Ben Bernanke spoke at length today on Capitol Hill. But did he say anything?
Over in The Guardian’s on-line comment page, James and I suggest an answer. There was nothing new on the big macroeconomic issues of the age. And on banking, we remain disappointed…
The Baseline Scenario 
Now what will Bernanke do when stagflation sets in? Will he increase interest rates when inflation is at 8% and unemployment is at 10%? This is where we are headed.
What precedent is there for deflation in the prices of goods and services with the current explosive rate of money supply growth?
They wait and see. If the SP500 goes to 600 nationalization may suddenly be the only way to go. What’s more people’s revulsion towards bankers may become overt…I mean those numbers on the tickers do represent something to some people and some of those people are probably getting pretty unhappy and some of them are pretty powerful.
You can’t just blame banks for the problem. It’s the US consumer can’t pay or are unwilling to pay their debt back. With such high volatility of GDP, any leveraged entity can’t hardly withstand it. It’s easy for you to blame banks for the loss, but can’t you come up with something constructive to solve the problem? If you are running a bank, the result can be even worse.
People say wipe out banks and start new good banks are good solutions. Former RTC chief proudly claimed that they reproduced many ‘healthy’ banks after selling their assets at loss and returned these banks to private sector. Just a little more than 10 years later, these so called ‘healthy’ banks are collapsing again. If you start new bank today, can you design the system in a way that they won’t fall again a decade later.
I thought people at MIT can come up with something other than the obvious blame games. I’m dissapointed by the quality of your posts. A community college teacher probably can do the same. No wonder people say if most economists are people don’t have common sense.
stan_for_bank indeed! Nope, this one cannot be blamed on the people, except to the degree that some of them eagerly participated in the game the brokers, investment banks, and investors set up for them to play in – with Greenspan, Rubin, Summers, and Gramm-Leach-Biley setting up the no_rules of play.
There is no “moral hazard” to speak of among the public, given the degree to which the financial community and authority figures lied and encouraged the people to buy, buy, borrow, borrow.
All of the moral hazard hangs, albatross like, upon the neck of the investors in these banks, the banks executives, their investment brokers and product managers, and the mortgage brokers and real estate people who fed the system with bad paper they induced consumers to sign on to.
Any one with “common sense” who lived through these years, and watched the process as it affected their neighbors and family, and successfully prevented the signature of family members on these ARM’s, knows that Simon is right, and you are simple.
Are you sure that “converting preferred into common shares has limited economic relevance”? In addition to the dividend payments, the full face value of the preferred has to be repaid eventually. As such, it represents a liability of the bank, although subordinate to its other debts.
But common stock represents no such liability. Converting the preferred into common makes it official that the bank itself will never have to repay the TARP injection. That sounds like significant economic relevance to me.
NEMO
hear-hear!!!
how is this transfer of money happening without anyone but the this group and a few others knowing that what is happening! it is like living through 911 days, except instead of being attacked from terrorists, our financial security has been and continues to be robbed by wolves in sheep(treassec/fedchair) clothings.
You made a good point. The system architects who designed the leveraged systems shall be mainly responsible for the mess they produced. The question is anyone can come up with a good system design to mitigate the chance that these so called ‘healthy’ entities won’t crumble again in the next downturn.
It’s easy to point out the root cause of the current crisis. It’s much more difficult task to come up with a good solution to address the current and future problems. Nationalize banks may sound simple, but it only transfer the wealth from mass to few hedge funds who try to buy assets at fire sale price they know they will get if banks are nationalized.
The banking system is inherently unstable if the volatility of economy becomes higher in the future. With so many financial derivatives, etfs, etc, wipe out current banks and establish so called good banks don’t solve the problem. Any highly leveraged entities simply can’t survive if the volatility of future economy is very high.
In this crisis, majority of people suffer even they live responsibly. Those who bought CDS at cheap made a fortune. The financial market become a huge wealth transfer tool. It’s true that those who bought CDS may be smart, but do they really derserve billions of dollars profit just because they spot the problem? Those people did not invent anything or create wealth for the society, yet they are the biggest beneficiaries if big banks are nationalized.
It’s ironic that many US states don’t allow gambling, but US goverment still allow naked CDS contracts to be traded in the market. I think US has a flawed financial system that allow mistakes of a few affect lives of many people who don’t participate the craziness of the speculative game. Why US goverment lend AIG 60 billion dollars to honor bad CDS bet? Why can’t US just cancel the CDS contract, this may hurt a few hedge funds, but those 60 billion dollars can be used in much more constructive ways than benefiting a few hedge funds betting against US financial system. The so called mark to market rules only add more fuels to both the upside and downside swings.
Financial innovations that never tested throughly caused big problems in the economy. The priority shall be focused on fixing designs and rules of the system, rather than wiping out participents of the system.
As to Bernanke today… in the words of King Lear “It was a Tale of Sound and Fury, Signifying Nothing.”
And since we’re back onto the bank issues, here’s an interesting article summarizing a not-so-new but often-ignored point:
http://www.forbes.com/2009/02/23/mark-to-market-opinions-columnists_recovery_stimulus.html?partner=popstories
The article points out three interesting facts:
Fact 1:
“Mark-to-market accounting existed in the Great Depression, and according to Milton Friedman, who wrote about it just 30 years after the fact, it was responsible for the failure of many banks.
Franklin Roosevelt suspended it in 1938, and between then and 2007 there were no panics or depressions. But when FASB 157, a statement from the Federal Accounting Standards Board, went into effect in 2007, reintroducing mark-to-market accounting, look what happened.”
