Some Questions For Mr. Bernanke

On Thursday, Ben Bernanke will appear before the Senate Banking Committee, to begin his reconfirmation process as chairman of the Federal Reserve Board.

Based on committee members’ public statements, Bernanke already appears to have enough votes on his side.  But Thursday’s hearing and the subsequent floor debate are an important opportunity for senators to raise important issues about how the Fed will operate moving forward.

This is more than a ritual.  Questioning (the monetary) authority and politely insisting on a coherent answer is an important part of our political governance structure – and something that was sorely lacking during the Greenspan era.

There are three possible lines of enquiry that could draw Mr. Bernanke out.  These questions could be separate or part of a sequence:

1. Andrew Haldane, head of financial stability at the Bank of England, argues that the relationship between the banking system and the government (in the UK and the US) creates a “doom loop” in which there are repeated boom-bust-bailout cycles that tend to get cost the taxpayer more and pose greater threat to the macroeconomy over time.  What can be done to break this loop?

2. Senator Aldrich and the National Monetary Commission explicitly sought to establish a bailout mechanism that would replace the role played by JP Morgan in saving the financial system during the panic of 1907, and Aldrich saw the creation of the Federal Reserve in 1913 as the lynchpin of that system.  But this approach has a fatal flaw.  As we saw in the 1920s, a lightly regulated financial sector can produce a boom, based on a high degree of debt, that causes major disruption when it crashes and leads to a Great Depression — even if the major banks are (initially) saved.  How should we modify the Aldrich system to remove such risks?

3. Mervyn King, governor of the Bank of England, argued in his recent Edinburgh speech that re-regulating the financial system will not effectively reduce its risks.  And history suggests that Big Finance always gets ahead of even the most able regulators.  Governor King insists instead that the largest banks should be broken up, so they are no longer “too big to fail.”  Paul Volcker and Alan Greenspan, in recent statements, have supported the same broad approach.  Can you explain why you differ from Mervyn King, Paul Volcker, and Alan Greenspan on this policy prescription?

In the history books, the Bernanke era at the Fed will be divided into three parts.  Through September 2008, Bernanke operated in the shadow of the Greenspan legacy: laissez-faire with regard to bank regulation, taken to the point of absurdity.

In the second phase, once the global financial crisis broke in earnest, Bernanke moved with alacrity to rescue the financial system.  History will likely judge him as too generous to the bankers at the center of the mess, but the real point person on bank-by-bank bailouts was NY Fed President/Treasury Secretary Tim Geithner.  Bernanke will be reappointed because our Worst Crash did not turn (yet) into a Great Depression.

The third phase is for Mr. Bernanke to decide.  Will he become a great reformer, like Marriner S. Eccles in the 1930s, leading the charge to rein in the damage that investment banking, writ large, could cause? Or will his legacy be closer to that of George L. Harrison, head of the New York Fed as the stock market crashed in 1929.  Harrison led vigorous efforts – sometimes stretching his legal authority to its limits – to save big banks and by the fall of 1930 was congratulating himself that no major financial institutions had failed.  At that point, Harrison thought his work was substantially done; sadly, he was very wrong.

By Simon Johnson

A version of this post appeared on the NYT’s Economix this morning and is used here with permission.  If you would like to reproduce the entire post, please contact the New York Times.

40 responses to “Some Questions For Mr. Bernanke

  1. Mr. Bernanke should be asked to explain how $300 million in defaults on $1.4 trillion in subprime mortgages opened a $14 trillion financial black hole the filling of which by the Fed (and the Treasury) has done NOTHING to restore the real economy while reinflating a stock market bubble and generating hundreds of billions in banker profits soon to be siphoned off in banker bonuses.

