Should Ben Bernanke Be Reconfirmed?

Ben Bernanke’s nomination to be reconfirmed as chairman of the Federal Reserve Board passed out of the Senate Banking Committee and will next be taken up by the full Senate. 

But, despite being named Time’s Person of the Year for his efforts during the financial crisis, the Bernanke nomination has run into strong pushback – both in terms of tough questions from the committee and in the form of a “hold” on the nomination, placed by Senator Bernie Sanders of Vermont.

The conventional wisdom among economists is that political control over an independent central bank is regrettable and should be resisted.  We like to think of the Federal Reserve as a bastion of technocracy, with monetary policy steering a course between recession and inflation just on the basis of “objective evidence” regarding the relative balance of risks (i.e., if monetary policy stays too loose for too long, we’ll get inflation, but if interest rates are tightened prematurely, the economic recovery will stall.)

But the fact of the matter is that, in any well-functioning democracy, independence is earned based on credible and ultimately successful actions — not granted for all time and without conditions.  The questions raised about Mr. Bernanke’s performance in office and his likely future actions are almost entirely appropriate – and focus attention on a major weakness in the case for his reappointment.

The issue is what economists like to call “time inconsistency,” but which everyone else just regards as common sense: If I swear up and down that I won’t bail out your firm in a future crisis, will I really keep this promise when the crisis hits and the consequences of “no bailout” look absolutely awful?  And if you know that, most likely, the bailout will be there irrespective of how you behave, for example because your firm is so big relative to the economy – why should you be more careful or take less risk?

Bernanke’s problem is that he says he won’t help big banks when they next get into trouble.  But is this plausible?

To be fair, Bernanke does not refuse to talk about the problem that is widely known now as “Too Big To Fail” or the repeated boom-bust-bailout cycle that is increasingly referred to in official circles as the “doom loop.”  But, when asked what will break this loop, his answer is weak:

“A new regulatory structure should address this problem. In particular, a stronger financial regulatory structure would include: a consolidated supervisory framework for all financial institutions that may pose significant risk to the financial system; consideration in this framework of the risks that an entity may pose, either through its own actions or through interactions with other firms or markets, to the broader financial system; a systemic risk oversight council to identify, and coordinate responses to, emerging risks to financial stability; and a new special resolution process that would allow the government to wind down in an orderly way a failing systemically important nonbank financial institution (the disorderly failure of which would otherwise threaten the entire financial system), while also imposing losses on the firm’s shareholders and creditors. The imposition of losses would reduce the costs to taxpayers should a failure occur.”

In other words, “if big banks should fail in the future, we’ll take them over and impose meaningful losses on creditors.”

But this is simply not plausible – and don’t take our word for it, look at the probability of default implied by the Credit Default Swap (CDS) spreads for Bank of America.  The market view is that Bank of America, despite all its problems and a risky balance sheet, is only slightly more likely to default than is the United States government (which, despite recent rhetoric, is still one of the most reliable borrowers in the world).  The market view for all other major US banks is essentially the same.

In other words, Mr. Bernanke’s key audiences – in financial markets – do not find him credible on the central issue of the day, presumably because he is unwilling to condone measures that would ensure today’s massive banks become “small enough to fail.”  If potential creditors do not fear losses, they will provide funds on easy terms to our big banks and we will re-run some version of our previous bubble.  This is how our financial system works.

The Senate will decide soon, but Mr. Bernanke has made his case and the market has already voted. 

Given his testimony, his written response to Senators’ questions, and the market reaction, we recommend that Mr. Bernanke not be reconfirmed.

By Peter Boone and Simon Johnson

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

43 thoughts on “Should Ben Bernanke Be Reconfirmed?

  1. I’m actually in favor of Mr. Bernanke’s reconfirmation – so long as it goes hand in hand with robust financial regulatory reform, and consolidation of the regulatory function at the federal level. Absent those tow things, we need to get Krugman or someone similar.

  2. As I asked the people at Core Economics when they gave their reasons for replacing Mr. Bernanke, whom would you like to see in his place?

