A Colossal Failure Of Governance: The Reappointment of Ben Bernanke

When representatives of American power encounter officials in less rich countries, they are prone to suggest that any failure to reach the highest standards of living is due in part to weak political governance in general and the failure of effective oversight in particular.   Current and former US Treasury officials frequently remark this or that government “lacks the political will” to exercise responsible economic policy or even replace a powerful official who has clearly become a problem.

There is much to be said for this view.  When a minister or even the head of a strong government agency is no longer acting in the best interests of any country – but is still backed by powerful special interests — who has the authority, the opportunity, and the fortitude to stand up and be counted?

Fortunately, our constitution grants the Senate the power to approve or disapprove key government appointments, and over the past 200 plus years this has served many times as an effective check on both executive authority and overly strong lobbies – who usually want their own, unsuitable, person to be kept on the job.

Unfortunately, two massive failures of governance at the level of the Senate also spring to mind: first, the strange case of Alan Greenspan, which stretched over nearly two decades; second, Ben Bernanke, reappointed today (Thursday).

Greenspan, as you recall, was worshiped as some sort of economic magician.  Even his most asinine comments were seized upon by a legion of acolytes.  Instead of providing meaningful periodic oversight, every Senate hearing was essentially a recoronation.

And now we can look back over 20 years and be honest with ourselves: Alan Greenspan contends for the title of most disastrous economic policy maker in the recent history of the world.

Some on Wall Street, of course, would disagree – arguing that the financial sector growth he fostered is not completely illusory, that we have indeed reached a new economic paradigm due to the Greenspan tonic of deregulation, neglect, and refusal to enforce the law.  Prove the ill-effects, they cry. 

What part of 8 million net jobs lost since December 2007 do you still not understand?

And now the same Greenspanians and their fellow travelers rally to the support of Ben Bernanke’s troubled renomination.  Certainly, they concede that Bernanke was complicit in and continued many of Greenspan’s mistakes through September 2008.  But, they argue, he ran a helluva bailout strategy after that point.  And, in any case, if the Senate had refused to reconfirm him - financial sector representatives insist – there would have been chaos in the markets.

Take that last statement at face value and think about it.  Have we really reached the situation where the Senate as a body and individual Senators – accomplished men and women, who stand on the shoulders of giants – must bow down before financial markets and high-ranking executives who are really just talking their book?

Here’s what markets really care about: credible fiscal policy, sufficiently tough monetary policy, and the extent to which big banks will be allowed to run amok – and then get bailed out again. 

Reappointing Ben Bernanke solves none of our problems.  In fact, given his stated intensions, a Bernanke reappointment implies larger bailouts in the future – thus compromising our budget further with contingent liabilities, i.e., huge payments that we’ll have to make next time there is a crisis.  What kind of fiscal responsibility strategy is this?

Rather than messing about with a meaningless (or damaging) freeze for part of discretionary spending, the White House should fix the financial system that – with too big to fail at its heart – has directly resulted in doubling our net government debt to GDP ratio from 40 percent (a moderate level) towards 80 percent (a high level) in a desperate attempt to ward off a Second Great Depression.

If you think we can sort out finance with Ben Bernanke at the helm, it was sensible to reappoint him.  But when the time comes for members of the Senate themselves to be held accountable, do not be surprised if people point out that pushing Bernanke through – come what may – was the beginning of the end for any serious attempt at reform. 

Ultimately, sensible democratic governance prevails in the United States. Sometimes it takes a while.

By Simon Johnson

77 responses to “A Colossal Failure Of Governance: The Reappointment of Ben Bernanke

  1. Consider the following two propositions:

    1) Government policy responds to short-term stock market movements.

    2) Goldman Sachs has the power to control short-term stock market movements.

    Does the available evidence suggest that either of these are certainly — or even very likely — false?

  2. Um… the beginning of the end of reform was when, after blithely dismantling the safeguards from the Great Depression, in order to cause new financial crises, we actually started forgetting the post-Depression lessons from the ’80s and used the bailout to create giant Zombie banks.

    I except the world to end soon in a Zombie-bank apocalypse as Citibank and Allied start shambling around the country moaning “deposiitttts! depooosittssss!”

  3. Does it make you feel good to set up straw man arguments, attribute them to “Wall Street,” and then knock those arguments down? Because that’s all this post does.

  4. So who would be a better candidate? From watching C-SPAN hearings on these matters .. not very people seem to understand our financial system. Anyone have a short-list of maybe five names as alternative candidates?

  5. I don’t think it’s a coincidence we are only in a recession & that a Yale Economist who studied the great depression was is Chairman. Depressions are about a pervasive loss of confidence, and we don’t have that now. It might have been the same (having made different decisions), but this article has been written in emotional confusion (namely anger), not objective conclusions.

  6. If you want to break free from the Private Banking Scam, just follow the lead from a candidate from Florida…the real solution, just apply to ech state and to the Federal Goverment. Time to break the shackles of the private banking system…

    The era of the commercial banking system is over because of:

    1. Their exploitive and speculative activities having reached intolerable limits.
    2. The fact that they allowed the destruction of the peoples creditworthiness; consequently they can no longer create jobs or lend money under present circumstances.
    3. The irresponsible behavior of the CEOs, such as paying themselves huge bonuses and their dubious business practices.

