Bernanke And The Lobbies: Confidence Illusion

Ben Bernanke is opposed to the creation of a new Consumer Financial Protection Agency.  Disregarding his organization’s disappointing track record in this regard, he claims that the Fed can handle this issue perfectly well going forward.

He thus adds his voice to the cacophony of financial sector lobbyists favoring the status quo.

At the same time, Bernanke and the lobbyists talk about the importance of consumer confidence for the recovery.  But how can you expect anyone to have confidence enough to spend and borrow when so many people have been so badly treated by the financial sector in recent years?

What happens when there is a scare regarding food contamination in the US or globally?  People buy less of that kind of food until the government assures them that (1) we know understand the cause of the problem, and (2) it will not happen again.

Word has got around that many financial products are not safe – as well as the idea that the debt levels encouraged by the finance industry are not always healthy.  Consumers are going to be more careful and, if there is no way to reassure them fully, they may be excessively careful.

In addition, we have learned that allowing financial firms to abuse consumers is very bad for our overall financial system health – leading directly to the current crisis, loss of jobs, and still rising unemployment; all of this further undermines confidence of all kinds.  If the financial system can turn nasty or even nastier, we should all carry more “precautionary” savings.

There’s no question that some financial firms would like to return to abusive practices, figuring they can once again make money and then move on.  Yet serious financial sector firms would prefer to clean up their acts and work with properly informed customers.  These firms are making a bad mistake in opposing the CFPA.

If the CFPA does not make it through Congress – and right now it seems a toss-up – this will just feed the backlash against finance more generally, e.g., in the 2010 midterm elections and beyond.  There is no way that is good for overall confidence.  It just doesn’t make sense for well-run financial firms to go down this road.

Industry thought leaders,  the American Bankers’ Association, the Financial Services Roundtable, and other interest groups should switch their positions and support the CFPA – if they really want consumer confidence in financial products and more generally to return.

The Fed, it seems, just wants to defend its turf.  This is unfortunate, particularly given its ambition to become even more responsible for the safety and soundness of the entire financial system.  How can our financial system ever be sound when so many elements prey on so many consumers’ confidence?

By Simon Johnson

(The material after the break is an excerpt from my Economix column on NYT.com this morning. )

 

 

50 responses to “Bernanke And The Lobbies: Confidence Illusion

  1. Nice thought, but my trust in any financial company is completely gone. It’s time for a new economic paradigm. I’m not looking to government or corporations anymore. Too much corruption and fraud.

    There are lots of other people looking for new approaches. A bit of searching on the net will yield lots of ideas from community gardens (“urban agriculture”) to sharing household items (the Sharing Solution, for example).

    It’s time to figure out what we really need (no more mountains of shiny trinkets, please), get together with the people around us, and learn how to do for ourselves. It’s a lot more fun and healthier. You can start with small steps, like talking to your neighbours, if you don’t already.

    We decided that we’d been suckered by the IRA and 401k con. Luckily, we were able get our money out, and we will buy a house with cash when the price is right. We don’t believe that retirement will be based on paying other people money to take care of us.

    As far as debt is concerned, what is “excessively careful”? If you have more than a trivial amount of debt, you are in serious trouble should you lose your job. This is a sad lesson that lots of people are learning right now. Debt is slavery.

  2. The Fed sides with the banks politically. Also, the Fed is beyond politics–for the good of our economy. Sums things up pretty nicely.

  3. Alan McConnell

    Unless I am very much mistaken, the Fed
    consists of the “Temple”(Greider-speak) in
    D.C. and twelve regional banks located throughout
    the United States. The present Vice-Chair of the
    Fed, Donald Kohn, is quoted in Wikipedia as saying:

    “Agrarian and progressive interests, led by William Jennings Bryan, favored a central bank under public, rather than banker, control. But the vast majority of the nation’s bankers, concerned about government intervention in the banking business, opposed a central bank structure directed by political appointees.

    “The legislation that Congress ultimately adopted in 1913 reflected a hard-fought battle to balance these two competing views and created the hybrid public-private, centralized-decentralized structure that we have today.”

    So the Fed is partly owned by banks, yet is
    supposed to regulate banks? This scheme is sort
    of reminiscent of Goldman Sachs alumni offing
    Lehman Bros and Bear Stearns. There are ancient
    proverbs involving foxes and hen houses to cover
    this situation.

    Best wishes,

    Alan

  4. People and institutions have short memories when it comes to cash. Along the lines of — no reason to fix the roof when it isn’t raining.