  3. Here is the roll call vote out of the Committee:

    Christopher J. Dodd Chairman (D-CT) Aye
    Tim Johnson (D-SD) Aye
    Jack Reed (D-RI) Aye
    Charles E. Schumer (D-NY) Aye
    Evan Bayh (D-IN) Aye
    Robert Menendez (D-NJ) Aye
    Daniel K. Akaka (D-HI) Aye
    Sherrod Brown (D-OH) Aye
    Jon Tester (D-MT) Aye
    Herb Kohl (D-WI) Aye
    Mark Warner (D-VA) Aye
    Jeff Merkley (D-OR) No
    Michael Bennet (D-CO) Aye

    Richard C. Shelby Ranking Member (R-AL) No
    Robert F. Bennett (R-UT) No
    Jim Bunning (R-KY) No
    Mike Crapo (R-ID) No
    Bob Corker (R-TN) Aye
    Jim DeMint (R-SC) No
    David Vitter (R-LA) No
    Mike Johanns (R-NE) Aye
    Kay Bailey Hutchison (R-TX) No
    Judd Gregg (R-NH) Aye

    I don’t believe Mr. Bernanke is totally oblivious to the issues you have raised in your various writings but it seems as though his preference is to error on the side of caution and conservative management. Mr. Bernanke’s continued argument for the Fed’s independence (from Congressional oversight) really means—–less transparency and accountability.

    What about auditing the Reserve as often suggested by Ron Paul? If President Obama, as well, would only apply some of the wisdom you (guys) have dispensed in numerous economic writings and media appearances…and (sorry to ask) but Simon, is that only yellow neck tie there is….?

  4. I would like to see it be someone who can tell me how the current crisis could have been avoided by early detection. Specifically what agency should have been aware that a problem was looming, when they should have been aware, what data would have made them aware, what actions could have been taken (over what time frame) to avoid the crisis, and potential positive and negative impacts of those actions. In addition I would like to hear proposes reforms and how they would insure that early avoidance recognition and actions occur. If Bernanke can do this, then I’m all for him.

  5. “Mr. Bernanke, an academic who has never worked a single day in his life. He will take anything off a cliff: a business, a McDonald’s stand, the Federal Reserve. And I have to say I have a certain sympathy for him as a character. He’s ok, but completely useless. I would not even hire him as my butler…Mr Bernanke is a madman, a destroyer of the value of money. And he is a wealth destroyer and an economic criminal. It is the duty of a central bank to keep the value of money. I believe today for ninety percent of Americans life is harder than it was in 1999. Basically I think they are a bunch of crooks.” Marc Faber on King World News

  6. I barely know where to begin with this one, but I will tell you that in the next election cycle my entire focus will be About getting out every single person who voted for this traitor. I know the words are harsh, but I only state the truth by analysis.

    Strangely, the republicans are working against the man but I’m sure it’s theater because industry wants him in there.

    Of course the markets have voted. What a surprise. I’d vote for someone who gave me everything and anythig I wanted, who didn’t distrupt the puch bowl, etc. In fact I’d argue that the markets are much better served by a Fed that doesn’t telegraph what it does. That way the risk of sudden tail events should be priced in.

    I want an independent Fed, the problem is that the Fed isn’t independent enough. Everyone screams about political influence, but the overwhelming amount of industry influence is what has destroyed the institution. It no longer functions.

    Hello, don’t people realize they are poorer than 25 years ago and more in debt. While the super wealthy are the only folks whose wages keep up with inflation. That this effect is a direct outgrowth of our credit driven society where real people get paid based on ROA and the wealthy get paid based on ROE (meaning the wealthy make get paid based on the effects of leverage, real people don’t). That the overleveraging of society is a dorect resulf of Fed policy and that it is unstable. You can’t have credit growth beyond gdp growth and maintain stability. Real incomes then can’t support the growth of credit. Even worse is the Fed has allowed those who make bad credit decisions to off load the risk to sociery (securitization)while they keep the bonus money. Not to see it can only be a policy of deliberate ignorance. Only a traitor would have allowed something so clearly destblizing to happen. These people have great minds and a high schooler could figure this one out it’s so simple

    As I go though the crisis the past 10 years the only thing that keeps going through my brain is 1984. Meaning that the state/media/oligarchy creates a truth narative that has no basis in reality to maintain control. From Bush WMD in Iraq, to the venertion of Bernanke (the man who has done more damage to this country that Osama). I see the media reporting something from officials that have no basis in reality like it is news because an official person says it. Honestly I see very little difference between what is going on and what the old soviet union did.

    I feel like I’m in North Korea and the media keeps telling me the dear leader is god and we live in a workers paradise yet people are starving of hunger. Strangely many believe it. Is something being put in the water.

