folks were too nervous to save money in banks, let them try something else. Why give banks an advantage over other investments and saving strategies? Is it that nobody really believes in the free market?
We need to end the federal reserve. There is nothing else to it. The US economy is a debt based system. You cannot print paper based on nothing backed by almost nothing and not ruin the economy.
OMG! If you think the Federal Reserve is bad ... just give the federal government a chance at tweaking the economy through more regulation. After all there's no fraud or corruption there ... Is there? Maybe they can do for money and finance what they've done for banking through institutions like Fannie Mae and Freddie Mac [sic]. Bernanke should go away for the AIG fiasco alone. The federal government is the single poorest source of financial advice I can think of.
This column should be required reading for all in the current Administration. If they can connect the dots (after Ms. McDonald made it easy for them), maybe the Marxists in power can figure out why we in small businesses are not knocking doors down to go out and borrow in order to bet on expansions of our enterprises.
Congress is being disingenious. The Senators fault Bernake for the crisis which orginated in Congress. (Perfect regulation might prevent problems, but it's never perfect & often causes problems its own.) The Community Reinvestment Act played a huge role in causing the crisis. Meeting the requirements of that Act as interpreted necessitated the creation of creative loans. When the Administrated wanted to crack down on the risks of these loans, Barney Frank and others prevented that move.
END THE FED
blah blah blah and still the beat wll be the same, dog and pony show for us poor sheeple, i bet the fed audit will never happen
USA did great with 2 periods of 20 year National Banking Charters from 1791-1811 and from 1816-1836. Lincoln's reconstruction plan used the Banking Act 1867 to usher in a great period of America industrial development that was also modeled by Germany Russia, and Japan in the late 19th Century. The FED is illegal in that it is "above" government control and is now out of control with its failed Keynsian economics. Abolish the FED. Set up National Bank. Down with the British Empire!
Seems this is Congress calling the kettle black. They [the banking committee] was just as much to blame. If Government stayed out of capitalism and the free market, these entities would have failed and some one would have swooped it to pick the carcass as it should have been. Would it have been painful? You bet. Would we have come through it? Probably. Would the problems we have today be lingering? Probably not because the free market is self correcting.
This is a classic case of the blind leading the blind. Our Senate,in full scale collapse, wallops the only technical expert in the room. The tables need to be turned. Bernanke should be sitting in the high position looking his nose at the real cause for our economic collapse. Let's break the smoke screen. Recognize that our House and Senate don't have a clue what they're doing and start the replacement process on both sides of the isle. The sooner the better!
I'm not surprised that Bernanke is taking this harsh criticism from Senator Dodds and other considering that's been Bernankes job description as of late, take criticism. Look, this guy knows what he's doing. He has a Ph.D in Economics from MIT, he used to be a Professor at Princeton and had near perfect SAT's. He's smart but he's going to drag us out of the economic depressesion. Consumers need to start spending more, and putting more money in our econonmy, plain and simple folks, Economics 101.
The author and the senators fail to connect the dots that it is the very existence of a central bank - a government sponsored banking cartel - that is the problem itself. The Fed was granted the power to centrally plan interest rates, and our economies have been a disaster ever since. The dollar is no longer redeemable in gold, it has lost 95% of its value since 1913, the Fed has facilitated massive debt and war financing, and it is THE cause of economic booms and busts.
Read Full Article »