  5. Prof. Johnson,

    In your opinion, who and what are the top 5 or 10 most influential persons and organizations in the world. Isaiah Berlin doesn’t count. It would be interesting to see what Baseline readers think as well.

  6. It would be insane if every insurance company could sell any homeowners policy they liked, or every automobile policy they liked. Their lawyers would write a contract with so many weasel words that they never had to pay a claim! That’s why we have states insurance commissions.

    With financial products they can write any contract they like, and it is insane. They not only screw all their consumers, but they have screwed one another! That’s why we should all support a Consumer Financial Protection Agency like the one struggling in congress to get past all the financial lobbyists.

  7. Brody to the mayor in Jaws, after yet another person is killed:

    “These people think you want the beaches open!”

    Are consumers finally realizing this about the banks and the government? That they are our enemies and mean us only harm?

    Harold Meyerson’s latest column discusses the health care disaster, how the political system has nothing left but pure psychopathic special interest entrenchment and obstruction.

    He asks the question, By now is America simply incapable of solving its problems? Does America as a society now perish once and for all?

    That question is certainly nothing new to those of us concerned with climate change.

    And Simon’s post here simply asks the same thing: is the project “civilization” now finished?

    All the evidence, unfortunately, says yes.

  8. The very idea that the Fed could be interested in protecting consumers is laughable. Fed’s people spend their time paling around with the financial terrorists called bankers.

    Excuse me while I fetch the air bag.

  9. “There’s no question that some financial firms would like to return to abusive practices”

    Would like to?

    Make that STILL are. Just today I got a postcard offer for ING for a 4.5% “MORTGAGE WITHOUT SURPRISES” (caps original), that “stacks up against the average 30-year fixed rate mortgage [of 5.31%]“. No other indication of what awaits in terms of “find print” is given on the postcard.

    What is this fantastic 4.5% fixed rate “MORTGAGE WITHOUT SURPRISES”?

    It’s a fixed rate loan that converts to a VARIABLE RATE after 5 years!

    I suppose it’s technically not a surprise if you’re paying attention, but that sounds like a “teaser rate” if I’ve ever seen one. Actually that’s being generous saying it’s “technically not a surprise” because their web site only says on the front page “You get a low 5-year fixed rate with payments that are based on repaying over 30 years.” It does not explicitly say what happens after 5 years even if you follow the “Learn more” link or even the “Rates and Closing Costs” link.

    After phoning them it is, and they said this directly, a “5-1 ARM”, meaning after 5 years it becomes an ARM following LIBOR.

    Of course given that the Fed rate is 0% and a likely bet to go up in 5 years, that’s a pretty good deal for ING and certainly a lot less attractive for the home buyer.

    So, it isn’t a case that we’ll need to protect against “deceptive lending practices” at some future date. We need to do it TODAY.

    If you want to check it out yourself, go here:

    http://home.ingdirect.com/products/products.asp?s=EZOHP&AB=HP_EZO_B

  10. Obama WILL reappoint Bernanke and make Wall Street happy beyond belief. Obama-Geithner-Bernanke are and will be OWNED by Wall Stree. How’s that for “change you can believe in?” Wall Street has something over or “on” Obama. When you elect amateurs, you get amateur shows. The stock market went up 700 points within an HOUR of word leaking that Obama would be appointing Geithner Secretary of the Treasury.

  11. Maybe Bernanke is just trying to win Wall Street’s confidence in order to keep his job at the Fed.

  12. Lavrenti Beria

    And what’s even more laughable, Dr. Frankie, is that anyone here or elsewhere would believe that some commission brought into being by the scum that make ownership of our government by these terrorists possible might actually achieve a result any more meaningful than one brought about by the Fed. Simon’s pitiful wimpering part of the problem, we’re now long past hope for justice through parliamentary devices.

  13. I would be much more confident if I knew that the Fed had actually audited the banks instead of giving them a pass.

    Unfortunately, the only ‘observable’ results highlight the collusion between Fed and the Financial sector.

    The lack of finesse is appalling. A good fraud should remain hidden.

  14. thesevenscholars

    When the crisis hit, many were sure that it signaled the end to the Anglo-American system of capitalism where the finance industry was of disproportionate importance. Everyone believed this because it just did not make sense for what many consider to be a non-productive industry to be a center piece for the economy.

    Now it seems the finance-industrial complex is too entrenched and unwilling to give up any power. The free market would have corrected the finance industry like any other excess. In the long run we would all be better if the government had let these firms fail.

