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Karen Bleier, AFP / Getty Images Time's Man of the Year helped start 2010 with a roaring stock market rally. But his recent statements should strike fear: Nomi Prins on how the Fed boss failed to learn from 2009.
Now Ben Bernanke wants better regulation?
The Fed chairman’s speech to the American Economic Association Sunday could be viewed several ways: Ironically, because he was involved in the monetary policies over much of the past decade that stoked the lending fires, yet failed to administer appropriate regulatory constraints over his domain. Or hopefully, because he appeared to be looking forward, with a mind toward what we might be facing in 2010.
The markets were certainly enthused about it, with the Dow starting the year up 155.15 points, or 1.49 percent, in part because his defense of accommodative policy was interpreted as a sign that rates will stay low and money will remain cheap.
The flip side of Bernanke’s conclusion—we need stronger regulation to avoid future crises—is that the Fed’s monetary policy was just fine.
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.
For Bernanke to blame weak regulation for the pyramid of bank-concocted, over-leveraged, high fee-producing assets—real loans mixed with a lot of price-inflating hype—is like a Super Bowl coach blaming coaching in general for the failure of his team to win the Lombardi Trophy. There were $1.4 trillion of subprime loans issued between 2002 and 2007, which became $14 trillion worth of mostly toxic assets, which were used as collateral by the biggest banks to borrow much more.
• Charlie Gasparino: 5 Economic Predictions to Bank On It would be more honest of Bernanke to put blame where it’s due. Banks did not merely lend predatorily—they pushed, scooped up, repackaged, and resold loans to a frenzied degree. The repackaging of distressed assets, formerly known as “toxic,” is again a top growth area for Wall Street. Meanwhile, risk at the major banks has increased alongside trading revenues, while consumer-oriented activities continue racking up losses. All this Bernanke missed in his speech and by extension, his future strategy.
Instead, he launched into a lengthy academic discussion of the Taylor rule, an equation used to evaluate how much rates should be lowered or raised to maintain a certain inflation target. Defending Fed rate policy, he advocated the “alternative” Taylor rule that considers forecasted rather than current information to determine rates, which he noted was applied properly.
More slides followed that addressed the housing bubble. The upshot we already know—the most rapid house-price gains were in 2004 and 2005. But, Bernanke insisted, if monetary policy was an important source of price appreciation in the U.S., then it would have also propped up home prices in other countries, which it did. Consequently, he concluded that accommodative policy (low rates) “does not appear to have been inappropriate,” and that “the magnitude of house-price gains seems too large to be readily explainable by the stance of monetary policy alone.”
In other words, the Fed did everything right.
Bernanke discussed how various kinds of mortgage loans, from adjustable-rate to no-documentation ones, exacerbated problems. This was true, but used to further support his argument that “stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been…more effective… than a general increase in interest rates.”
And in case we seek to cast future blame, he warned “monetary policy can be problematic to pop asset bubbles,” that constraining the bubble in 2003 and 2004 could ”have seriously weakened the economy at just the time when the recovery from the previous recession was becoming established.”
In other words, the Fed did everything right—again.
Bernanke has this habit of expounding academic garble to deflect attention from the Fed’s regulatory responsibility for monitoring the banking system. It’s a safer tact, especially when the final Senate vote is still not yet cast with respect to his re-confirmation.
Sure, keeping rates low helps capital flow. But banks first lent cheap capital at exorbitant rates—to subprime borrowers and credit-card users alike—putting the customer economy at a distinct disadvantage to the financial-system players. And today, they are using it for risky trading purposes. Lesson not learned. Problem not solved.
While Time magazine and others gave Bernanke credit for supposedly saving the world from a second Great Depression, all he really did (alongside Geithner and former Treasury Secretary Hank Paulson) was feed capital to a capital-starved banking system, hoping it would find its way to the population, with no plan for stabilizing ongoing credit problems, including rising bankruptcies and foreclosures that lie at the economy’s foundation.
If you build an asset from a loan that defaults, the asset has less value. The Fed merely subsidized that declining value, on Wall Street’s behalf. It did nothing to fix the loans themselves. Still hasn’t. Yet this point—the $6 trillion of Fed loan facilities and guarantees still deployed to buoy Wall Street—wasn’t highlighted in the speech.