    In contrast, the Khavari Economic Plan, proposes a state run bank that will:

    1. Lack the shortcomings of the commercial banking system by employing transparent oversight by the public.
    2. Become the engine to drive an economic miracle in the State of Florida, bringing general prosperity and economic security for all Floridians.
    3. Create jobs in giant numbers that are simply impossible under the present commercial banking system.
    4. Cut costs in half or more by providing low interest financing to Floridian homeowners and businesses.
    5. Use profits to benefit students seeking higher educations.
    6. Secure attractive salaries for teachers and educators.
    7. Take care of veterans and elderly by making health care affordable.
    8. Reduce property taxes, eventually eliminating them altogether.

    We will put the power of modern banking to work for the people of Florida, not for Wall Street.

    Over the years, interest has been the biggest cost most families have had. Interest paid to the bank means less money for your family. Reducing interest costs can save a family hundreds of thousands of dollars.

    Scenario 1 Let’s take a $100,000 mortgage, for example. With a 30-year fixed rate 5.5% mortgage, your monthly payment is $567.79 and you will pay $104,404.40 in interest on that loan.

    Scenario 2 With a 2% fixed rate 15-year mortgage, your payment would be $643.51, the total interest would be only $15,831.80 – and the mortgage would be paid 15 years sooner! You would save 88,572.60 in interest. After you’ve paid off your mortgage, if you continue to make monthly payments of $643.51 to a BSF savings account earning 5% interest, at the end of 15 years you will have more than $160,000 after taxes in your account—just by having your mortgage from the Bank of the State of Florida.

    In scenario 1, after 30 years of payments, you would own your house. Given scenario 2, after 30 years of payments, you would not only own your house, but also have more than $160,000 in savings.

    How could the BSF do this? It’s called “fractional reserve banking,” the same principle all banks use to operate. If you have $100 in reserves, you can loan out $900 or more. That means you collect interest on $900 but you pay interest on only $100 at most. If the bank pays you 2% for your CD and lends it at 5% on 9 times as much money, you can see this is a really good deal – for the bank.

    Now our Bank of the State of Florida does not need to be greedy. It is not going to get involved in shenanigans like bundling and selling mortgages, taking out weird insurance policies and general practices that have caused the mess we are in today. When we make a mortgage, that asset remains right on our books and the paperwork is right there on file. We are going to pay good dividends and the highest rates in the market for long term deposits. We are going to loan out 9 times our reserves. And we are going to make billions of dollars for the State Treasury while we save Floridians a trillion dollars—and that trillion dollars becomes many trillions in Florida’s economy.

    Let’s say we pay 5% for our $100 and loan out our $900 at 2%. We pay out $5 in interest, and we take in $18 in interest. Can we make money at that? You bet we can.

    We could make the $3.6 billion we are short this year on just a couple of million 2% mortgages. We can do even better on 3 – 4% commercial financing and vehicle loans.

    And all the money the bank earns goes directly into the State Treasury, to work for Floridians, not to Wall Street.

    Where do we get the reserves? The State of Florida has billions invested with Wall Street. 5 or 6% guaranteed looks pretty good these days compared to a 50% decline in the stock market. Look at what long-term bonds are paying, look at CD’s—we will have no problem attracting all the long-term deposits we need to get started, simply by paying good rates.

    Now look what happens. With a 2% fixed rate 15-year loan, the buyer has paid off over 11% of the principal within 2 years. That means we have more than enough reserves to make a new mortgage for someone else, without having to pay interest for the reserves! (In comparison, a 5.5% 30-year loan takes 7 years to pay 11% of the principal).

    Now some people might think that low interest rates will just raise the price of homes. That would be true if the 2% loan was for 30 years. But the payment on the 2% loan for 15 years is a little bit higher than the payment for 5.5% 30 years, so this tends to hold prices down. It also tends to eliminate speculation that messes up the market every time. As long as prices are stable, we can offer mortgages with low down payments, so homeownership can be as easy as paying rent.

    What the Bank of the State of Florida does is transfer hundreds of billions of dollars away from Wall Street directly into the pockets of Floridians by reducing interest costs… and it puts hundreds of billions into the State Treasury, too. We will have stable, fair prices for homes and take 15 years of slavery out of the process of owning a home.

    Consumer financing is another area where Wall Street and the big banks are costing us way too much. Banks charge huge interest on credit cards, for example, where the cost of money to the bank is really zero. If a family has $10,000 in credit card debt at 25% interest, that’s over $200 per month in interest alone. At 6%, the monthly interest is only $50. This family could reduce monthly payments by $50 and pay off the debt years sooner. The State earns billions of dollars per year while saving Floridians billions and billions more.

    The Bank of the State of Florida will earn billions of dollars per year for the taxpayers of Florida, not Wall Street fat cats. At the same time it will reduce interest costs and save Florida families hundreds of thousands of dollars per family. Who needs that money more? You or Citibank?

    The Bank of the State of Florida can handle checking accounts and ATM’s too. The other banks will have to become competitive, and there is no reason why they cannot.