  15. Daniel Habtemariam

    Perhaps I’m missing something here…

    But if the point is to have some sort of systemic risk regulator and (secondary to that) some entity to protect investors against unreasonable hidden risks in the financial products they purchase, then what difference does it make if it’s the Federal Reserve doing it or some other newly commissioned independent agency doing it?

    Too many people have this cartoonish view of the Fed as a gang of nefarious oligarchs. The oligarchs are JPMorgan (Jamie Dimon), Bank of America (Ken Lewis), Goldman Sachs, and their lot. The Presidents and Board of Governors at the Fed (including and especially Bernanke) are some of the most independent and nerdy policy wonks around. Bernanke, Geithner, and Summers aren’t your enemy, here. They may be wrong on things (as Simon Johnson has done a fine job of arguing), but they’re not the oligarchs here. They’re actually a lot smarter and a lot more sympathetic than you may think.

  16. Alan McConnell

    Mr Habtemariam writes: “The Presidents and Board of Governors at the Fed (including and especially Bernanke) are some of the most independent and nerdy policy wonks around. Bernanke, Geithner, and Summers aren’t your enemy, here. They may be wrong on things (as Simon Johnson has done a fine job of arguing), but they’re not the oligarchs here. They’re actually a lot smarter and a lot more sympathetic than you may think.”

    This is interesting to learn! Many of us here don’t
    have this touching faith. Have you any evidence to
    support your above claim?

    Best wishes,

    Alan McConnell, in Silver Spring

  17. The Federal Reserve ownership/control structure is very complex. Here is an article on it. The author is strongly libertarian, but pretty sharp nonetheless. :)

    http://www.libertyunbound.com/archive/2004_10/woolsey-fed.html

    The upshot is that the individuals who run the Federal Reserve at this moment were pretty much installed by politicians over the last 14+ years, and work closely with bankers (who, technically, own the bank, even though their ability to profit from that ownership is highly restricted).

    But you are correct that the Fed, by design, has a pro-banker bias in its control structure (although most of the control still resides ultimately with Congress, witha 14 year lag time built in)… The economic argument for this is that it provides a commitment structure to avoid monetization of federal spending, and in the long run keeps interest rates low (via the Fisher Curve).

    We can argue about the competence of the particular individuals running the Fed over the last 8-12 months, but there is a legitimate purpose for the Fed’s structure.

    HOWEVER, it makes ZERO sense to give an agency that is BY DESIGN favorable to the banks the chief responsibility for regulating their consumer products. There is no plausible “commitment” benefit.

    So while you may be overstating the case slightly, you are essentially correct. And SJ is quite correct in opposing Bernanke’s empire-building.

  18. Yes, but the reason it jumped 700 points was because everyone was so unbelievably relieved that he had finally appoints SOMEONE. Remember, this was when the dam was breaking and no one had the fortitude to step up to the plate and plug the crack.

    (how’s that for mixed metaphors?)

    Bernanke has been dissappointingly slow to act, and overly concerned with inflation even through several deflationary months. He’s also been a strong-dollar-wolf in anti-depression-scholar clothing.

    But, Bernanke DID eventually act. He hasn’t been terrible, and we don’t know what happened behind the scenes, but Obama should think twice about re-appointing him. If he continues to pursue a strong-dollar policy to keep inflation <2%, Obama WILL end up owning this recession, and will pay for it in 2010 and 2012.

  19. Interesting responses on a great piece. The Fed has some seriously fatal flaws – most of which the culture of corporate greed and American earn however, there are some serious reasons why it is in place. It even hurts to say that!

  20. Like almost all “progressive” era reforms, the Federal Reserve Act was crafted by the industy most affected by its creation. Read Kolko’s book(s) on this subject. Citigroup is an heir to a banking firm that has now been bailed out THREE times by the Fed, once after David Rockefeller lent money very foolishly to Latin American countries. Guess which famous American family was up to their hips in the creation of the Fed? Let me give you a clue…his last name was Aldrich…as in Senator Aldrich. What was Nelson Rockefeller’s middle name? Aldrich… Aldrich…Aldrich, any one?

  21. Patrice Ayme

    The Fed failed the People (People as “We The People” in the Constitution). And on a gigantic scale. Why to keep on trusting the butcher, when we know it is not a doctor?