  2. I would ask about something like the Fed’s own minutes as reproduced here:

    http://www.nakedcapitalism.com/2009/11/a-significant-portion-of-policymakers-are-simply-clueless.html

    “Overall, many participants viewed the risks to their inflation outlooks over the next few quarters as being roughly balanced. Some saw the risks as tilted to the downside in the near term, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation. But others felt that risks were tilted to the upside over a longer horizon, because of the possibility that inflation expectations could rise as a result of the public’s concerns about extraordinary monetary policy stimulus and large federal budget deficits. Moreover, these participants noted that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation. To keep inflation expectations anchored, all participants agreed that it was important for policy to be responsive to changes in the economic outlook and for the Federal Reserve to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and pace.”

    (My emphasis.)

    So right here is an example of the Fed formally admitting that the premise of the bailout, to “get banks lending again”, was a Big Lie, a monumental fraud on the people.

    On the contrary, they view restored lending as an inflation risk which will need to be somehow “offset”.

    It’s apparent that even as the TARP was unrolled, Bennie deployed the helicopters with the understanding that no lending would be taking place, so they didn’t have to worry about inflation. The same is true for all the secret “facilities” going back to spring 08, even though these have all been politically sold under the bailout rubric.

    And so to this day they deploy monetary policy as a looting conveyance, and that’s its only purpose.

    So the specter of “lending”, if it ever did somehow occur, is a monkey wrench which would force them to deviate from business as usual.

    So I would ask Bernanke what non-criminal explanation he can give for the contradiction between the propaganda of the bailout, which he personally took part in selling, versus the clear reality of the conveyance, including the acknowledged fact that the Fed would view bank lending as contrary to the goal of monetary policy.

  3. These Truths Are Self-Evident:

    The time for dialogue with Bernanke is long past.

    The power of the Fed to bailout financial institutions must be reduced. This :fourth” branch of government is a cancer on our future financial well-being.

    Both political parties criticise the Fed, but in reality they are happy with the off balance sheet financing and spending ability of the Fed; the Fed is a convenient scapegoat when plans go awry.

    The financial system is broken; a make-over won’t suffice; we need a new one.

    The U.S. taxpayer is hostage to complexity, interconnectedness, and rules of international banking.

    International banks have become bigger and more powerful since the crisis began.
    http://www.bloomberg.com/apps/news?pid=20601109&sid=aRDrzOAWRekc&pos=12

    Good or bad, we appear to be moving towards a European model of financial regulation.

    Regulation does not work and gives us a false sense of security.

    “Kicking the can” down the road, and adopting policies of increasing risk in the hope that gambles will pay off, invariably turns out badly.

  4. Prof. Johnson –

    These are excellent questions, but nobody in Congress will ask them because they are no more interested in the answers than Bernanke himself.

    Perhaps after the next crisis…

  5. After the next crisis, Congressmen will be worried about how they could get away with it again. And how they would make the big income, once in “private business”, if too much regulations spoil the party… The bipartisan party, of course.

  6. I have a few questions for Mr Bernanke as well. Such as:

    1) What is money? Does it exist by nature or by law? Why does a $1,000 bill have more value than a $1 bill?

    2) Why do governments issue debt to the banks then call it the money supply? In other words why do the banks issue the principal but never the interest to service the principal and interest payments?

    3) The US government has issued trillions in debt in the past hundred and fifty years. Please give us an indication of WHEN the Federal debt becomes unserviceable? Is such a debt/monetary system even sustainable?

    4) Does the Federal Reserve serve the interests of the citizenry of the nation or the private banks? Is the Federal Reserve a private or a public institution? It is very difficult to tell, in truth, as the Fed’s record is rather dismal and murkey.

    I look forward to Bernanke’s responses.

  7. Folks… “after the next crisis” is going to be a messy time… at that point the dollar will be trashed, reserve currency transferred to a multinational basket, gold devalued, and martial order in place… only then will our “elected officials” be ready to act… but it will be too late….

  8. These are good questions, how about this one also. When the Fed creates money out of thin air to purchase US debt and that debt is repaid, who gets to keep that money? Just exactly who owns the Fed and how much are they worth.

  9. Why is everyone so bent on the “next crisis”? Start with the pinprick of Feb. 2007 and lump in the next 10-20 years. This is a huge baggy monster; it takes a lot of time to stomp all the air out of it.