Though he spent a lot of time defending past actions, Bernanke spent little on addressing future solutions. He didn’t talk about fixing loans that are still hurting. Or reducing the complexity of the products engineered from these loans. He didn’t talk about reconstructing the banking landscape, a la Glass-Steagall—by separating banks into those that deal primarily with consumer deposits and loans vs. those creating systemic risk.
Certainly, the Fed should not have raised rates or restricted credit during the crisis. Nor should it now. But, it should ensure that credit flows beyond Wall Street’s doors, which hasn’t happened. Hyper-funding the banks wasn’t the only way to stave off doom. In fact, the Fed could have promoted injecting capital directly into mortgages instead, which would have done the trick more cheaply and fairly.
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.
The Fed is angling to be the most powerful systemic regulator, which is why Bernanke stated that it will go beyond monitoring each firm individually to being “attentive to the stability of the financial system as a whole.” It sounds good, but not if the Fed keeps ignoring problems at individual firms, and systemically.
Once the Senate confirms him, Bernanke will have to do more than just talk about regulation—he will have to start regulating. Otherwise, all these missed problems will be a horrific legacy, and an expensive lesson not learned for the rest of us.
Nomi Prins is author of It Takes a Pillage: Behind the Bonuses, Bailouts, and Backroom Deals from Washington to Wall Street (Wiley). Before becoming a journalist, she worked on Wall Street as a managing director at Goldman Sachs, and running the international analytics group at Bear Stearns in London.
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I just want to thank you for articulating in one sentence what many of us are feeling about this entire crisis: "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." It is a man-made disaster. It was and continues to be directly created by a few irresponsible, narcissistic execs at enormous finance institutions and it seems like business as usual, pretty much. All this talk about 'getting back to...'. Yuh, back to the false economy that got us into this? Let's hope that is not allowed to happen.
Nomi Prins is a past managing director of Goldman Sacs and as such she know that she is deliberately misleading the public. Bernanke was at Princeton until Feb., 2006 and 3 years does not comprise a decade. When Bernanke took over the, Goldman Sacs et al had paid of the U S Senate who failed to legislate any regulations for the concocted, over-leveraged high fee producing assets. As Nomi Prins well knows by 2006, the crisis had become unavoidable and even divisions of AIG quit selling these instruments as they saw the writing on the wall. So, while you are thanking the author, perhaps you would like to pen a note of thanks to her former employers, Citi, BOA etc. Ask yourself, why interest groups are trying to place the blame on Bernanke who was the head of the economics departement at Princeton while they were concocting.
Thank you for the excellent article.Nomi is showing that those persons in the federal reserve are really ignorant. Anybody can predict the USA's future.With 98% of all USA politicians being on the take ( being crooks ) e,g; the majority of USA senators are whores with only one skill ---> the expertise to lick large corporations asses. I had been predicting that the whole USA is going down the toilet for a long time.I was wrong about the rate of speed ( of going down the toilet ) the rate of speed is a lot faster than what I estimated. To fix this problems the first step should be to prosecute the crooks in the USA government.But,since nobody is prosecuting these USA government crooks ( e,g; senators ). We need to ask the chinese government to come to Washington D.C. and start kicking ass.The chinese have more political ethics and they seem to be able to prosecute the crooks in their own government.
Um, yeah, by cutting off their heads. How very French of you.
My great-grandmother often said that people used foul language because they lacked the vocabulary to do other wise. To avoid continued public embarrassment I recommend that you purchase a thesaurus and refer to it often.