    Couldn’t the federal government do the same thing? Actually, the federal government could do even better and they could do it immediately at huge benefit to the U.S. Treasury. Do you think we should wait around for them to do it? We can have this program in effect in Florida within a year, at no cost to the State

  7. maynardGkeynes

    Start with the A’s in the Manhattan phone book.

  8. Once we get rid of derivatives the problem goes away, I think.

    No one has ever convinced me that we cannot live without derivatives (or Dark Pools) and every indication is that our lives would be better without them.

  9. “Depressions are about a pervasive loss of confidence, and we don’t have that now.”

    Well if what we are going through in Main Street isn’t a loss of confidence, God help us when the second dip comes along …

  10. TARP came about in the same way. The DJIA trumped a massive public outcry.

    Policymakers only share the public’s outrage when it is time to give a speech.

  11. 8 million jobs destroyed? Isn’t the argument that the bubble(s) generated the jobs? So if we hadn’t had the bubble(s) we would have had the high unemployment for 20 more years? Somehow we would have had “good” growth instead of “bad” growth?

    So is the assumption that somewhere there is the perfect, all-knowing person (Simon?) who could give us unending growth with no inflation and no corrections?

  12. some guy in a cube

    Purely selfishly, I cheer Bernanke’s reappointment – I began shorting the SPX on Monday. However, as a parent of children who will have to somehow manage to eek out an existence in this f’ed in the head nation – not so much.

  13. “Ultimately, sensible democratic governance prevails in the United States. Sometimes it takes a while.”

    I wouldn’t bet on it – that’s probably a sentiment based on a bygone era.

  14. Hmm, GS is still using derivatives. The there’s not enough money in the world to deal with this: http://www.siliconvalleywatcher.com/mt/archives/2008/10/the_size_of_der.php

    I think we can live without them. Get over it!

  15. WTF – we’re in a Depression!

  16. The ‘all-knowing person’ Federal Reserve could be someone else other than Mr. Bernanke – Thomas Hoenig, president of the Fed Reserve in Kansas. Back link to a previous Baselinescenario posting (Qs&As, Simon with The Atlantic Magazine (business section): ”Another good question with no obvious answer. I would bring in a new Fed chair – someone who would be much tougher on too big to fail institutions, like Tom Hoenig, president of the Kansas City Fed. I would give him the power, the people, and the resources. And I would break the biggest banks into much smaller units. Then at least it would be a fair fight.”

    Better geographical representation at the Federal Reserve would also get my vote, as suggested in this commentary/transcript from NBR – Todd Buchholz’ opinion: http://adjix.com/u3xm

    ”Ben Bernanke is holding an old map. No wonder he didn’t see the recession coming. The Federal Reserve system looks like a railroad map from 1913. Do you realize we have a Kansas City Fed and a St. Louis Fed? But we have no Federal Reserve Bank in southern California or in the entire state of Florida. Yet the housing bubble in those regions nearly destroyed the entire world. They are gateways to our fastest growing trading partners. The nearest Fed headquarters to the port of Miami is almost 700 miles away. Do we have a regional Fed president anywhere near Seattle, where Boeing builds planes? Nope. The Fed meets in Washington, DC and yet we have a Richmond Fed just down the road. Now, I like Richmond a lot, but if a city cannot host a major league baseball team, should it host one of only 12 districts? Who cares? Like the army, there is no substitute for boots on the ground. Back in the early 1990s the Fed missed a recession that was brutal for California’s aerospace industry. If regional Fed banks are to act as an early warning system, they better be equipped and in the right places. Now, I’m not here holding a brief for California. Arnold Schwarzenegger can do that just fine. He used to pose in briefs. But I am arguing that the Fed’s geography should partly reflect economic geography. And as long as Congress is looking to tear up and rewrite the Fed’s mandate, it should call the AAA and ask for a new map, too.

    Hope does spring eternal….

  17. First, if you think anyone votes based on the the fed chair, you are nuts.

    Second, your criticism of Greenspan, while correct, benefits mightily from hindsight.

    Third, again withe benefit of hindsght I think you are far to critical of beranke. I might have preferred a change, but I am not confident anyone I would have preferred would have been confirmed with the senate in such disarray.

  18. Want some names? Easy.

    Dean Baker, Bill Black, Sheila Bair, Elizabeth Warren, Thomas Hoenig, Joseph Stiglitz – the main requirement – anti-Wall-St, pro-Main-Street.

    There are thousands of more qualified names.

    Just no more sophist.

  19. Ron Paul
    Peter Schiff
    John B. Taylor
    Paul VolCker
    Bill Still

  20. DPS, BMG, AJ, Unlike you, I’m stating my full name, and I’m angry too. I am a Stanford University professor, an elected member of the National Academy of Engineering, and I can remember a time when the Democrats urged transfer of resources from the rich to the poor. Now we see they have it backwards! Thanks to Simon Johnson for explaining how they do it.

  21. North Dakota already has a State Bank.

    And another option:
    http://economicedge.blogspot.com/2009/12/freedoms-vision-introduction.html

  22. Well said Beth!

    My mother-in-law lived in San Jose. She told me about a company called Apple that was going to start selling “home computers.” She also told me about Palm, HP, and very best of all about a thing called “software,” and a company just starting up called “Michaelsoft” sic. All of which she heard about only through casual conversations with neighbors, business associates, church members, and the local newspaper. All of which I, living in Southern California, never heard about until their IPO’s went through the roof. Having local FED’s is brilliant even in this age of instant communication. You might also have mentioned Texas as a FED location. And yes, many of us in the real estate field saw this bubble bursting IN 2005! I personally re-fi’d my home in 1993 to a fixed rate expecting rates to begin rising in early 2004. I fully expected the FED to see the bubble, and seek to shrink it before it got out of control. Boy was I wrong.

