Ben Bernanke must go

Posted by AzBlueMeanie:

I have argued that Ben Bernanke's nomination for a full six year term as Federal Reserve Board chairman currently before the Senate should be withdrawn. I would have much more confidence in Paul Volcker, who previously served in that position. Dean Baker of the Center for Economic and Policy Research makes the case in this post Yes, Virginia, It Is Bernanke’s Fault – CEPR:

As the Senate debates Federal Reserve Board Chairman Ben Bernanke’s reappointment, it is striking how the media view blaming Mr. Bernanke for the Great Recession as being out of bounds. Of course Bernake bears much of the blame for this economic collapse.

He was either in, or next to, the driver’s seat for the last 7 years. Bernanke was a member of the Board of Governors of the Federal Reserve Board since the summer of 2002. He served a 6 month stint as head of President Bush’s Council of Economic Advisers beginning in the summer of 2005 and then went back to chair the Fed in January of 2006.

This crisis is not a weather disaster like Hurricane Katrina; it is a manmade disaster that was brought about by seriously misguided economic policy. And, after Alan Greenspan, Bernanke was better positioned than any other person in the country to prevent this disaster.

The basic argument is very simple. The country had an enormous housing bubble. This bubble drove the economy ever since the last recession in 2001. It propelled the economy directly through a building boom that sent housing construction to record levels. Indirectly, it led to a consumption boom as people spent money based on the $8 trillion in housing equity that was temporarily created by the bubble.

When the bubble collapsed it was inevitable that it would lead to the sort of disaster that we are now seeing. We lost close to $500 billion in annual demand due to the collapse of housing construction. The building boom created an enormous glut of housing. There will be little need for new construction for several years in the future.

The disappearance of trillions of dollars of bubble generated housing equity led to a plunge in consumption. Annual consumption has fallen by close to $500 billion. If we add in a loss in demand of close to $200 billion associated with the bursting of a bubble in commercial real estate, the collapse of the bubbles led to a fall in annual demand of close to $1.2 trillion. The Fed has nothing in its bag of tricks that allows it quickly replace $1.2 trillion in demand, which is why the country is now mired in double-digit unemployment.

In spite of the heroic efforts at obfuscation by many economists, there is not really much to dispute in the above story. Add in the fact that the bubble was both recognizable and preventable and you have a very solid indictment of Bernanke.

The bubble was easy to recognize, Bernanke just failed to do so. Nationwide house prices had already experienced an unprecedented 30 percent increase by the summer of 2002. Since there was nothing in the fundamentals of the housing market to justify this run-up and no remotely corresponding increase in rents, Bernanke should have already been aware of the housing bubble by the time he joined the Fed in 2002.

The Fed has a large arsenal with which to attack a housing bubble, but the first weapon is simply talk. If Greenspan and Bernanke had used their platform at the Fed to educate Congress, the financial industry, and the public at large about the existence of the housing bubble and the risks it posed, this likely would have been sufficient to rein it.

This is not about mumbling “irrational exuberance,” it’s a question of using the Fed’s full research capacities to document the existence of a housing bubble (they actually did the opposite) and then disseminating this research as widely as possible.If this proved inadequate, the Fed also had substantial regulatory powers to curb the deceptive subprime loans that helped inflate the bubble in its later stages.

If talk and regulation and failed, then the Fed could have used interest rate hikes. A policy of raising interest rates with the explicit target of bursting the bubble, for example a commitment to raise rates until house prices fall, would almost certainly accomplish its goal in fairly short order.

Bernanke and his sidekick, Greenspan, chose to take none of these measures. Instead they insisted everything was fine the whole time. Things were not fine and the country is paying the price. And yes it is very much Bernanke’s fault.

When one fails so spectacularly at their job, they should be fired, not rewarded. But that is not the culture of Wall Street, where one keeps his or her job and receives outrageous bonuses even when their actions nearly destroy the world's economy.

I have no explanation for why President Obama appointed Timothy Geithner to Treasury and nominated Ben Bernanke for another term at the Fed, nor an explanation for why he appointed Larry Summers to his National Economic Council, and Robert Rubin as an economic adviser. Alan Greenspan is probably still consulted as well.

One theory I have heard is that these guys know where the bodies are buried so they are needed to clean up the mess they left behind. But that theory does not hold water when these guys continue to oppose regulatory reforms for Wall Street now working through Congress. There is no remorse, no born again "I've seen the error of my may ways" repentance and conversion to regulatory zeal.

It is purely speculative on my part but it appears to me that Wall Street extorted the White House to appoint their guys to key positions as the price for its cooperation with the economic rescue plan. Give us our guys or we walk away and let the world's economy go down – a Doomsday threat (and a very real threat at the time). Now that the first part of the rescue plan has succeeded – Wall Street has got what it wanted – Wall Street is now reneging on its support in favor of returning to business as usual as if nothing ever happened.

If this is the case, the White House needs to play rough and replace these Wall Street insiders immediately with persons who are committed to ending casino capitalism and the biggest Ponzi scheme the world has ever known. It's time to change the rules of the game. Somebody needs to go to emergency, somebody needs to go to jail.

UPDATE: Meteor Blades at Daily Kos posts Paul Volcker disses Fiancial Innovations: 

Julia Werdigier reports from England:

Paul A. Volcker, the former chairman of the Federal Reserve and an adviser to President Obama, told a room packed with banking executives on Tuesday to "wake up" to the need for more drastic regulatory changes.

"Has there been one financial leader standing up and saying, ‘This is really excessive’?," Mr. Volcker asked about 80 bankers, executives and investors at a conference organized by The Wall Street Journal."

But Volcker didn't stop there. He went on to tell  

some of the world's most senior financiers that their industry's "single most important" contribution in the last 25 years has been automatic tell[er] machines, which he said had at least proved "useful".

Echoing [Britain's Financial Services Authority] chairman Lord Turner's comments that banks are "socially useless", Mr Volcker told delegates who had been discussing how to rebuild the financial system to "wake up". He said credit default swaps and collateralised debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown at "greater rates of speed" during the 1960s without such products.

When one stunned audience member suggested that Mr Volcker did not really mean bond markets and securitisations had contributed "nothing at all", he replied: "You can innovate as much as you like, but do it within a structure that doesn't put the whole economy at risk." …

Mr Volcker argued that banks did have a vital role to play as holders of deposits and providers of credit. This importance meant it was correct that they should be "regulated on one side and protected on the other". He said riskier financial activities should be limited to hedge funds to whom society could say: "If you fail, fail. I'm not going to help you. Your stock is gone, creditors are at risk, but no one else is affected."

As Yves Smith at Naked Capitalism pointed out, it's not surprising that Volcker said what he said. He's verbally cold-cocked arrogant financiers before. What was remarkable is "that the listeners were stunned. This is yet another proof of industry narcissism: the complete and utter inability to recognize and take responsibility for the damage it has wrought."