Update: the Senate needs to hold a new hearing for Ben Bernanke – here’s the full proposal.
Ben Bernanke’s reconfirmation as chair of the Federal Reserve is in disarray. With President Obama having launched, on Thursday morning, a major new initiative to rein in the power of – and danger posed by – our leading banks, key Senators rightly begin to wonder: Where does Ben Bernanke stand on the central issue of the day?
There are three specific questions that Bernanke must answer, in some convincing detail, if he is to shore up his weakening cause in the Senate.
- Does he support the President’s proposed emphasis on limiting the scope and scale of big banks?
- With regard to the key detail, is it his view that the size of big banks can be capped “as is” or – more reasonably – should we require these banks to contract or divest so as to return to the profile of system risk that prevailed say 15 or 20 years ago?
- If Congress cannot act in the short-term, because of opposition from Republicans and some Democrats, does he see the Fed’s role as taking the initiative in this arena – or will he wait passively for the legislature to act?
As running hard against the “too big to fail” banks is now a major theme of 2010 and beyond for the Democrats, how can any Democratic Senators feel comfortable voting for Ben Bernanke unless they know exactly what his position is on all of these points?
And given what we know about Bernanke’s record and positions relative to these questions, absent new information it is not a surprise to see his support dwindling.
By Simon Johnson
The Baseline Scenario 
If Bernanke does not get confirmed, maybe Obama could re-appoint Volcker.
It was a blessing in disguise, causing the alarm bells to go off at the White House (From A.P: Scott Brown 51.9% / Martha Coakley 47.1%). Although, President Obama is not going as far as to advocate breaking up the TBTF banks and is having his Treasury hack, Geithner, instead, defend the broader (if not rather vague) outline of financial reform as was reported earlier this evening. Mr. Bernanke will continue to make his case in front of the Senate, on how he (heroically) saved the economy from going off the proverbial cliff. And what should the Senate say in return—Mr. Bernanke, you are only as good as your last Bailout!
I love Mr. Volker – he should be appointed to the Fed if Bernanke fails to make the convincing case as to why he deserves another term. I love you too, Simon, but in the interim, Mr. Volker has my undivided attention ;-)
I saw 3 questions and immediately thought “what is your name? What is your quest? …”
These questions are perfectly fine, but, Simon, I really think you’re focusing too much on the size issue. As far as I’m concerned, I think we’re fine as long as the high-risk activities are stripped out of the commercial banks and the I-banks are forced to give up their hastily granted bank charters.
Re the commercial banks, once their high-risk activities are stripped out, the key is to make sure they are properly regulated to ensure they have strong lending standards and don’t overly concentrate their risk. Simply stated, we need to simplify their activities and return them to the days of 3-6-3 banking: borrow at 3%, lend at 6%, and be on the golf course at 3 o’clock. Keep their activities simple and easy for regulators to examine.
Re the I-banks, derivatives need to go through an exchange, and we need to regulate the hell out of their securitization activities. I think we should even consider whether they should allow them to be publicly traded.
In addition, we need to eliminate loopholes concerning non-bank lending and the facilitation of credit transactions; i.e., no more unregulated mortgage lenders! Also, much tighter restrictions could be drafted for writing derivatives transactions, but I’m concerned that the activity would just move offshore. Instead, we’re better off changing the activities that the derivatives are being written on. Remember, naked contracts (and bets of any kind) are only interesting when there’s uncertainty involved. In the case of mortgage-related CDS, some parties thought the underlying securities were AAA, whereas others knew they were trash. The imperfect information created an absurd mispricing of the CDS. By simplifying the underlying activities, you greately reduce the risk of an uneven playing field, and away goes the market for derivates. The focus has to be put on creating a “plain vanilla” financial system that puts the public’s interests first. Do that, and the Wall Street boys will be left twisting in the wind.
Despite all I’ve said, yes, smaller would be better, but a forced downsizing is a battle that will never be won. However, with these controls in place, the risk of “big” would be greatly reduced. I’d just rather focus on fights that really can be won.
When Bernanke chose Patrick Parkinson that was the final nail in Bernanke’s coffin for me. Actually it was obvious before but I’m a slow learner.
Out with Bernanke, and do a wild native dance around his burning ashes. If he doesn’t care about the savers and depositors of this nation any more than to choose a jerk like Parkinson he deserves my utter contempt, and he’s got my utter contempt.
Why does everyone, including writers for Atlantic magazine and Bruce Krasting want to quote Volcker and yet none of them can manage to spell his family name???
Bernake, Summers, and Giethner were key achitects of, and disinformation warriors advocating for (along with the facsists in the bushgov), of the most devastating financial crisis since the great depression.
It’s absurd and a grotesque injustice to even consider these horrifically FAILED bushgov Wall Street insiders (Bernake, or Giethner) for additional terms.