    Patrice Ayme

  22. Daniel Habtemariam

    Just look at what they write. Janet Yellen is a good example. Or read in detail (ie don’t watch on television) Ben Bernanke’s written testimonies before Congress.

    I’m not saying the Fed has always been right. I’m just saying they’ve been as close to objective and nonpartisan and (as a result) trustworthy an institution as we’re going to get to do this. The new Consumer Financial Products Safety Commission would, on its surface, be another Federal Reserve charged with a different task.

    Even Simon Johnson has repeatedly given Bernanke’s (and often Geithner’s) plans the benefit of doubt and surgically attacks specific parts of it from an solidly academic point of view, often drawing on his experience at the World Bank. What Johnson never does is cast aspersions on the intellectual integrity or motives of the Fed (as many of the commenters on this site seem to do).

    You have to, at some baseline level, give the politician the benefit of the doubt. The onus isn’t on one to prove someone’s not corrupt. The onus is on the person believing that they are corrupt.

    I may certainly be wrong, and after carefully reading your post, I suppose the answer is no, I don’t really have any evidence to support my claim.

    Hello from Columbia Maryand, by the way.

  23. Actually, the illusion is that there is some independent metric called “confidence” that needs to be maintained at all costs.

    When the Kursk sank, Putin refused to ask NATO for help with an underwater rescue, even when it initially seemed the crew had survived. It was necessary to maintain confidence in the Russian Navy. Of course, the entire world – and certainly the other professional navies – took another lesson: the Russian Navy (a) had no underwater recovery capability; (b) was too proud to admit it; (c) was so distracted by pride they didn’t even ask for help to study the NATO reaction tactics.

    Any thought that the organs of the US government were in complete control should have gone out the window in mid-September, when we jumped all over the place by the seat of our pants trying to contain the crisis. One minute Lehman was failing, the next we were guaranteeing money market accounts. Announcing a variant of PPIP seems the surest sign that this variant will not happen.

    In the name of “confidence in the financial markets,” the administration is pursuing “confidence in the particular government officials who run large agencies.” Since these are the precise people who have demonstrated no ability to articulate clear rules going forward and are unwilling even to engage those (Volker, Stiglitz, Warren, some guy named Johnson) who have, there is no reason to believe it will create a better financial system in the future.

  24. It comes down to Obama – again. If the White House truly wants a Consumer Financial Protection Agency, it gets it. That means calling out the banking industry in forceful public remarks that, this time, come across as sincere. That means arm-twisting the financial giants (e.g. Jaime Dimon) who parade in and out of the Oval Office. It means leaning on Ben Bernanke, privately and – if necessary – publicly. That means talking tough to relevant folks in Congress.

    In other words, that means acting as a responsible President of the American people.

    cheers,
    Michael Brenner

  25. Alan McConnell

    Mr Habremariam, _Everybody_ talks real good in
    public. But I follow the old saw: “Follow the
    money”. And my point remains the Fed is owned,
    and presumably operated, by the banking industry
    all over the country.

    So you are just “up the road”! May I ask: are
    you, or your ancestors, from the Horn of Africa?
    I spent the academic year ’97-98 teaching math
    at the University of Asmara.

    Best wishes, and “put not your trust in princes”,
    nor yet bankers!

    Best wishes,

    Alan McConnell, in Silver Spring

  26. Simon, what is Larry Summers’ position on the CFPA? I’m NOT a Larry Summers fan, but I would be curious to know his position on this issue.

    Also, one question I have that I wish someone would answer: Is there any chance a “dark horse” candidate like Alan Blinder could be considered for Federal Reserve Chairman? I’ve always been an Alan Blinder fan and I want to know how he got lost in the mix. He got tired of Washington DC politics?? Or he cares too much about main street?? How could a great economist like Blinder not be on the short-list for Fed Chairman??

  27. I agree with Mr. Brenner,

    GENERALLY I am a supporter of President Obama. But President Obama needs to get out and swing the bat on these issues. He can’t just say things he wants on the phone and wait for Congress to do it. That’s absentee leadership, and we had that enough that the 8 years before. CHANGE is getting out and speaking for the values and beliefs you have. If you don’t get out and speak strongly, people will assume you just don’t care enough.

  28. Now Alan, Don’t you know that as long as they can pay hefty bonuses, the financial sector business are mor ethen happy to police themselves? They are all vested in the long term growth and survival of the economy afterall.

  29. “It just doesn’t make sense for well-run financial firms to go down this road.”

    Well. These were and are not well-run?