  10. As Professor Simon questions the need to reign in the again dangerous aspects built into the present central banking system the rigging of present elites goes on , it seems, in high gear.

    I speak of Bank of America redeeming out the United States Government positions it owns in Bank of America. Total $45 billion. A very major piece of that redemption is quoted by the press as derived from removing “excess liquidity”. That can only mean that the Bank of America is liquidating it’s Reserve Demand Deposit at the Fed. Given the real world illiquid aspect of these deposits they can still be used to redeem out the USG from Bank of America.

    The easy way is to transfer their interest to the USG at the FRB NY for the amount contemplated. The amount is nebulous as I have read differing amounts. So I will use $30 bn. The entry at the Fed is simple enough Debit B of A Reserve Demand Deposit $30 bn and credit US Treasury Demand Deposit at the FRBNY $30 bn. The Entry on Bf A is just as simple . Debit various stock accounts and any loans for a combined $30 bn and Credit their Reserve Demand Deposit Account $30 bn.

    The government is out of Bf A’s hair and the bonus pool question is very much simplified for B of A.

    There is a longer round robin methodology using currency ordered from the Fed by Bof A which is transferred to the USG which deposits the currency at the FRBNY. Same result as the entry method.

    But there are inescapable consequences to the foregoing after all the major big finance firms that are banks do the same.

    That consequence is that in real terms the Mortgage Backed Securities owned by the Fed cover the Treasury demand deposit at the Fed to the extent of the aggregate of all the banks removing excess liquidity to redeem out the government and free them from bonus pool interference. Not incidentally, the entire bailout of the big banks has been paid off.

    The big banks also sold off a lot of mortgages to the FED that cannot come back to haunt them.

    Pure simplicity. Will Congress pose my question outlined above to Mr. Bernanke?

  11. Excellent questions. Would love to hear the answers.

  12. Congressman Ron Paul of Texas and Congressman Alan Grayson of Florida have been go-getters on this issue. I don’t agree with everything Ron Paul says, but I do believe putting pressure on the Federal Reserve to let them know they are working at the discretion of the taxpayer/voter and not for the swindlers/bankers is a very healthy thing. If Bernanke continues to do things off-balance sheet and if Bernanke continues to let bankers abuse their depositors there will be consequences.

    By the way, I need to do some more reading on this, but it appears one of the next swindles the banks are planning is creating and increasing fees on debit cards. This is something to keep a sharp eye on. They know that people are much more aware of bogus charges on credit cards, so now the big bankers are seeing if they can catch people asleep at the switch on bogus fees on the debit card. Mike Konczal has some posts over at Rortybomb and I’m gonna see if I can educate myself better on this, so if this topic comes up again I can speak more knowledgeably about it.

  13. Ron Paul talking with Jon Leibowitz about the Federal Reserve on Comedy Central.
    http://www.thedailyshow.com/watch/tue-september-29-2009/ron-paul

  14. I’m sorry, I’ll put this last thing. I can’t stop myself to say this one more time. If people want Bernanke out (and many American voters do) we should have some idea who would be the person to improve the situation. Alan Blinder is a great choice for Federal Reserve Chairman. Blinder has for many years been a strong proponent of Federal Reserve transparency.

  15. When the banking crisis hit Mr. Bernanke had two choices. Do something with the devices he had available or could quickly secure from Congress or do nothing. The man used every trick he could legally utilize under the circumstances. Did he stretch legality sufficiently under the circumstances of the immediate crisis?

    Before Bernanke, “The Maestro” ran things his way. He had an enormous cult following for years preceding Bernanke.

  16. wrt comments of how to resolve “the next crisis”, I think it would be more pertinent to determine what and how the financial oligarchs were able to do to escape the wrath of their investors and drop it on the federal govt. to answer all the while not doing much to increase liquidity to benefit the larger economy. Remember the oligarchs have no country to have allegiance to, only relationships.