    Just like in 1984 where the TV had devices to watch the populace the government is monitoring internet content and social networking sites. Peaceful protestors get gassed sitting in a park during the G20. The right wing screams crazy stuff that gets many people to vote agains their own economic interests, and the left wing is happy to water down any reform and keep the oney flowing. At the same time they can claim victory agains the “hardliners” when they have given corporate interests eveyrthing they could ask for. It has become a scripted theater that keeps happening over and over again. HELP I AM IN THE TWILIGHT ZONE

  7. Bernanke needs to have looked away from his charts and graphs and read more history: to wit, I was looking up something in Chernow’s big book on Morgan and found on pp.354-55 this great exchange in the summer of 1932 (before the election) between Leffingwell of Morgan and FDR:

    “…You and I know,” (wrote Leffingwell,) “that we cannot we cannot cure the present deflation and depression by punishing the villains, real or imaginary, of the first post war decade, and that when it comes down to the day of reckoning nobody gets very far with all this prohibition and regulation stuff.” To which FDR replied: “I wish we could get from the bankers themselves an admission that in the 1927 to 1929 period there were grave abuses and that the bankers themselves now support wholeheartedly methods to prevent recurrence there of. Can’t bankers see their own advantage in such a course?” And then Leffingwell again: “The bankers were not in fact responsible for 1927-29 and the politicians were. Why then should the bankers make a false confession?”

  8. So the obvious problem is that the special interests of the finance industry captured the regulator, The Fed. To some degree, it does not matter who the chairperson is.

    What is more important is regulatory reform and transparency. The regulatory reforms that Elizabeth Warren, Sheila Bair, Paul Volcker,, and others have proposed is correct and would be in society’s best interest. Transparency is extremely necessary as Johnson stated, “independence is earned based on credible and ultimately successful actions.” Auditing the FED is not a fringe movement. True Ron Paul brought fourth this regulation, but it has turned into a well-supported bi-partisan bill. The Fed has acted questionable at best and has a ballooning balance sheet of $2 trillion + it is entirely appropriate to audit them.

    Still a great post by Johnson, Ben Bernanke’s reconfirmation should not be a forgone conclusion. In a well functioning democracy, there should be an open debate on Bernanke’s reconfirmation. True Bernanke got us out of the crisis without another great depression, but he is also one of the policy makers who got us into the crisis.

    Should we put the gambling regulators in charge of our economy? With Dean Baker ~

    Seasons Greetings!

  9. The very notion that money creation should be “independent” of democracy is far fetched.

    Demo-cracy is People-rule. Now, for millennia, the State has ruled over the money used in the State. But now money creation is “independent” of the State, it is not ruled by the State anymore? So, what, or whom, is ruling money creation? If People is not ruling, who is? Money? Is it then Money-rule? That is, is it Pluto-cracy?

    The Demos has to regain the rule of money. Money creation has to be ruled by the People again. Time to get going. auditing the central banks ought to be a good start.

  10. We like to think of the Federal Reserve as a bastion of technocracy

    Spoken like true technocrats. If only they put economic experts in charge…

    Oh, wait.


  11. “I would like to see it be someone who can tell me how the current crisis could have been avoided by early detection.”

    The answer is that it could not have been. The notion, that during a boom, somehow a regulator can detect when the economy has departed from sustainable growth and entered into bubble territory, and then somehow turn a few knobs to tighten the reigns and lead the economy back into the sustainable growth range, is patently absurd.

    The ONLY answer is STRUCTURAL reform. Re-instate an updated version of Glass-Steagall to build a firewall between banks proper and everything else. Place explicit size restrictions on financial institutions, either directly by force of law or indirectly through steeply increasing capital regulations tied to size. Change compensation practices to tie compensation to long term performance. Finally, as Bernanke notes, create a permanent resolution mechanism for large financial firms that do fail. But dispense with the nonsensical idea that regulators can somehow see it coming, and through better discretionary action, can prevent it.

  12. Reasons for not confirming Bernanke:

    1. Presided over the crisis and not only missed the causal buildup but dismissed it when warned.

    2. Doesn’t understand how the monetary system works. Thinks that banks lend reserves. They do not. Thinks there is a money multiplier. There is not.

    3. Botched the rescue and did nothing to tie bailout funds to reform. The oligarchs have emerged more powerful than ever.