    Ultimately, the mistake is one level up. Not only do Bernanke and his ilk have to restore citizen confidence in the financial industry, its regulators, and its “sages”, they have to do so by putting money into the hands of said citizens, by taking it away from the uber-citizens – the wealthy for whom casting a vote is of no importance, as they prefer to participate in the democratic process primarily – or exclusively – by casting money.

  30. And no one seems to want to measure confidence in government, except for approval ratings for the President and Congress.

    That said, if you want to knock “the government” can you be a little more specific? Are you knocking the political appointees or the career civil servants. Makes a huge difference.

  31. Daniel Habtemariam

    Holy moley! Mr. McConnell, or presumably Professor McConnell, I am indeed from Eritrea. I was raised (mostly) in suburban Maryland, though, so you likely know more about my ancestry than I do.

    And I’ll admit. There’s a lot I don’t understand about the Fed, like the point you alluded about them being composed of the major banks in the country. But I recall when interest rates were super high in 80s and when they were super low in 90s, and I can’t help but think that at least one of those must be bad for the banking industry, and a more self-serving institution wouldn’t have behaved that way. Also, so many of the economists whom I’ve come to respect (Krugman, DeLong, Stiglitz, Volcker, Haas, Romer, Feldstein, Bernstein, Johnson) are generally neutral on the Fed.

    In my opinion, following the money trail is a necessary but not sufficient step in casting shadows. People all too often have (again, in my opinion) overly simplistic arguments to the thoughtful, carefully articulated posts Simon Johnson puts here. But then again, what do I know really?

    Best,
    Daniel Habtemariam, in Columbia MD

  32. Since we’re getting personal here…

    Summers is a bonafide super-smart guy, but calling him sympathetic is going overboard. He’s the archetype for academic elitism and disdain for lesser beings. And lesser beings are… pretty much everyone.

    Bernanke is smart, and sympathetic. And probably honest and good intentioned. He’s the best of the trio. But Fed policy from early October through late February was disastrous. Many people have tried to understand how Bernanke – of all people – could have been so inadequate in reacting to the onslaught of deflation (which both the stock markets and consumers correctly anticipated), and could have delayed so long in committing to QE policies that he had (in his academic writings) strongly signalled would be employed in precisely that sort of environment. My best guess is that Bernanke was painting a unified face on a highly fractious Fed (which is still dominated by appointments made under Bush II and/or approved by a neo-Con Congress). The other explanations are less flattering, but I’m still giving him the benefit of the doubt.

    And Geithner… *sigh* Sympathetic? Possibly, but by many accounts he’s spent much of his life desperately trying to become part of the club, and yet still gets treated like an outsider. Smart?

    http://www.businessinsider.com/henry-blodget-tim-geithner-what-part-of-this-chart-dont-you-understand-2009-3

    http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=22886

    I could link hundreds of articles… But even his masters haven’t been happy with his performance. The day after his speech tanked the markets earlier this year, the bosses of wall street allegedly called a meeting to let their boy know how upset they were, and gave him an earful.

    Maybe Geithner will turn out to be a decent secretary in 3 or 4 more years, but his on-the-job-training has been very costly. But I guess I’d rather have Geithner than Evil Hank.

    So how is that for throwing stones from the shadows?

  33. “Word has got around that many financial products are not safe – as well as the idea that the debt levels encouraged by the finance industry are not always healthy. Consumers are going to be more careful and, if there is no way to reassure them fully, they may be excessively careful.”

    What is excessively careful? Not taking out vacation loans? Paying off their credit cards every month?

    “In addition, we have learned that allowing financial firms to abuse consumers is very bad for our overall financial system health”

    I take it that that is a rhetorical device. Come on, you knew that abusing consumers was bad for the system.

    “There’s no question that some financial firms would like to return to abusive practices, figuring they can once again make money and then move on.”

    Return to abusive practices? I’m with Matt Farhner. Who has stopped, if they still exist?

    “Yet serious financial sector firms would prefer to clean up their acts and work with properly informed customers.”

    Yes and no. I think what we are seeing now is that firms are telling you that they are screwing you, or will screw you.

    “These firms are making a bad mistake in opposing the CFPA.”

    Agreed. :)

    I am with Carol. People have already lost confidence in the financial sector in general, and with specific firms in particular. It is one thing to know that the fine print gives them the right to screw you, it is another thing when they actually do so. Especially when they are receiving taxpayer largesse, making record profits, and paying themselves big bonuses.