  17. Hillbilly Daryl

    “Remember the oligarchs have no country to have allegiance to, only relationships.”

    You hit the nail on the head. And, no one, including Baseline Scenario, has addressed this wrinkle. The Oligarchs simply don’t care about the U.S. In fact, I submit that they are in full money harvest and extraction mode, with attendant full offloading of bad risky and losing investments to the Fed, Treasury, American Government, and taxpayers for multiple generations.

    At the end of the day, they’ll suck everything out of the U.S., if they haven’t de facto done this already, and leave. What do they care. It’s a global economy, and China’s growing but almost 10%….they will simply continue to extract and re-deploy elsewhere until such a time as there is nothing left to extract, and then they’ll move on….

    I was going to address this issue in a comment on Simon’s last post from yesterday wherein Simon relies on an unspoken assumption that the Oligarchs are American, they care about America, they’ll stay in America, and their philanthropy will continue and stay American focused, etc. I don’t believe this assumption is accurate at this juncture.

    They’re Oligarchs. Not Americans. And, they care not what country they happen to be in at any given time save for how much money they can extract there….

  18. And, no one, including Baseline Scenario, has addressed this wrinkle.

    At any rate nobody prominent, so far as I’ve seen.

    But I’ve often said these aren’t citizens, aren’t Americans, are stateless, are anti-American, are basically traitors.

    I’d make that a key point of any anti-corporatist political movement.

  19. I endorse the above two comments. My initial comment was that if the fed was responsible for monetary supply and congress for taxing, why can’t they get together?
    Now, I wonder if we aren’t talking of two different allegiances?

  20. Wow!

    Wow,again!

    I intuited that, but I hadn’t heard it spat out like that…. Yeh, ask him that one.

  21. Lavrenti Beria

    More than anything, today’s confirmation hearings make clear one thing about Ben Bernanke: He missed his calling by become an economist. Bernanke would have been far more suitably employed as a mortician, wearing non-descript gray suits and passing on meaningless condolances to the bereaved family. One can almost hear him offering assurances sotto voce concerning his best efforts with the appearance of the deceased. “But, Mrs. Roland, Harry’s upper lip would have looked even more waxy if we hadn’t injected the more expensive embalming fluid.”

    Hat’s off to the the questioning of Jim Bunning who missed nothing in his indictment of Bernanke. Perhaps they’ll trot him out to do the people’s Andrei Vyshinsky to Bernanke’s Bukharin when the show trials begin.

  22. Great, great questions Simon. Wouldn’t we all love to hear Bernanke tackle them?

    Unfortunately, there is zero chance that any member of congress will ask them as members of Congress Judge their questions only on their effect on the re-election of the questioner. And, sadly, few members of the electorate can understand these questions.

    I guess we’re left hoping that Bernanke and some members of Congress read your post.

    Cheers,

    tas

  23. “If Bernanke continues to do things off-balance sheet and if Bernanke continues to let bankers abuse their depositors there will be consequences.”

    Like the consequences bankers have suffered for their bad behavior? I’m sure he’ll be real scared after seeing that.

    Face it: no one in charge of any institution of any power in this crisis has or will face any kind of punishment greater than being lobbed the softballs that our government passes off as “tough questions” these days. They got away with it and will continue to do so, Bernanke included.

  24. Exactly.

  25. Excellent comment.

  26. “At the end of the day, they’ll suck everything out of the U.S., if they haven’t de facto done this already, and leave.”

    I cannot believe this has not yet been posted in this thread:

    http://www.huffingtonpost.com/2009/12/03/bernanke-channels-willie_n_378963.html

    “Bernanke Channels Willie Sutton In Assault On Social Security: ‘That’s Where The Money Is’

    Citing legendary bank robber Willie Sutton, Bernanke said of the retirement and health care funds that are the legacy of the New Deal: “That’s where the money is.”

    Bernanke reminded Congress that it has the power to repeal Social Security and Medicare.

    “It’s only mandatory until Congress says it’s not mandatory. And we have no option but to address those costs at some point or else we will have an unsustainable situation,” said Bernanke.