I state over and over I am an independent candidate for president of United States. This is my fix. Our economy requires an innovative renewal. This is about that - about transferring the private wealth of interest payments from the private banksters to the public good, in such a way to benefit the whole country. Upon election, here is my program. We used to say, what's good for General Motors was good for America. But today, as America goes, so might go the health of our whole planet. We need to refresh our "cap id a list" structures, and renew our entrepreneurial spirit. Obama is not doing that. In Oslo, when Obama stated, accepting the Peace Prize, "We will not eradicate violent conflict in our lifetimes," he was endorsing the continuing ad infinitum Military Industrial Procurement Complex which we cannot afford, with or without true bankster reform. Everything hangs in the balance of sense. First, we, the people, through our government, must purchase every mortgage in USA, the good, the bad, and the ugly. Ugly mortgages are those known as "tock sick" because the clock is ticking on foreclosures affecting the value of whole neighborhoods. These residential mortgages can be purchased with Mortgage Savings Bonds. The Mortgage Savings Bonds is an original innovative financial instrument. Wed are not conducting the buy out with inflationary cold cash, hot off the presses, which in fact we don't have, but Obama's administration insists on printing. The Mortgage Savings Bonds couldn't be cashed until the mortgages are paid, but they could be sold or traded by their holders, the banksters, on the open market. Savings Bonds are backed by the good faith of the American people; in this case, real properties on which these proposed innovative instruments, Mortgage Savings Bonds, will be written. We can pay 85 cents on the dollar for the good, 70 cents for the bad, and 55 cents for the ugly; millions of mortgages, refinanced with thirty-year fixed rates, the interest spread, according to the credit worthiness of the mortgagee, running from 3% for triple A, to 7% for sub-prime, late payers rated deadbeat. This proposed buyout is a reasonable, yes we can do, beneficial refinance program! the giant too big to fail banksters will wet their pants because all of their rip off swap shenanigans are grounded in all the millions of mortgages they hold that by Executive Order we, the people are purchasing with innovative Mortgage Savings Bonds. Retooling these millions of mortgages, a giant job, can be accomplished with a fail-safe do-it-your self, online program. Those without computer literacy can get their numbers entered by income tax preparers, their fee, Uncle Sam guaranteed. Every homeowner benefits from a restructured fixed 30 years mortgage. Every home owning family will have a lower more reasonable mortgage payment with more money in pocket to improve the quality of their life. The whole world's economy will settle into non-inflationary growth from this mortgage solution. We can tack a non-interest bearing 2nd mortgage on sub-prime homes that swapped and sold for twice their value, (tock sick) toxic still, after a 60 percent whack, so people can remain in their sub-prime dream, pay down their debt, and eventually, as prices inch up, their mortgage drawn down, see their liens paid off fair and square, with their equity left intact. This is a healthy way to stabilize sub-prime neighborhoods. A foreclosed house devalues the street. After our Louisiana styled repurchase, the mortgages on every house in America will be divided amongst bank branches in the same zip codes, for servicing. The ex-mortgage holder banks are compensated for collecting our mortgage payments, on behalf of we, the people, the Mortgage Savings Bond backers. We let the banks hold 'our' money, twelve payments worth, before they have to begin handing over our ducats to Washington. With a year of mortgage money, banks at the branch level will be flush with liquidity for loans, replacing money central management blew on swap speculations. Branches can provide capital to all the capital hungry businesses in their zip codes the old fashioned way, after a visit to the businesses premise. There will be interest on the Mortgage Savings Bonds with which all the home mortgages were purchased. There will be interest on 'our' money, which we are allowing the banks to borrow from us expressly to loan out to all the businesses in their neighborhoods that require capital, so interest we accrue from our trillion-dollar mortgage purchase is washed. Our Treasury Secretary misstated on This Week, With George Stephanopoulos, "A core part of our plan involves making sure banks have enough capital to provide the lending we are going [slur] need to get recovery back on track" He was wrong. The banks used our bailout money to purchase other banks instead of loaning the money to capital hungry businesses! Now to the interest on these millions of mortgages: The interest goes to Washington every month! The monthly interest on all the home mortgages in USA, could total 300 billion dollars. All the income tax collected from taxpayers, their taxable earnings up to 125 grand's worth, might also total 300 billion dollars per month. The interest on all our home mortgages can replace our income tax, up to the first 125 thousand dollars worth of taxable income! Someone who rents has their income tax dollars in their own pocket to do with as they please, pay down credit card debt, save up for a house, a car, the kid's tuition, pizza. Keeping your money is a politic concept all the people can endorse as long as the government is able to operate and deliver services. A working homeowner is freed from paying income tax. The interest on his mortgage goes for our public works, replacing the tax on his hands. Washington, DC has operating capital. We keep what is ours. Apply