    4. Remains under the illusion of inflation expectations theory while disregarding unemployment as a relevant parameter.

    Ergo, Ben Bernanke is not fit to be Fed chair.

  13. ECON
    Brilliant ! We are in the twilight of democracy. Just as Glen Grunwald’s blog of today on U.S. torture as described by NY Times and other media. This is truly 1984.

  14. Thank you Simon for another of your reasoned persuasive posts and thanks to some good comments esp DCB who hit the center of the nail. And if any of you missed Geithner’s interview on NPR, go to the site for the transcript. Shockingly clueless would be my polite and conservative assessment.

  15. Tom Hickey summarizes the essentials against the system. BB could hardly argue the facts about Reserves, particularly the enormous demand deposits of the banks held by the Federal Reserve Banks where virtually none in comparison existed before September 2008.

    Under the circumstances of a crisis, a panic, what else might BB have done to stop the panic except prevaricate? What happened was by nature a total surprise . What really set off the panic? I mean what was the specific causal event?

    I have my own suspicions about some stupid reactions to Bush foreign policy moves in the two months or so preceding September 2008. A move or moves that backfired beyond possibilities considered. What caused the bank runs immediately before the Lehman bankruptcy? There was an initiating event that snowballed after a couple years of great uncertainties.

    Then, why on Earth would Ben Bernanke even want to continue to be Fed chairman? Is he being altruistic? Getting on with Hank Paulson must have been vexing in the extreme. Getting on with President Obama and Rahm Emanuel in particular must also be quite vexing. Why would he need the grief? This is a nation long in political crisis with a Congress that simply has and deserves little respect. Congress wants to run things , so let them.

    BB made his Bones long ago and could easily settle in at his university again. In government he answers to a moribund governmental state system with a broken commonwealth of factions. So broken in fact that differences are irreconcilable.

    I doubt any Fed Chairman will ever be effective again. Perhaps , this is Ben Bernanke’s greatest blindness?

  16. BB was appointed by a republican and confirmed by a republican congress. He frequently speaks in coherent sentences and does not pander to Congress like the last guy. Everyone in the lynch mob was hiding under the bed praying to Jesus when the banks ground to a halt. Not one of them provided a solution or a press release suggesting they had a solution. The lynch mob is pandering to the Tea Party crowd so they can provide a convenient villain and re-direct the attention from their own crooked deals. As to the destruction of the US wealth and US currency, that was going on long before BB got in. He just got left holding the burning bag of dog pooh on the front porch. Bottom line: Saudia Arabia takes US dollars for a barrel of oil and they take less than they did 18 months ago. China loves our currency so much they refuse to devalue it by floating their exchange rate. He ain’t perfect but the banks are still open 6 days a week unlike 1932.

  17. It is unlikely, but not all that absurd. It would certainly take a brave Fed Chairman, but Greenspan probably could have prevented or at least curtailed the crisis if he had listened to some of those who directly warned him. Over the long term, yes, structural reform is the answer, but there were economists and financial analysts who did spot the bubble and they likely would have done a better job than Bernanke.

  18. Is Mr. Bernanke helping Mr. Blankfein to do God’s work?

    Interesting article in the NYTimes.

    “But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.”

    “The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

  19. Should Bernanke get all the blame for this mess? No. Should he be reconfirmed? That’s a fat maybe.

    What is the alternative? Larry Summers? If that’s the case, I’ll take Bernanke any day, even if he IS just a sad little hack who doesn’t realize his strings are being pulled.

  20. Why on earth would you conclude from current CDS spreads that the market believes Bernanke won’t institute a revised resolution process for the future? That’s completely illogical. Obviously, the future resolution process will apply to next cycle; not this one. He’s already made it clear nobody big is going down in this cycle, precisely because no feasible resolution process is currently in place.

  21. The essential point made here by Simon Johnson and Peter Boone is that Mr Bernanke has not broken the US TBTF model for banking.

    This is an important point, and perhaps enough to disqualify a person from leading the US’s monetary policy for another 4 years.

    Even more disturbing to me is Mr Bernanke’s behavior prior to the crisis. He was repeatedly shown evidence of a bubble, and waved it all off with flippant or vapid comments, as in the colloquy with Dekaser of National City in 2005. “They have been saying that about California since I bought my first house in 1979.” In his personal life, he purchased a very expensive home with a very low 10% downpayment, using an ARM. This is not a criminal act, or negligence or anything, but it is yet more evidence that Mr Bernanke had no idea that house prices were in a debt-induced bubble. A man this unaware of basic economic and monetary trends and forces should be following, not leading.