  27. The Fed’s policy of monetizing debt is largely responsible for our present economic imbalances, a weak dollar, and a bleak future.

    Therefore, I believe that Bernanke should leave and be replaced, maybe by Thomas Koenig, maybe by Stiglitz, or you, but shouldn’t stay. I believe that the Fed should be subject to oversight by a committee like Elizabeth Warren’s COP (nice acronym, I think), and should be transparent, at least insofar as it creates a greater and greater monetization policy to keep the government afloat during times of distress, so that we can know who’s actually getting the benefits (it seems that only the military industrial complex and big finance are getting these at present).

    Bernanke, Geithner and Summers should all step down, the TBTF’s should be dismantled. The government should call in all remaining TARP funds, even from GM, and then we could finish our depression and get back to the business of rebuilding our third world country.

  28. Despite his handing over of taxpayer money to people who should be in jail he is not satisfied and intends to go after social security and medicare. These people won’t stop until 99 % of the nation is in abject poverty.

  29. I’m sorry that this post will be buried down at the bottom of a sea of others. I applaud the creators of the site and our dear sister Marcy Kaptur of Ohio for speaking up. I want to make people aware that with the proper education, it is possible to completely settle your mortgage 100%, by confronting the bank with the proof of their fraud. They did not disclose to you that the money that funded your “loan” was provided directly from the Treasury using the very note the you created, and then funded the deal. In fact no loan ever took place, just an exchange of value, because you were used by the bank to “create” new money. This RESPA violation (disclosure) alone makes your mortgage contract null and void (among many other obvious violations). Many mortgages have been cancelled as we speak, there is nothing the banks can do about it, and why should they. They would have to change the way the are structuring these mortgages, and the way it stands, that would mean an end to an unlimited money supply for them. Get educated, start seaching out how to do a mortgage purge, you can do this without going into court. The information is out there. If we can get enough people to do this we just may be able to bring about real, lasting, change.

  30. Actually, money out of thin air is what the private banks are doing, using a non democratic mandate form the State. The State USED to create money. Now private lords do it. In that sense, we are less democratic than at the feudal height of the Middle Ages.

  31. “And so to this day they deploy monetary policy as a looting conveyance, and that’s its only purpose.

    So the specter of “lending”, if it ever did somehow occur, is a monkey wrench which would force them to deviate from business as usual.”

    I agree completely.

    This bigger than a question of Bernanke’s competence. It seems to me that getting rid of Glass-Steagal enabled the trading arms of the banks to speculate with Fed money, obviating the need to make loans in the depleted US economy.

    In which case, it’s not at all apparent why Congress should continue to extend its powers to the Fed and not charter a national bank to attend to the needs of the real economy. This is the purpose of the national currency, not the generation of a new aristocracy at the expense of everyone else–until the day they bust the US Govt entirely.

    If you think about regulatory changes like Glass-Steagal, who promoted them, how the crisis enabled investment banks to get access to the Fed, etc, it also becomes apparent that they did this deliberately. It just works a little too well. Sometimes the “conspiracy” is real–and even if it isn’t, whatever “it is” is still too dangerous to go unchecked.

  32. As argued in http://euandus3.wordpress.com/2009/12/04/the-federal-reserve-we-screwed-up-but-should-be-given-more-authority/ , Bernanke admits that the Fed screwed up in the housing bubble and should be given even more authority to protect us from systemic risk. You try connecting the dots.

  33. I agree with Russ’s post: Bernanke is a criminal. But such a conclusion is at this point still pretty unpalatable to the masses.

    What’s really astounding, and indicative of the state of public discourse in the USA, though, is how Bernanke just marches straight to a new term despite his obvious failure to fulfill the Fed’s mandate to keep unemployment low. I mean… words fail.

  34. James might like this. People have been fishing about for the best name for our predicament. “GDII” and “The Great Recession” seem to be favorites. How ’bout something nice and pretentious to accord with the bombastic nature of it all? Le Plus Grand Complot Du Monde? La Mere des Tous les Complots? (Is that the proper translation of this brand of conspiracy?