  23. Before naming names, these people need to be researched for their connections to big banks and other corporations, lobbying organizations, etc.

    Not to be paranoid, but, according to OpenSecrets.org, and other organizations (that track all the tentacles from Washington and Wall Street to our gov’t officials) – it can’t be assumed that anyone is NOT connected to the big banks, even though they appear to be doing a good job/the “right” things.

  24. Right on BMG! Why is it that so many blogers rant rather than carefully craft a reasoned argument? Greenspan kept rates too low for too long. MBS were over-rated and so many failed to exercise prudence in underwriting, rating, insuring, and buying them. I just don’t know what else anyone could have done except exactly what Ben did, except that he should have saved Leaman.

  25. Nemo you always cut right to the heart of the matter.

  26. DPS, I kept on reading thinking the entry was all an introduction that was going to be followed by evidence, alternative strategy suggestions, and carefully reasoned arguments. Then suddenly, the post just ended.

  27. Irresponsible behavior is an understandment, Jamie Dimon is a criminal …

    http://www.kccllc.net/documents/0812229/0812229091214000000000008.pdf

    Page 443 onward is a must read, I urge everyone to take a gander, starts off with …

    “JP Morgan takes the valuable assests of Washington Mutual and destroys the property rights of shareholders and contract rights of debt holders”

    Page 447
    44. This was not the first time JPMC pressured government officials to gain undue advantage in its efforts to bid for an ailing competitor. As Reuters and the Washington Post reported in articles published on October 22, 2008, according to an “anonymous but specific” complaint to Senator Chuck Grassley, the ranking Republican on the Senate Finance Committee, the general counsel for JPMC and the enforcement director for the U.S. Securities and Exchange Commission had inappropriately discussed the details of the SEC investigations into Bear Stearns in relation to JPMC’s efforts to acquire Bear Stearns in March of 2008. Sen. Grassley, in a letter to SEC Chairman Christopher Cox, stated that Linda Thomsen, the SEC enforcement director, gave inside information to Stephen
    Cutler, the General Counsel of JPMC (and himself a former SEC enforcement director), about the state of SEC investigations into Bear Stearns, which enabled JPMC to put together a low-ball bid to purchase Bear Stearns. JPMC ultimately won the Bear Stearns bidding with a bid of $2 per share, after the company had previously traded at $30.85 per share. JPMC later agreed to raise the price to about $10 per share. As Sen. Grassley’s stated regarding JPMC’s misuse of its personal relationshiop with an SEC official,

    “This inside information, gotten through a personal relationship, would be critical in helping Morgan put together a low-ball bid to Bear and the US government”

    Page 445
    39. JPMC’s and CEO Dimon’s strategy of gaining an insider position was a well trodden approach for them. They used this approach in 2006 to gain confidential information regarding a client’s natural gas derivatives trading positions, Amaranth. JPMC and Dimon used this confidential information and misstatements about Amaranths’s solvency to prevent attempts to sell a block of its natural gas postition to an outside party. JPMC inserted itself into the deal and reaped a profit of more than $725 million. As reported by an online news source on November 15, 2006 and later cited in Amaranth’s lawsuit against JPMC, a JPMC executive boasted of JPMC’s ability to leverage its inside information sources:

    “We are not exposed from a credit perspective, materially, which allows us to respond quickly to opportunities when they come up…Amaranth was one obvious example of that. I imagine there will be others as we go through time where our ability to be on the inside, but not compromised, is extermely powerful”

    http://en.wikipedia.org/wiki/Racketeer_Influenced_and_Corrupt_Organizations_Act

    “Under RICO, a person who is a member of an enterprise that has committed ANY TWO of 35 crimes—27 federal crimes and 8 state crimes—within a 10-year period can be charged with racketeering”

    And of course now WAMU. It took Markopolous almost 8 years to convince the SEC of Madoff’s criminal activity, how long will it take for Dimon to finally be behind bars where he belongs.

  28. Paul Volcker

  29. How about Nouriel Roubini?

  30. First, you need to read Too Big To Fail, which suggest the low price for bear was treasury policy.

    Second, how would inside info lead to a lower price? Would a bidder without that info offer more and win the deal?

  31. Brookesley Born
    Tall Paul
    Elizabeth Warren
    Mark Thoma
    Simon Johnson

  32. So sad. So true.

  33. Michael Hudson

    William Black

  34. Thanks for writing this, Simon.

  35. I would argue that our policy makers actually help create public outrage by pointing out the less critical problems we face like Wall St. compensation. This administration uses populist outrage to distract from their failure to get anything, really anything done at all.