this same principal to commercial mortgages. The mortgages are seized, not the property. Mortgage Savings Bonds are a great rock solid investment. This buyout is fabulous for commercial mortgage holders because so many are facing default. The advantage: their property is purchased, the mortgage in the Government's hands, via Mortgage Savings Bonds, letting the owners off the hook, their option, retain property management, which earns them money. The principal goes toward retiring the Mortgage Saving Bonds, the interest to cover the rising cost of living, example Medicare, so life is good for all. The above program provides permanent income tax relief for our citizenry, toxic asset relief for bogus banks, and effective capital replenishment for the government. With this mortgage innovation in place, other countries will be lining up to invest in America. We want that. 180 million taxpayers will vote for these recession stuffing relief measures in a heartbeat because every taxpayer benefits. President Obama should read this essay. His approach feeds the bureaucracies that fed his campaign by printing trillions of dollars in future debt, Obama's risk: a stick of chewing gum will cost our gum chewing electorate one dollar plus tax before the next election. This innovative program bypasses bureaucracies, the only ego inflated creatures on planet earth that both feed on themselves, and multiply. Can you suck on your toe and create two of you? Bureaucracies can and do. Bureaucracies are rigid, appearing unsinkable, but they must be "sliminated" for planet health. We need to rearrange how governments generate money so the funds are available to cleanly reenergize our good ship Mother "Urf." I am an independent candidate for president. The above is my mortgage program. (Insert Law and Order drum beat). michaelslevinson.com is the official web site of the Michael Stephen Levinson independent campaign for United States president and the page out of which the Independent Lev Party will become electoral reality. michaelslevinson.com
Mike, Why not go with Jon Stewart's idea of giving everyone with a mortgage the funds to just pay off their mortgage and be done with it?
Nope. We pay off every mortgage, rewrite them at a better rate, see to it money is availbale in the zip codes where the houses are, to loan out to small business, and use the interest on all the mortgages to half pay off the national debt, the other half to replace the withholding tax. This way we straighten out our balance sheet, and eliminate a regressive tax. I like Jon Stewart. But with his idea evryone would sign up for an equity loan and the bubble starts all over again. (Besides, my idea is worth a Nobel Prize). michaelslevinson.com
seriously, you need to stop.
The so-called economic "recovery" is like Sisyphus. Keep thinking we can push that boulder up that hill . . . as the debt mounts, and we continue to spend money we don't have . . . as we near the top . . . that boulder just rolls back down the hill again, only this time in the form of the next crisis . . . the collapse of Commercial Real Estate. Spending money we do NOT have. Truly, there is NO common sense in Government, and who cannot wait for them to control our healthcare ?
Beautifully and truthfully stated, sophia5
The metaphor was lovely, but the hyperbolic mis-statement of fact was not. There is no evidence that the government has any plans to "control our healthcare." The only plan being attempted is a plan to control health care INSURANCE. We are all entitled to our own opinion, but we are not entitled to our own "facts".
Dear Friends, Perhaps necessary change is in the offing. As currently structured, the global economy appears not to be working well and could be fast approaching a point in human history when the manmade "economic colossus" becomes too big not to fail because of its unsustainability in the finite and frangible world we inhabit. Although many of you appear to be correct in so much of what you report, I have held onto hope for more, much more intellectual honesty, moral courage and bold action from leaders in my not-so-great generation as a way of responding ably to the global challenges that have emerged in my lifetime. Perhaps there is still time available to reasonably acknowledge and sensibly address the converging global challenges that loom before humanity now. At least one of these ominous global challenges, the human overpopulation of Earth, is clearly visible for all to see if not for the willful blindness, hysterical deafness and elective mutism of many too many leaders and experts. Their disregard of the best available science as well as their specious ideological presumptions, the ones derived from the culturally extolled virtue of unbridled greed on one hand and the endless global growth of human production, consumption and propagation activities on the other, appear to be directing the children down a short, patently unsustainable "primrose path" to an unimaginable confrontation with some sort of colossal ecological wreckage, I suppose. Thanks again to all for speaking out loudly and clearly. Sincerely, Steve
The homogenous populations in the developed countries aren't growing, many are decreasing. It's ironic that the more kids people can afford, the fewer they have! The answer is not some global leadership, it's economic advancement. China and India are both working on controlling their populations now that they're becoming economic powers. Hopefully, Africa and other Third World areas will be next.
Why is this man still here.
Speaking metaphorically, I understand Ms. Prins to be saying that the economy needs a belt and suspenders and if we don't talk about both, we shouldn't talk about either? Under Ms. Prins' approach it seems unlikely that we will end up getting either one.
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