  34. NYTimes: “Mr. Bernanke says that the Fed has expertise that would be difficult to replicate at a new agency. Consumer oversight coincides with the Fed’s mission to oversee the safety and soundness of banks,”

    No, they do not coincide. Bernanke is on the wrong side of the fence. Even if his heart is in the right place. Ask yourself, would Greenspan have seen the need to protect consumers, or to simply let the unfettered market work? Greenspan would not have — indeed, did not — consider it his job to protect consumers.

    The expertise required is not financial expertise, but the ability to take the viewpoint of ordinary, financially ignorant consumers — not a quality that gets you to be the chairman of the Federal Reserve.

  35. I got to agree with you that something has to got to change.

    And most definitely, “Debt is slavery”. And right now the US is slave to a lot of people and nations.

    My plan is to get out of debt asap, into some wealth securing assets, and start uping my amount of savings.

  36. Alan McConnell

    Selam Habtemariam! (As I would salute you in Eritrea)
    Please excuse a) the misspelling of your name in
    my previous post, and b) the convoluted way in which
    I referred to the Horn of Africa, and “ancestry”.
    I had to allow for the fact that you might be a
    Weyane. (Although it seems there is not in the USA
    the Erit/Ethio antagonism that one finds in Eritrea
    and Ethiopia)

    You, or anyone, can send me private E-mail at
    alan17b0@gmail.com
    This is best if we are going to reminisce about
    wonderful wonderful Eritrea and the tragic times
    on which it has fallen.

    Back to economics. It is possible, even likely,
    that Rubin, or Geithner, or Summers, are pleasant
    people who it would be fun to have a beer with –
    preferably Melotti, of course. But the fact
    remains that they are from and of Wall Street,
    and the present well-being of the big banks
    reflects that IMHO. I hope we ALL know that
    according to Michael Moore every other house in
    Flint Michigan stands vacant.

    I also just discovered that there is a sub-program
    of the TARP called HAMP, the Home Affordable
    Modification Program. The GAO has some interesting
    stuff about this; check out
    http://www.gao.gov/highlights/d09837high.pdf
    for the highlights of their just released report.
    It seems that every home-owner seeking relief
    under this program must “undergo counseling”. ! ! !

    Is there any requirement that the heads of
    Goldman Sachs, or AIG, undergo counseling?

    It is not a good thing to be a poor person in
    these United States.

    Best wishes,

    Alan

  37. A nit-pik: Can we not refer to ourselves as “consumers” please? We are rather more complex than that, and our emergent fear of the markets and government are not restricted to getting price-gouged or something.

    We are CITIZENS. We own the government, and the government in turn regulates through charters and laws the very existence of corporations. Period. The sense however is that our ownership rights are being infringed by powerful interests, if not outright stolen.

    This theft can only be accomplished readily if the myth is maintained that the citizens are “consumers” and the rightful possession of corporations, rather than the reverse.

  38. Daniel Habtemariam

    What sort of strong-dollar/deflationary policy are you referring to when you cite early October through late February? Are you looking at the federal funds rate? the discount window? asset purchases? the Fed’s lending programs? ‘Cause when I look at them, I don’t think I’m seeing what you’re seeing.

    And you’re right. From a rational point of view, we’re going overboard by getting this personal. I just wish everyone else felt the same way.

    I also hadn’t given thought to it, but you’re also probably right that Bernanke is simply the only face we see hiding a fractious Fed.

  39. It’s business as usual on Wall Street but even more manic. A few weeks ago my 401k statement with Morgan Stanley Smith Barney on the paperwork instead of Smith Barney. I laughed and asked my wife if there were now less than 5 Wall Street companies.

    Well today I got a love letter (okay a very nice form letter) bragging on how the merger of Morgan Stanley Smith Barney happened to better meet my needs. But I was shocked to see their new company brags of managing 1.3 trillion (!) in assets. I guess moral hazard is a thing of the past. I find that quiet concentration of assets into fewer and fewer hands with little input or protest unnerving. We really are not in Kansas anymore.

    I have half a mind to write a satirical response to my new pen pals, the Chairman and CEO, to thank them for thinking enough of my needs that they built an unsustainable monopoly. There must be only sunshine and rainbows and unicorns in their part of the world. Sadly I live with the 99% of Americans who worry about being laid off and paying our 20% increase in health care premiums every 9 months.

    Short answer: we’re toast.