  35. I like the way Uncle Billy C. thinks. It’s great to have a forum like this. It’s a comfort to know that there is a portion of the population on the same page!

  36. Dated a few days ago from internal sources, here are some BAC talking points and their ‘exit strategy’ highlighted: “Under terms of the authorization from the U.S. Treasury and banking regulators to repay the $45 billion investment made under TARP, Bank of America will repurchase all 600,000 shares of the company’s Preferred Stock……, Series N…… We appreciate the critical role that the U.S. government played last fall in helping to stabilize financial markets ……. ….for taxpayers, our actions reflect our desire to thank U.S. taxpayers for lending us the money by making good on the investment… Approximately $1.7 billion through the issuance of restricted stock issued in lieu of a portion of incentive cash compensation to certain Bank of America employees as part of their normal year-end incentive payments. Year-end incentive payments are dependent on the performance of the company, business units and individuals and have not yet been determined…… Bank of America is not exercising its right to repurchase the related warrants at this time…… In addition, Bank of America agreed to increase equity by $4 billion through asset sales to be approved by the Board of Governors of the Federal Reserve and……”

    Re: James Kwak blogging comment on BofA, he concludes with: “……But those restrictions have to apply to all financial institutions, not just some of them; otherwise, you get this situation where Bank of America is making a silly financial decision because it has to in order to hire a new CEO. (The fact that nobody will be CEO of America’s largest bank because of executive comp restrictions is another issue, but there’s not much we can do about that. I would do it, but I don’t want to move to Charlotte.)”

    BAC is currently in the vetting process and is reportedly near a final decision on its next CEO; hopefully one of the final candidates is not a former Countrywide executive (who happens to be on the BOD’s short list). To say that “nobody will be CEO….. b/c of executive compensation restrictions” is at least, not currently the case and by most accounts, BAC had this planned way in advance – these people still live in a bubble (not appreciating and think their untouched by the ongoing financial problems in the wider economy).

    Mr. Bernanke will be confirmed for a second term by first, our Spare Change You Can Believe In President Obama. Secondly, Congress will also approve his appointment since Banking and Congress share the same campaign contributors, bundlers, and political constituency. Although the best line in the debate over his appointment has come from the Senate hearings – that, some of the phony outrage from the finance committees is turning into more substantive hearings on reform and neutering that puppy called the Fed.

    However, any real replacement for the chairmanship seems pretty remote don’t you think… Would Secretary Geithner (and Dr. Summers) be willing to step down and be replaced by someone who seems to be making more sense these days; like Jared Bernstein. Vice Pres Biden was quoted to saying that Jared Bernstein is “an acclaimed economist, and a proven, passionate advocate for raising the incomes of middle class families.” He will serve in a new position called Chief Economist and Economic Policy Adviser. Personally, I don’t think Dr. Johnson would want to volunteer for that post; firstly, he’s too bright; 2) too overly educated; and 3) and by all observation, way too civil in his discourse. Compare that with someone rather average and mediocre in their life accomplishments ;-)

  37. Capra? Uncle Billy? What the deuce is going on here?

  38. I had a contractor explain to me the other day how he built a 10000 sq foot house, borrowed $2.7 million mortgage with no down to retire his construction loan, then walked away with .05 million in his pocket as the bank ate the loss, which the taxpayers eventually picked up.

    Where was the Fed, super-regulator, while this crap was going on. With the GW political machine. Who wants this piece of crap back.

  39. Whoops; walked away with 0.5 million.

  40. Victor Spoils

    The unconstitutional IRS is just the enforcement arm of the Fed. Why else did it get created right after the unconstitutional Federal Reserve Act? It’s a state sponsored extortion racket, plain and simple, and they’ve been fleecing the general public for decades. The Rothschilds, Rockefellers, Morgans, DuPonts, etc ad nauseum. No country for old men. They all need to be drawn and quartered.