Bernake, Giethner, and Summers are rank partisans and predatorclass vipers and thieves who were gleefully bruting the NAKED lies in August of 2008 that the “fundamentals of the economy are sound”, and the blooming crisis were just cyclical fluctuations in the markets, and that everything was fine and dandy – until it was NOT! Then these same pernicious predatroclass pathological liars, thieves, and tax dodgers came begging, bribing, and extorting the Obama government and the American people for $14tr (Thats TRILLION) in bailouts and taxpayer, governmentfunded largerss,… or else. Bernake should be in jail, NOT head of the FED.
Obama is already fatally tarnished. As one who fought for, defended, and supported Obama during the election process, – there is simply too much blood in the water now, too much pain and suffering, too much deciet, – and Obama cannot be trusted anymore to promote or advance the best interests of the American people. Obama like all the other forked tongued politicians works for the predatorclass and predatorclass oligarchs singularly and exclusively. The American people are mean NOTHING to politicians until election day. Browns victory in
Massachusetts was certainly a wakeupcall to Obama and the democratic party who shamelessly and cowardly bowed down, bent over, cowtowed to, and advanced, promoted, and shielded the predatorclass den of vipers and thieves who are responsible for causing, perpetuating, cloaking, and profiteering from most devastating economic crisis since the great depression.
When Obama musters the courage to fire and replace Bernake’, Giethner, and Summers, and call for investigations into the criminal conduct of the predatorclass den of vipers and thieves on Wall Street, annuls the TBTF charters, and siezes their deposits – then and only then will he win back my support and trust. I am not alone. Just ask the good citizen of Massachusetts!! Until that day – all of this chari vari is just politicalspeak gibberish and talk. Hollow words. Stale air…”having no more substance or moral dignity than a shout”.
The den of vipers and thieves on Wall Street ushered the nation and the world to the brink of economic collapse with their FAILED institutions, and FAILED managements pimping and bruting FAILED models and criminal PONZI schemes! That den of vipers and thieves is accountable for grotesque failure, criminal conduct, and wanton disregard for the wellbeing of the rest of America. Until the den of vipers and thieves are held accountable, immediately REPLACED, and those responsible for criminal conduct are sent to JAIL – there will be no change and no justice, and nothing like the America most of us were born into. The Amerika we inhabit now is a keptocracy, wherein select oligachs and predatorclass dens of vipers and thieves own and control the government and the conduct of the government. Aside from the markets sour reception to Obama’s words, – nothing has changed. NOTHING HAS CHANGED. Words mean nothing. DEEDS are the metric that measure the mettle of a man, and a nation.
I am still on the question of why businesses that fail shouldn’t go bankrupt
My 3 questions are:
1. If the bankers were too stupid to understand that money should only be loaned to people who can pay it back, why would anyone think that they know that now?
2. If Moodys, Fitch, and S&P didn’t were too stupid to understand the risk of bonds, why would anyone think that they know that now?
3. I have got myself into a massive liquidity crisis by investing money on booze and strippers – where is my bailout?
While Mr. Foresta’s diatribe is a bit “over the top”, I generally agree with his assessment. I am still struggling with my assessment of our President: (a) has he simply been naive, (b)been too cautious and/or too “unprincipled” or (c) is he simply playing the American public. Our President’s most recent call for the “de-fanging” of the banking industry may (a) simply be an election oriented maneuver (without principled commitment) or (b) yet another bargaining tactic. Will the real Barack Obama please step forward? Can the President grow a pair? Does the President know when it is time to drop the political maneuvering and actually take a firm and principled position?
Ron Paul on Rachel Maddow January 6. Speaking about the Federal Reserve hogging power and concealing how public money is spent.
Great article. We need Bernanke to continue. Progress has been good so far. Let him finish the job. Politics needs to be reduced. Recovery talk needs to increase by this administration.
SJ I agree with your sentiments in terms of containing the banks. Is there a reason that you framed some of your questions in a political context?
“Does he support the President’s proposed…”
In various blogs your name is being floated as a possible candidate for a position on the President’s economic team.
There is a an AP piece this afternoon that Senators Feingold and Boxer will oppose the Bernanke nomination on the floor of the Senate. Both are up fopr re-election. If the 26 Senators claiming to be running for re-election understand the import of special elections in three states they will be forced to vote against Bernanke. BB’s term ends in nine days.
It looks like it is everyone for themselves is shaping up. Obama must contain that. Might he force BB to withdraw? Similarly, might Geithner leave in several weeks? Both must go to pander to the voters. But too much pandering is as dangerous as not enough pandering . I find it incredible that the Congressperson’s up for re-election did not draw these conclusions weeks ago . These people are about as sluggish as we have seen inside the beltway in a very long time. Congressperson’s are by nature terrified of the voter. That is why they need such large campaign treasuries.
It is getting very interesting.
Senators Boxer and Feingold as of today have no declared big ticket Democratic opponents. Announced Republican opposition so far is by unknowns for both.
Are both simply terrified of a Democratic debacle.
There’s the next Fed chairman!
Actually, if Bernanke advocated a return to Glass-Steagall, he would cement his confirmation. Almost anything short of this (stroke of genius) cannot save him. I think he’s gone, and the President will take some time to replace him, but will with someone of Volcker’s choosing, mark my words.