Fact 2:
“In the 1980s and 1990s, there were at least as many, and probably more, bad loans in the banking system as a share of the economy. The difference was that there was no mark-to-market accounting. This gave banks time to work through the problems.”
(I would call this a partial fact – the 80s weren’t all giggles.)
Point 3:
“The real problem with Japan was not zombie banks; it was that there was no growth. After all, foreign banks were allowed to lend in Japan and were not in bad shape like the Japanese banks. They stayed away from Japan because the economy was not vibrant.”
That’s right – FOREIGN BANKS COULD LEND IN JAPAN AND WERE WELL CAPITALIZED – the reason they did not lend was NOT because they could not, but because it seemed like a BAD BET. It seems as if the entire debate today is driven by a fear of zombie banks, but the historical case that insolvent banks drove stagnation (rather than stagnation driving insolvent banks) seems rather weak.
How is it that bank balance sheets are more important to growth than household balance sheets?
I am stunned that I agree so strongly with an article posted by Forbes, but I am utterly at a loss as to why our academic economists are ignoring EVERY OPTION to address the banking crisis OTHER than absorbing losses (either through capital injections or nationalization – either way we suck up the losses).
Why are we so eager to absorb these losses, and WHY are we so sadly eager to pay for these losses by issuing debt rather than expanding the monetary supply? (And why are our beloved economists desperately avoiding this question…)
Oh yes, and one more memorable moment from Bernanke’s testimony.
Bernanke was asked point-blank when the Fed will start buying T-bills (as they promised back in November in Bernanke’s quantitative easing speech).
True to form, Bernanke did not answer the question. He, like every other academic economist with a voice (except perhaps Krugman), is deliberately avoiding the question.
As time passes the urgent necessity of fixing the financial sector fades away. There is no shortage of credit for creditworthy borrowers. Demand for credit is down because of the need of households and businesses to reduce debt and the shrinkage of the economy. The damage from the Paulson/Bernanke/Geithner floundering has been done. People have had time to adjust to the fact that the large banks are economically insolvent.
It is time to announce a step-by-step plan to withdraw all the guarantees extended by the government to the banking sector on an emergency basis last fall. Let Citibank et al. make their case to investors if they need more capital.
The focus of regulators should be to collect data on megabank balance sheets and to devise an expedited process to restructure the megabanks as they begin to fail one by one. The goal should be a process that can be executed over one long weekend.
Mr. Stats Guy: Speaking of King Lear and other royalty, pray tell what was that oratory by President Obama last night all about? Don’t you feel all warm and cuddly now?
The problem is trust and transparency (or rather lack of it) in wall street , and justice too.
stand_for_bank, StatsGuy, Charles R. Williams: My take aways from your comments, for which I am grateful are:
CW – Clear eyes and steady nerves help a lot, thanks for the perspective.
s_f_b – don’t let the desire to get even interfere with the goal of fixing the system that caused the problem.
SG – While we should not seek retribution, we should at least not let the institutions and those off the hook, while leaving the taxpayers, unemployed and wage earners holding the bag for them – but even more importantly we should be plugging the hole through which the money supply is draining and refilling the bathtub.
I am indebted to Bill Gross for the last analogy; he has a post I like at http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2009/Investment+Outlook+Bill+Gross+March+2009+Hairy+Lips+Sink+Ships.htm
The problem with the discussion on nationalization is that it has no depth. A proponent pointing to historical examples needs with some care needs to show that nationalization is feasible for banks of the size as a percentage of GDP as BAC, the destruction of long term relationships and good will implicit in the forced liquidation will cost less than the upside of having new credit worthy owners and that the new entities are likely to lend more wisely than the own.
The opponents need to explain how the current banks can function and be constrained to both to lend given their miserable balances and how they can prevent from becomming so insolvent so that they will not have the funds to pay wages to their employees. They also need to explain how management decision can be arranged so that banks lend for necessary investment such as Energy and in Education and stop financing McMansions and other harmful expenditures which work against the long term issues of the economy.
Above all the discussion needs nuance, numbers and a discussion of what occurs when ones favorite hypothesis is wrong. Ask whether or not you would have surgery for a cardiac bypass given a couple of alternative treatment options based on what one would see in this diswcussion.
While economists are second cousins to accountants and bankers one needs to realize that finance has to shrink as a portion of GDP and the decisions make by finance capital need to be made more by firms investing in energy or education and have a better idea of what they are doing. Obama’s discussion of credit as the lifeblood of the economy is a half-truth. In fact Savings are the lifeblood of the economy either through corporate profits or individual contributions when they are invested in new companies, people, and infrastructure not when they are placed in the Ponzi Scheme known as the stock market which does almost nothing for the economy relative to assets invested as none of the funds save IPOs pay for any productive additions to the economy.
It seems neither the government, the press, nor the economics profession are doing the necessary systematic thinking at least in Public. Without out it Policy is at best a crapshoot.
Bernanke is learning from the Greenspan speech book.
Bloviating BS! he’s got a snarky crook smile with that rascally stubble.
Hi “Stand_for_bank” CDS’ are the most dreadful tools of the industry. Those who bought the CDS cheaply can either sell, or sit back and insist that those credits (the underlying) go into bankruptcy and collect their reward.
How is CDS pricing achieved when the presence of a CDS actually influences the LIKELIHOOD of bankruptcy! Duh quants!