  36. I feel like make more comments than usual tonight…Billy, do you even know what a dark pool is? Dark liquidity pools are essentially just electronic exchanges where every order is a limit order. They were “bad” when there were just 2 or 3 of them out there, because they gave an advantage to certain trading institutions that no one else had. But guess what – that was 20 years ago. Today there are probably 40-50 of these pools and crossing networks which essentiall allow you to access multiple pools at once. There is nothing essentially wrong with dark pools, they are just a type of ECN, and if you want to argue that ECNs are bad then you are essentially making an argument against transparency – not for it. If you think that the trading floors and exchanges of yore are better, you know when there were just people calling out bids and ask prices to make a market and thousands of morons writing stuff down on little pads of paper – you’re just plain nuts.

  37. BMG and Steve – I agree, Simon needs to do a better job of presenting evidence in this post to fully justify his argument / opinion. I love this blog and have been reading since the dawning days of the crisis, but more recently it has become more “ranty” and I hope it returns to being a forum of well reasoned debate.

    On the other hand, I disagree with both of your comments. 1.) Ben could have started reigning things in when he began his term under Bush. To say that it was all Greenspan’s fault for keeping rates too low for too long is ridiculous. 2.) Ok, I agree – MBS were over-rated and that created laxity in the market, but Bernanke could have and should insisted on regulations for institutions looking to borrow from the fed window to post higher capital requirements in direct proportion to their securitized holdings. 3.) Ben had nothing to do with the decision to save Lehman – that was all Geithener. 4.) This one is for BMG – yes, it’s because of the bailout that there wasn’t a pervasive loss of confidence, but that doesn’t mean we aren’t in a depression. The worst years of the Great Depression didn’t happen until several years afer the market crashed. The stimulus may have saved us for the time being, but that doesn’t mean it saved us.

  38. Jon Claerbout,

    There won’t be a transfer of riches until working people demand it. That’s the way it has always been. Right now working people are too disorganized, demoralized and balkanized politically, particularly within ethnic factions (along with illegal/legal immigrant divisions). You live near San Jose, so you must see that daily. These attitudes are nurtured by authorities at every level of education and governance.

    P.S.People are anonymous because we have to be. Most jobs do not come with tenure.

  39. If you were a regular to this blog, you’d realize that the cogent arguments and alternatives have already been offered and there was no need for Simon to replow planted ground.

  40. I have to confess that I was just a toddler during Jimmy Carter’s administration, so I can’t tell you how bad things were, but I’ve read and heard that things were pretty lousy. The OPEC oil crisis was a shock to our economy just as the bursting of the real-estate bubble and financial crisis was, but what’s with all this total b.s. that we need a Fed Chair that caters to Main St. not Wall St.? that is the same type of inane rhetoric that was used by the Carter administration’s Michael Blumenthal (Treasury Sec.) and G. William Miller (Fed Chair) to promote an economic policy urged by Carter that was meant to take the publics eye off the cost of the Vietnam war. A policy targeting jobs creation at the expense of dollar devaluation. However, for anyone who still believes in the Phillips Curve (econ 101 basics), you can’t bring unemployment below the natural rate of unemployment without producing inflation. Right now the natural rate of unemployment is probably much higher than it has been historically, even if unemployment is high. A Fed Chair that acts on administration policy is the worst of all possible worlds. My vote is for Bernanke because I think he gets that – but if he starts to become a puppet of the Obama administration’s political objectives – watchout, ’cause there’ll be inflation + stagflation far worse than anything ever experienced in the last 50 years…nothing.

  41. And, in any case, if the Senate had refused to reconfirm him – financial sector representatives insist – there would have been chaos in the markets.

    These “representatives”, these thugs, with their constant threats and frequent destructive actions (like sinking the market whenever they don’t like something, especially whenever it looks like the public interest is getting a hearing) are nothing but terrorists by most definitions.

    They should be recognized as such and dealt with as such.

    Anyone who goes through life in terror of the tyranny of the stock market, and who always knuckles under to its terrorist threats, will always be its slave.

  42. “Ultimately, sensible democratic governance prevails in the United States. Sometimes it takes a while.”

    Simon, Simon, as PP&M said one time, “When will they ever learn” (and that was about the military-industrial complex).

    I wholely and entirely disagree, and the Supremes assured my perspective, now the we are more of the true corporatist plutocracy than ever. What Congress will be sensible about is protecting their (and their friends’) power and greed. Bernanke’s reappointment is the clearest evidence of that.

    The 8 million jobs that have been lost have been wrung out of the economy by the litteral strangle hold of the bloated TBTF financial sector, and won’t be back (or more that are really necessary to overcome the drop with all of the new faces being added since) any time soon, since the rest of the private sector can’t find a way to generate itself without the support it can’t find in Washington.

    The President spoke of jobs as his biggest challenge, and then fought for Bernanke. He’s definitely one of Them, and not one of Us. That becomes clearer by the day.

  43. I am sorry but I have to disagree. Bernanke may have made some serious mistakes / misjudgements prior to 2008 but the one principle most agree upon is that markets hate uncertainty. He was certainly not alone in failing to estimate the severity of the Great Recession: most central bankers are guilty of the same mistakes. It does not mean he cannot learn from erring from too little to too much. As said before (most) academics fail to “get” markets. Thus no matter how unpopular reappointment was appropriate. As Keynes said when the facts change.. I change ny opinion. There is no reason to assume that Bernanke will not make better judgements as a result of this torrid experience. Timing the removal of the stimulus is going to be an exquisite exercise of timing. I think that picking a fight with Bernanke and appointing a new and probably an outsider would have beeen a mistake. I think this article is a knee jerk over-reaction

  44. Not that anyone would be any better I believe, so why not let him sweat through his own mess? Do we see a gold bubble?

