« Jan. 16, 2010: Update on the HAMP (Home Affordable Mortgage Program) | Main | February 7, 2010: Assessing the January 2010 Employment Report »

January 30, 2010: Grading the Bernanke Fed

On January 28, 2009, the U.S. Senate voted 70-30 to confirm Ben Bernanke for a second four-year term as Fed Chairman. While this lopsided margin sounds like a resounding endorsement, in fact, it was narrowest in the history of the Fed. Prominent senators on both the right (Jim DeMint (R-SC)) and left (Barbara Boxer (D-CA)) opposed Bernanke’s bid for a second term.

Prior to this vote, the narrowest margin was 84-16 in favor of Paul Volker’s second term in 1983, after what had, up until now, been acknowledged as the worst U.S. recession since the Great Depression. (Unemployment was actually higher in 1983 at 10.8% than the 10.2% peak recorded during 2009).

Why the opposition to Bernanke? To better understand the opposition to Bernanke, let us consider the Fed’s three main areas of responsibility: (i) monetary policy; (ii) consumer protection; and (iii) bank regulation.

The Fed’s monetary policy is driven by a dual mandate: keep inflation and unemployment low. While the Bernanke Fed kept inflation under check, many economists (including this one) think that Bernanke’s “easy-money” policy on interest rates led to excessive leverage, (i.e., borrowing) in the financial system, which not only created the housing bubble but also fueled speculation by investment banks, hedge funds and other financial institutions, leading to the ongoing financial crisis. We now have a 10.0% unemployment rate. Moreover, the Bernanke Fed has more than doubled the size of the Fed’s balance sheet, from about $800 billion before the crisis, to more than $2.25 trillion in the most recent week. While most of this increase was initially for “liquidity facilities” used to provide liquidity to the financial markets during the crisis, the Fed has wound down most of these facilities and replaced those assets with purchases of $1.25 trillion in mortgage-backed securities (MBS) designed to keep mortgage-interest rates low. The Fed now has to craft an “exit strategy” for reducing its balance sheet in order to keep the money supply from exploding and causing double-digit (or worse) inflation. Yet, if the Fed sells the MBSs, which  no other entity would purchase during 2009, it risks pushing mortgage-interest rates up by hundreds of basis points. If rates rise while the Fed holds these MBSs, then the Fed will lose hundreds of billions because the market value of the long-duration securities will fall precipitously as rates rise. One can easily arrive at a grade of “F” for Bernanke’s monetary policy.

Next, consider the Bernanke Fed’s record on consumer protection—not a pretty picture. Under Bernanke, the Fed failed miserably in protecting consumers from predatory mortgage lenders, who saddled uninformed borrowers with “teaser-rate” mortgages, option ARMs, subprime mortgages and usurious credit-card loans. It also failed to reign in home-equity loans, which consumers used to turn their homes into piggy banks, paying off credit card balances with cash-out home-loan refinancings. The four largest banks hold more than $400 billion in home-equity loans that, if marked to market values, would be worth pennies on the dollar, wiping out the capital of these systemically important “too-big-to-fail” banks. Again, one can easily arrive at a grade of “F” for Bernanke’s record on consumer protection.

This leads us to the third main area of the Fed’s responsibility—bank regulation. Under the Bernanke Fed, the big Wall Street banks funded lines of credit to the unscrupulous mortgage brokers who originated the toxic home mortgages (subprime, Alt-A, Option ARM, stated income, etc.) that Wall Street securitized and led to the financial crisis. Two of the four largest bank holding companies--$2 trillion Citigroup and $800 billion Wachovia--arguably failed (or had to be bailed out by taxpayers). The Fed is the primary regulator for bank holding companies. Losses at failed banks have pushed the FDIC into insolvency for the first time since the early 1990s, and the banking system is in shambles, with more than a thousand banks in serious danger of failure. The widely publicized “stress tests” of the 19 largest bank holding companies were designed by the Fed and have been roundly criticized as a total fraud. Under Bernanke, the Fed punted on providing liquidity to Bear and Lehman, allowing them to fail, but somehow figured out how to allow Goldman Sachs and  Morgan Stanley to become bank holding companies, which saved them from insolvency. In so doing, Bernanke extended the taxpayer safety net to these two investment banks, which were largely responsible for creating the financial crisis. Again, it is easy to arrive at a grade of “F” for the Bernanke Fed’s record on bank regulation.

With grades of “F” in each of the Fed’s main areas or responsibility, it is truly amazing to this economist how 70 U.S. Senators and the President could possibly consider Bernanke fit to serve another term. It just goes to show how, in the world of Washington politics, nothing succeeds like failure.

The financial crisis isn't over. We are looking at either double-digit inflation (perhaps the best case) or a massive double-dip recession (the worst case).

TrackBack

TrackBack URL for this entry:
http://www.krahenbuhlglobal.com/blog-mt/mt-tb.fcgi/45


Hosting by Yahoo!

Comments

Nice dispatch and this enter helped me alot in my college assignement. Thank you on your information.

Sharp site. Wondering if you ever trade featured articles? I am running a site on my latest obsession akita dogs and wanting to trade some articles with worthy sites. I checked out your blog and you've got some great content and I was thinking our visitors would both benefit. Thanks!

Very nice site!

Nice dispatch and this mail helped me alot in my college assignement. Thanks you on your information.

Good stuff you've got here. I'll be looking forward to reading some more.

What theme are you utilizing on your site ? I really like the style. Thank you for the post.

Hey, toller Blog! Weiter so!

Gracias estaba buscando info de estos temas!

I don't normally reply to posts but I just had to in this instance. Really great post!


I recently came across your post and have been reading along. I thought I would leave my first comment. I don't know what to say except that it caught my interest and you've provided informative points. I will visit this blog often.

Thank you,

Business Loans

Making money online right now is easy with your help! Thanks for your amazing blog posts! Keep working hard.

great info. What are your thoughts on last year vs this year?.....i'm bullish here!

I do agree with all the ideas you have presented in your post. They are very convincing and will definitely work. Thanks for the post.

Great post! Thank you for sharing. That was a very satisfying read

Thanks, Great article! That's so awesome

This is a pretty hot article, and some great tips. I hope to put these to practice soon.

Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind updating your blog with more information? It is extremely helpful for me.

i¡¯m regularly scurrying across the net most of the morning which means I usually tend to browse a bunch, which isnt commonly a beneficial thing as many of the internet websites I find are constructed of useless nonsense copied from other internet sites a zillion times, however I have to give you credit this site is in truth enjoyable and includes a bit of authentic information, for that reason kudos for breaking the pattern of merely replicating other individual¡¯s blogs and forums, in case you ever want to play a couple of hands of myspace poker together just hit me up ¨C you have my e mail

Thank you again for your time and effort, I appreciate the information and advice you have given, as well as the content you have shared with me.

Nice post, thanks so much

Be Careful When Comparing Mortgage Rates Most people know it's important to compare mortgage rates before they purchase or refinance a home. Some may even know to compare fees, points and other costs associated with purchasing or refinancing their home but, there are some things you didn't ....

The credit card is still one of the most popular method of payment and will be replaced increasingly by Paypal & Co. As a result of security of Paypal it will be safer to use this more in the future.

Needless to say this isn't the point that everybody will accept or believe is OK to believe that. Nevertheless, you can find several great website out there around the globe that always inspire me to reading them as they truly enhance my know-how. Yours is just make me comprehend a lot more about the topic.

I admire the valuable information you offer in your articles. I will bookmark your blog and have my children check up here often. I am quite sure they will learn lots of new stuff here than anybody else!

Post a comment

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)