  22. After watching the 60 Minutes piece on Bernanke a few months ago, I was enchanted and felt a great deal of faith in his capabilities AND his integrity. I actually still like him on a personal level. I, however, don’t believe that he is the right man for the job on a continuing basis. It has partly to do with his natural fear of the potential consequences of making a hard choice to break up our financial oligarchs, the behemoths of our present economy. He is afraid that things could go very wrong, but at this point the risk is low relative to the future gains in economic stability. Interestingly, my favorite Senator, Bernie Sanders, has stepped in to put a hold on his nomination (
    with the understanding that his continued engineering of the financial community truly threatens our long term national prosperity.

    Thus far, the messages, as indicated in your post, which BB has sent to the world at large and the financial community specifically can be read to mean that he will continue to support them as necessary ad infinitum. There seems to be little question, and, his obfuscation is related directly to the enactment of financial reform geared to taking him and the FED of the hook relating to the control of these TBTF institutions.

    It is odd that the Republicans on the committee all voted to remove him, considering that he is a Republican appointee and that he supports their economic view.

  23. @ Beth’s “sorry to ask” question – Surveying eleven videos of Simon from PBS player or my Tivo, I observed four yellow ties differing in pattern and distributed as follows:
    pattern A – Moyers 2/13
    pattern B – Newshour 6/23, Dan Rather 6/23, NBR 9/21
    pattern C – Business Desk 8/25, Newshour 9/25
    pattern D – Moyers 10/9, Newshour 11/25 & 11/27
    other color – Newshour 10/1/08, Moyers 4/24

    (Pardon the frivolity, I’m an anthropology student).
    Merry Christmas!

  24. “The issue is what economists like to call “time inconsistency,” but which everyone else just regards as common sense: If I swear up and down that I won’t bail out your firm in a future crisis, will I really keep this promise when the crisis hits and the consequences of “no bailout” look absolutely awful? And if you know that, most likely, the bailout will be there irrespective of how you behave, for example because your firm is so big relative to the economy – why should you be more careful or take less risk?

    “Bernanke’s problem is that he says he won’t help big banks when they next get into trouble. But is this plausible?”

    No, it is not plausible, but that is not Bernanke’s fault. People talk as though the bailout last year created a moral hazard. No, the moral hazard was created over time, centuries, in fact. The big surprise last year was not the bailout, but that Lehman was allowed to go belly up. No matter who is chair of the Fed, it will not be plausible.

    That said, I would oppose Bernanke’s reconfirmation because of his forgetting about the Fed’s unemployment mandate. I do not think that it was just a slip. Bernanke was willing to move heaven and earth to shore up the bankers, as well he should have. But what has he done for the unemployed? Now, or ever?

    The saying is that unemployment is a lagging indicator. Of what? Banker’s bonuses? How about pain, distress, and human suffering? The prospects are that we will have years of high unemployment. What is the Fed doing about that? Anyone? Mr. Bernanke?

    The next Fed chair should be someone who will focus on the Fed’s unemployment mandate, not someone who will fuhgedaboudit.

  25. oldgal: “I would like to see it be someone who can tell me how the current crisis could have been avoided by early detection.”

    RueTheDay: “The answer is that it could not have been. The notion, that during a boom, somehow a regulator can detect when the economy has departed from sustainable growth and entered into bubble territory, and then somehow turn a few knobs to tighten the reigns and lead the economy back into the sustainable growth range, is patently absurd.”

    The highway patrolman does not have to assess the degree of risk to ticket someone for speeding. To use the punchbowl metaphor, the Fed does not have to know that the punch is spiked to take the punchbowl away. “This time it’s different” may be true, but it probably is not, and the burden of proof is on showing that it is different.

    The Fed certainly knew that there was a boom in housing, with questionable (“creative”) lending practices. (I do not know how much it knew about the rickety superstructure in derivatives.) It could have tested the waters with a public statement of concern, such as Greenspan’s “irrational exuberance” remark, along with a small interest rate increase.

    Greenspan talked about being afraid to burst bubbles, maybe Bernanke was, too. How different from the Fed chairman of yore, William McChesney Martin!