  45. It is astounding. A man who who didn’t see it coming, didn’t understand it when it arrived, and continues hosing a drowning man in the hopes that it will revive him. Bernanke alone is bad enough.
    But what of the Predsident and the senate? 71 individuals who use what criteria to judge Bernanke?

  46. Yes, we would have had “good growth” not “bad growth”. The bubble created jobs that were largely unnecessary, out of line with the country’s real needs/desires/health.

  47. Mr, Johnson’s assertion quoted above is arguable, at best. (Wishful thinking, perhaps?) It makes me nervous when Senators like Bernie Sanders and Jim DeMint are plowing the same political acreage. They say ‘politics makes strange bedfellows’ (political “Don’t ask; don’t tell”, anyone?), but this is a little weird. Don’t get me wrong, I don’t think Bernanke is the man for the job, and I’ll leave it to others with more specific knowledge to throw the names of would-be nominees into the circus ring. Unfortunately the tent is empty except for the guys sweeping up.

    Anytime you create a political or economic institution in which the average person can’t walk up to the person who runs that institution and say, “What the hell were you thinking?”, the jig is up. The charade is played willingly by all when times seem to be good (read: credit bubble), when people can take out a ‘home equity line of credit’ (read: second mortgage) to finance lifestyle fun and games, but when the bubble hits the fan, it POPS(!). Then we get to see who’s left holding the incredibly large bag of money (and who’s lined up to ask for some of that money for reelection).

    Tinker here, tinker there isn’t going to do anything. Until the American people pull their heads out of their…the clouds we might as well kick back and watch the political football game. Because that’s all we’ll be: spectators for the speculators.

    Go Saints!!!

  48. Everything up to the last quote is dead on, however:

    “Ultimately, sensible democratic governance prevails in the United States. Sometimes it takes a while.”

    Is just too optimistic. It might be a reasonable assumption based on prior history, but that is just that – history.

    With the advent of mass media and the convenience it lays for propaganda, I think the game is just about nearly over.

  49. Read Minsky. Greenspan was essentially a victim of his own success. By helping to create (he didn’t do it all by himself, but I acknowledge his contribution) such a long period of relative stability, he sowed to seeds of doom in the economy. Key players began to assume that panics couldn’t happen (just as they assumed that real estate wouldn’t devalue) and took larger and larger risks. According to Minsky, that’s human nature and a fundamental feature of market economies.

    Regarding the last sentence of the post, “Ultimately, sensible democratic governance prevails in the United States. Sometimes it takes a while.”: it has been said before, and by much better men, that Americans will always do the right thing — after they’ve tried everything else.

  50. Conservatives want small government and Liberals want good government. Neither are getting their way, due to the influence of corporate executives. Some of them are finally realizing this and that makes for the strange bedfellow.

  51. I can support your position if you mean transferring resources to the poor so they, in turn, can become productive members of society.

  52. Except he is still in cover-your-a.. mode. Last fall, past Feb, yesterday, today, tomorrow, five years from now when those secret documents from AIG are published-Bernanke will hit the ‘so much worse if we didn’t give everything away to the banks’..
    They knew before it all came down what they were going to do-same as Savings-n-Loan precedent, except to the multiple of trillions degree. And this time, no one goes to jail. (Beyond nice work if you can get it..)

    Don’t b.s. us JR with the ‘nothing to see here, move along now’. The Markets are not the economy, they are just a part. Eventually, one way or another, this truth will come home to roost. Hopefully, not after our country splits up into several parts.

  53. Homo aureus consilium rei publicae agit?

  54. Jimmy J,

    Thank you for your cogent and respectful reply. This missive is sent with the same sentiment.

    On “1″ above, The reason banks and other investors bought MBS when heretofore they had not, was because the yields on Treasuries was so low that they began searching for higher yielding securities. This is not a theory. This was what the MBS buyers themselves said. Also, since most buyers of homes need a loan, the low rates fueled a homebuying frenzy. This in turn created “The Housing Bubble,” that is at the base of our current, and future crisis, and you have not changed my mind that Greenspan was the culprit. (I theorize that G.W. Bush saw that Greenspan had kept rates high during the election cycle of his father G.H.W. Bush, and G.W. hammered Greenspan to not let the same thing happen to G.W. that happened to G.H.W.)

    On “2″ above I think it takes a crisis to provoke the government to institute change. As long as the economy was running nicely, on paper, I think that even if Ben saw what was to come he couldn’t have done much to change it. I also believe that Ben clearly did not see what was coming and he probably thought he had inherited nirvana from Greenspan.

    Also in 2004, the Bush administration attempted to reign in Fanny & Freddie from their profligate lending ways and was stopped cold by Barney Frank and the National Association of Realtors. This was an extremely proactive and prescient act on the part of the Bush administration. But, to support my thesis, since there was no crisis, there is no urgency or perceived need for any corrective action.