  40. bayardwaterbury

    As much as I love Bernanke (more than Geithner and Summers, less than Bair and Romer), I do see this argument as a part of simple “turf” defense. Ben wants to keep the power that the Fed has, and, if it becomes dispersed, especially relating directly to banks, He loses some authority, or at least that seems to be his perception. I also believe that it is a bad idea, but I go further in that I feel that the Fed shouldn’t be involved at all in direct regulation of banks. There is no need: Sheila Bair’s group does just fine in that area.

  41. Why not count Isaiah Berlin?

  42. bungalowbill

    StatsGuy,

    if Geithner is the idiot that you and Blodget suggest, why did Obama pick him?

    Was he chosen because he was an idiot?

  43. some guy in a cube

    Why don’t we just call their bluff? Let’s abolish the Fed, and see what happens.

  44. In his testimony, Bernanke makes the case that the appropriate expertise lies with the Fed. Whereas it’s accurate to assert that the Fed understands banking, especially commercial banking, from an asset/liability management perspective, it’s inaccurate to assert that this understanding implies a deep grasp of the nature and subtleties of consumer banking, in particular credit card lending. If this expertise isn’t the Fed’s, then, whose is it?

    Without granting the Fed their expertise, assume for the moment that they are, indeed, THE experts. What evidence do we have that they would act in defense of the borrower on the conclusions that they reach about any predatory or near-fraudulent behavior of lenders? My sense is that the Fed has demonstrated, or certainly evidenced, a strong bias toward preserving the the banking system “as is”, i. e., the status quo. So what if they’re the experts? I doubt that their expertise would benefit the retail borrower in cases of conflict between the bankers and the borrowers. Knowing how the car works doesn’t imply that a) you know how to drive it, b) that you’ll drive it safely or c) that you’ll drive it to the right destination.

  45. All transaction markets can function effectively only if the participants trust each other. Laws and enforcement is intended to ensure that this trust extends to all participants because not everybody can be trusted. If a participant doesn’t suffer consequences of his behavior, whether legitimate in the market (he loses money on the deal or leaves money on the table) or not (he gets caught cheating and is punished by incarceration or fines or whipping or being pilloried or some combination of items in this list or not in it), he acts in a trustworthy manner either because he sees a long-term or more general benefit from it, because he thinks it’s the “right thing to do” or he’s afraid of being caught and punished. If other participants don’t trust him, they won’t transact with him. This simple, but, not naive. We, the borrowers (even those who understand the lenders and the language – I was a commercial lender for 9 years) don’t trust the lenders, so, we won’t transact business with them. To rebuild trust, banks will have to act differently AND to ensure that they do, we need an independent agency to “police” this market.

    Without it, the banks have no incentive to act fairly or honestly. They have no reason to compete so intensely that they drive other out of this market or out of business. Antitrust law, if enforced, won’t allow it and the cost of doing this would exceed the benefit to be derived from it. They have “market power”. There are few lenders and many borrowers. Borrowers compete intensely for loans, but, banks don’t have to. They establish an informal cartel through signaling rather than collusion, thereby, keeping industry profits higher than they would be if they competed “to the death.” It’s called being “smart competitors”. Borrowers, because there are so many small ones and so few banks (I know, there are 7,000+ banks in the US. But, there are 200 million borrowers), are not “smart competitors” (they have too much to compete with each other for limited funds offered by these banks). Thus, the banks are collectively better off than they would be if they actually competed.

  46. The article: Ben “Systemic Risk” Bernanke proves that Bernanke knowingly maintained a strict monetary policy long after he knew of the sub prime problem as he knew it would be the only cause of the “Depression”.

    It shows that he probably engineered it on purpose!

    If you want to sleep tonight, Don’t Read It!

    “In contradiction to the prevalent view of the time, that money and monetary policy played at most a purely passive role in the Depression, Friedman and Schwartz argued that “the [economic] contraction is in fact a tragic testimonial to the importance of monetary forces” (Friedman and Schwartz, 1963, p. 300).
    …..

    The slowdown in economic activity, together with high interest rates, was in all likelihood the most important source of the stock market crash that followed in October.

    In other words, the market crash, rather than being the cause of the Depression, as popular legend has it, was in fact largely the result of an economic slowdown and the inappropriate monetary policies that preceded it.

    Of course, the stock market crash only worsened the economic situation, hurting consumer and business confidence and contributing to a still deeper downturn in 1930.”