  26. George Soros wrote a book about the coming financial crisis in early 2008 and detailed the credit default swap problem as one of the main contributors. Most of the work was doe prior to this time. While his concept of reflexivity work does not pass scientific method, the idea may be proven to work some day. Being a successful hedge fund manager for many years he has some gravitas. Some refer to him and his kind as pirates.

    In 1933 Roosevelt appointed Joe Kennedy as the head of the newly created Securities and Exchange Commission. Critics charged that the president was putting the fox in charge of the henhouse. This was based on alleged activities of Kennedy manipulating security prices using insider information. Perhaps rather than using economists and politicians for this task we might prefer a fox.

  27. (re-posting in proper location)
    FYI neck ties: since you asked, I had to check. He’s wearing four different yellow and two non-yellow in eleven videos.

  28. Some liberals want Bernanke replaced so that the Fed will print money fast enough to generate inflation:

    “ Right now, unemployment is a much larger problem than inflation, and creating a specific inflation
    target would, as Paul Krugman puts it in his discussion of the Japanese case in the 1990s, allow “the
    central bank to credibly promise to be irresponsible – to make a persuasive case
    that it will permit inflation to occur, thereby producing the negative real
    interest rates the economy needs.” Negative real interest rates would be the step
    beyond the zero-interest rate policy that the Fed is following right now, which
    is not enough to provide a significant monetary expansion to allow for employment

    The same liberals are worried about the impact of replacing Bernanke: “There are
    definitely downsides, of course. Financial markets, and bonds in particular, would
    probably react unwisely … The danger is that explaining the intricacies of
    monetary policy is challenging and that deficit hawks on CNBC and Fox would lose
    their minds.” Besides, Bernanke and the Fed continue to be a convenient scapegoat
    for the financial crisis.

    There seems little doubt that Bernanke will be reconfirmed. Obama is probably not
    able or willing to pull the lever on inflation just yet; and besides , time is on
    the side of Obama, since the political make-up of the Fed will likely turn
    Democratic within his first term.

    The governing body of the Federal Reserve System – the board -consists of seven
    members,with the following term expiration dates(two seats have been empty for
    years).The members are appointed by the President, subject to Senate confirmation.

    Federal Reserve Board Members            Term Expires

    Bernanke  Chairman                         2020     Term as Chairman expires  January 2010
    Kohn    Vice-Chairman                      2016     Term as Vice-Chair expires June 2010
    Duke                                               2011
    Tarullo                                             2022     Democratic  appointee
    Warsh                                             2018

    Obama will be able to nominate four governors, a majority, in his first two years.

    Not only will Obama be able to nominate four governors, a majority,in his first two
    years, but the board also has the final say in the appointments of the presidents
    of the 12 regional Federal Reserve banks. On a rotating basis, five of them have
    voting rights within the Federal open market committee, the body that decides on
    the Fed’s open market policy and, thereby, the federal funds rate. Although the
    regional presidents are appointed by the member banks themselves, their
    nominations have to be approved by the Board of Governors.

  29. Let me understand this. If I have notional exposure of X dollars, and the underlying asset takes a dive of 50%, I am then liable for 0.5 X dollars?

    If so, Yow!

    If my premise is mistaken, please accept my apologies; but further explanation would be welcome in that case.

  30. No one knows the exact amount of the losses, because JPM, Goldman, Bank of America etc. are being allowed to hide the exposures with the Fed’s and Treasury’s blessing. Just like sub-prime was “one half of one per cent and would be contained”, JPM will claim that their actual exposure is hedged in one way or another.The problem is that even if this were true, and even if ALL their bets are correct, they still have massive counter-party exposure (which means the U.S taxpayer will be liable when the counter-parties fail). I make the assumption that of that 80 Trillion notional, at least one half to 3 per cent is “real”, and the multiplier effect with counter-parties and systemic effects (after all, who is on the other side of these Massive one-way positions?)doubles to triples the actual loss, hence 80 trillion= 800 billion to 2.4 trillion x 2= 1.6 to 5 trillion in losses still to come- for JPM alone.
    This “back of the envelope” method done two years ago came up with a number much closer than the “experts” came up with. I believe even the IMF is still looking for another 2 trillion or so in losses still to come, after they constantly had to revise their numbers upward. I believe they will do so once again when the Crash resumes.
    Delusional thinking has returned in full force- equity investors are as bullish or more bullish than they were at the October 2007 all time (nominal)highs.

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