    On “3″ above, I stand corrected.

    On “4″ above, I do expect the future will be worse than today.

  55. Jobs created by the bubble replaced jobs that were moved offshore (off-shoring of manufacturing and other jobs that can be done over a wire, essentially “free manufacturing” in China, etc.).

  56. Not true.

    The DJIA _CREATED_ a massive public outcry, which forced Congress to recant. You give way too much credit to the American public.

    Remember, TARP was initially rejected by Congress, which somehow got the ludicrous notion that it was really in control of anything. Then the market makers b*&#h slapped Congress by shorting the s#*t out of pretty much everything with any short term debt rolling over (and anything with high leverage), and all the momentum players followed along (up/down doesn’t matter, as long as you know which direction to go in). Retail buy-n-holders stayed put for a bit, but when they saw the incompetence of the Bush/Paulson leadership, they too got spooked and bailed, forcing fund managers to go into fire-sale mode.

    The public panicked, and realized that while they hated the banks, they feared them even more. Congress reverted, tail between its legs, duly chastised for its insolence. Meanwhile, the Fed foolishly believed that consumers would carry on with their mindlessly consumeristic ways, failing to see a collapse in aggregate demand as _real_ interest rates (not the nominal rates that “loose” money folks like to talk about) went through the roof and deflation set in.

    So, the US public can rail in anger all we want and beat our chests like an angry bull gorilla confronting a hunter with a .30-06 pointed at his heart. Sad, really. One histrionic display of courage before it becomes worm food.

    The credit-creating institutions have a strangle-hold on asset prices, and with every retirement-institution (and most 401k owners) in the US dependent on asset prices to support their ludicrous 8% annual growth assumptions (in order to justify insufficient direct savings/contributions, excessive payouts, and early retirement for a longer-lived population that is increasingly dependent on SERVICES which are INCREASING in price), the banks have a strangle-hold over policy. And their price of sustaining the money supply? A cut of all the money that goes through their hands.

    You know it. I know it. The American public may hate itself for being dependent on banks, but they know it deep inside in places they don’t talk about at parties. It’s unsustainable, but the train’s moving too fast to get off.

    Every once in a while people start to forget who is in charge, like when Obama decided to go populist. But he too got slapped around like some punk kid; Li’l Tim undercut him that very night, and not only didn’t lose his job, but was VISIBLY given a place of honor and a firm handshake at the State of the Union.

    But if you think that Congress or the Fed WILL (or even SHOULD) stand up to banks given the current institutional structure, you are either hopelessly optimistic or totally suicidal.

    As I’ve said before ad nauseum, we need to secure the money supply BEFORE (or at least at the same time as) we discipline banks. Otherwise, we’re jumping off a bridge with a noose around our necks…

  57. Valerie Gagnon

    Yes, why not Simon Johnson!

  58. Valerie Gagnon

    Get out from your pretty little box.

  59. Valerie Gagnon

    Like you Jon I a dare every one of you to state their own names
    What kind of cowards are you guys?

  60. “Ultimately, sensible democratic governance prevails in the United States. Sometimes it takes a while.”

    Really? How many decades? Ever since Eisenhower abdicated his sworn duty and rode into the sunset with a drive-by speech on the National Security Racket, things have gotten steadily worse. Now we are looking at illegal war and torture as the new normal. Bernanke and his ilk are just a case of governmental herpes compared to the original sin.

  61. SECURING MONEY SUPPLY SHOULD BEGIN WITH PASS THROUGH LOANS TO SMALL BIS.COMMUNITY BANKS PROCESS VET THE APS,MONEY WIRED THROUGH THE BANK RESERVES NOT REQUIRED.THIS IS NOT ROCKET SCIENCE

    TOMTOM

  62. Save Black for Treasury…

  63. While it may be appropriate to be paranoid, there needs to be a whistleblower to get reform that will work. IOW not all people with connections to oligarchs are enemies – it is a herculean task to identify the ones that are trojan horses before they can do additional damage. But the most effective reforms will come from insiders (see Chester Arthur and civil service reform).

  64. exactly

  65. Johnson asks:

    Have we really reached the situation where the Senate as a body and individual Senators – accomplished men and women, who stand on the shoulders of giants – must bow down before financial markets and high-ranking executives who are really just talking their book?

    Simple answers to simple questions: Yes.

  66. Well said. Helicopter Ben along with Greenspan is the architect of this crisis. His foolish PhD thesis about the great depression has permitted (because we can avoid depression through the printing press, duh) the financial elite to recreate the same conditions.

    I have dubbed this crisis the Great Impoverishment. It is bigger in size than the Great Depression. By arresting the liquidation of bad assets and propping up and officializing the too big to fail financial institutions, we have avoided the immediate depression but the underlying issues remain unaddressed. Worse, we have torn the heart out of the principles that made America great; gone is the freedom to succeed, since it cannot logically exist without the freedom to fail.

    There will be no recovery from this crisis. We will lurch from crisis to crisis, destroying and consuming what is left. Through inflation or through deflation and probably episodes of both, our standard of living will decline. The middle class will be decimated and society will devolve towards the 3rd world structure of super rich elite and the masses.