    Governor Ben S. Bernanke
    Money, Gold, and the Great Depression.
    At the H. Parker Willis Lecture in Economic Policy, Washington and Lee University,
    Lexington, Virginia.
    March 2nd, 2004

    You can read also: Preparing for the Crash, The Age of Turbulence Update: 22/07/09., which tries to accomplish Greenspan Mission Impossible:

    “Much as we might wish otherwise, policy-makers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances. Financial crises are characterised by discontinuous breaks in market pricing the timing of which by definition must be unanticipated – if people see them coming, then the markets arbitrage them away.

    …..

    That is mission impossible. Indeed, the international financial community has made numerous efforts in recent years to establish such oversight, but none prevented or ameliorated the crisis that began last summer. Much as we might wish otherwise, policy makers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances. Financial crises are characterised by discontinuous breaks in market pricing the timing of which by definition must be unanticipated – if people see them coming, then the markets arbitrage them away.”

    Alan Greenspan
    The Age of Turbulence: Adventures in a New World [Economic Order?].

    Plea for a New World Economic Order. explains the nature and causes of economic depressions and proposes a plausible alternative solution.

  47. Implied real interest rates (estimated via TIPS/Tbills spread, or other mechanisms) were negative.

    Goldman Sachs (evil, but still smart) estimated that the ideal Taylor rate was -6% – yes, well below the zero bound. They also estimated that achieving an effective rate that low would require credit facilities several times larger than what the Fed was then deploying.

    The obvious response was QE. This did not come till much much later, and when it did, it (in comnbination with a Geithner plan that was deeply flawed but at least had some details) clearly marked the beginning of the stabilization. However, the stabilization occurred at an unemployment rate that is ALREADY higher than the “bad case scenario” projected by the Fed in late 2008.

    Meanwhile, at the same time, the dollar broke a long term secular losing trend to GAIN against other currencies, in spite of sustained trade deficits. I suspect the US Fed may have delayed QE because the ECB charged forward with its strong-euro policy which I suspect was designed to replace the dollar as the world reserve currency. And yes, I believe this was a mistake, and caused significant unnecessary harm to the world economy. (And yes, the ECB is the greater villain and Europe is still paying the price, but the Fed wasn’t blameless.)

  48. Because he was an insider, and Obama wanted to signal his non-confrontational stance to Wall Street. (Indeed, for the first 6 months of office, Obama has been too eager to signal his non-confrontational stance on pretty much everything.)

    Here was the sentiment at the time:

    http://www.time.com/time/business/article/0,8599,1861311,00.html

    And for the record, it’s a rare thing that Blodget and I agree on anything.

  49. Maybe I’m an idiot, but my reaction is pretty much as you described, though it happened before things really crashed. I got in to a bit of debt voluntarily for the first time in my life. Used a credit card a bit just to “build some credit”. Then I wound up unemployed. Twice. The second time just as I had paid down the debt from the first time. My opinion was already swinging toward “The finance industry is a crock…” as I looked at how the finance charges affected my budgeting.

    Then the whole blow up happened, and suddenly I took an interest in financial education that I never had before. Everything I’ve read has convinced me that while getting in to debt (on a FIXED RATE, thank you) for a reasonable house is acceptable, and MAYBE a reasonable (used) car purchase on a loan can be done, for all other reasons it’s just a massive trap you can catch yourself in. It’s much better to have money in the bank and a solid budgeting plan.

    Granted I didn’t get in to the AMAZING levels of debt some of my friends did, but the small burn I felt combined with the mess the finance industry has put this country in have left me reticent to trust any money to the jackals currently slashing and burning their way through the economy. I’ll keep a savings account, maybe some CDs, but using credit to buy things or investing in anything other than saving up to build my own business seems idiotic at this point. Particularly with how the finance industry is fighting (and winning) for the right to keep up the same behavior.

    They will get no confidence from unemployed, underemployed, or in my case simply wary customers (I REFUSE to be labeled “consumer”) that have now done their homework and refuse to be suckered. The 23rd ended with stocks up due to increased profits from blue chips and investors saying “WHEW, IT’S ALL OVER GUYS!” but unemployment numbers continue to look bad, and the profits came without any increases in revenue.

    My question for the Masters of the Universe: How are you expecting to restore confidence when you’re firing everyone you need to buy your junk, and letting the ones still employed know that you intend to keep being irresponsible with their money?

  50. Helen Updike

    A few posters have mentioned this, but keep in mind that the Fed is the banks. Some independent economists get onto the Fed boards, and some of the executives from smaller banks have been consistent voices of reason, but they did not predominate.