    Worse yet, I am not aware of any historical precedent of this magnitude that did not lead to the W word. It is truly a horrifying prospect. Yet it also seems a fitting conclusion to a crisis of this magnitude. These debt abominations do not dissipate and die over time. They can only be cured by currency destruction that makes the previous debt meaningless. Wars create the perfect backdrop for destroying currencies and taking/transfering wealth by fiat.

    The worst is yet to come.

  67. AJ, there you go again with that First, Second thing, LOL

  68. I’m trying to square this eminently sensible argument with your foolish suggestion of Paul Krugman as an alternative, and it keeps coming up a circle.

  69. aRE YOU A cOMMUNIST? wHY DO YOU HATE aMERICA?!?

  70. What a bunch of rubbish, I can’t believe you are a professor at MIT Mr. Johnson. You clearly are an angry man, but I yet to have read a sensible argument coming from you. What’s your argument against Bernanke – that the supporters of Greenspan were wrong ? Sounds like something from Kindergarten to me. What a waste of time.

  71. Read this quote from Simon Johnson: Sunday, April 5, 2009

    “If he succeeds in restarting growth while avoiding high inflation, Bernanke may well become the most revered economist in modern history. But for the moment, he is operating in uncharted territory. ”

    Seems like growth is bank, Johnson.
    Johnson, how do you have any credibility now, in saying that its a colossal failure to reappoint him? Seems you’re just trying to get noticed, screeching at the top of your voice and ride on populism, its pathtetic.

  72. Agreed. This is the Depession its just that everything hasn’t yet hit the fan

  73. Noone mentioned the elephant in the room…..the Marxist(5th Plank) PRIVATE “Federal” Reserve Bank and its PRINTING PRESS Weimar-like FIAT paper “dollars”.

    Having CONGRESS(that CREATED the GOVERNMENT-backed MONOPOLY) rescind its vote of 1913 and replace it with..

    NOTHING ie follow the Constitution.

    THAT is the solution…NOT the “meet the new boss-same as the old boss!” shuffling deckchairs “new’ leader to “fix” the socialist quagmire.

    The same old Rockefeller/Goldman Sachs One World regimenting will NOT do.

    Stop being a “hacker”…be a ROOT STRIKER!

    Thoreau said…
    “There are a thousand flailing away and hacking at the branches of the tree of tyranny for one who is striking at the root.”

    Urge your Representative to abide by his/her OATH to Honor and OBEY the rules ie THE CONSTITUTION.

  74. In a country with an estimated 312 million residents, why is it that the same names have reappeared over and over again for the past three decades, individuals that continue to promote policies that have contributed to the creation of a 3.8 trillion dollar budget complete with a 1.56 trillion dollar deficit. Are you telling me that there are no new ideas or persons available that can inject some innovative solutions to this catastrophe that my children and possibly grandchildren will NEVER be able to pay down. If there are no apparent heirs to these positions, what happens when they ultimately retire or pass away?

  75. The republic was created by Plato in angered reaction to Greek democrats forcing Socrates to suicide with hemlock because Socrates refused to recant the statement that “Not all government positions should be elected, some need to be appointed because they require skills not necessarily available through general elections.”
    As a result Plato created the republic to be the antithesis of democracy, everything a republic is a democracy is not and vice versa.
    A republic is run by elites while a democracy is run by the majority of citizens who vote. It is impossible to have a democratic republic – run by wealthy elites and the majority of common voters at the same time. It is either one or the other!
    America is a republic which has a lot of votes but the national political system is designed to be stalemated. If government is vacant or stalemated, who wins? The wealthy or the middle class & poor? Wealthy elites win of course. America is set up to be run by wealthy elites not a majority voters through elected officials.
    So Bernanke’s reappointment is not a colossal failure of government; it is the American political system doing what it was designed to do – serve the interests of the wealthy elite minority while ignoring the needs and interests of the working class majority!
    With the exception of the 30′s to the 80′s – and only as a result of the total economic failure of the conservative political agenda – America has had very little or no regulation, no restriction on greed, and powerless politicians incapable of building a framework of social and personal morality.
    Moral is when you know what it is and do it.
    Immoral is when you know what it is and don’t do it.
    Amoral is when you never consider morals in the first place!
    There is not a single human or social value or moral which can be expressed in terms of dollars.
    This means that any system in which the final and deciding value before action is dollars, is by definition amoral.
    The additional problem is that the costs of implementing social and human morals CAN be expressed in terms of dollars; while the benefits CANNOT directly be expressed in dollars. Conservatives know the cost of social and human morals and can see few or no dollar benefits – they know the cost of everything and the social moral value of nothing.
    Government is the only vehicle through which moral values can be expressed in society because private enterprise is defined by and profit/loss is expressed by dollars!
    Only through government can social good or human values override the total dictatorship of dollar costs. This is why conservatives & Republicans detest democratic government and do everything to control, frustrate, shrink and kill democratic government.
    If government was so ineffective why would Republicans, conservatives and corporations spend hundreds of millions of dollars to corrupt and destroy it? If government was really ineffective if done correctly the wealthy elites wouldn’t spend a dime on politics or politicians!
    That government done correctly can prevent the dictatorship of wealthy elites and the creation of only one value – dollars – is the reason the wealthy part with hundred of millions each year to prevent, impoverish and pervert democratic government!