Senator Bunning to Bernanke: You Are A Moral Hazard

Ouch.

Jim Bunning, Republican Senator from Kentucky and the only one who voted no on the 1st confirmation 4 years ago, had some harsh words to Ben Bernanke in today's confirmation hearing.

Mish Shedlock has a partial transcript on his blogsite. Among other things, Senator Bunning said to the Fed chairman:

"Chairman Greenspan sold the Fed's independence to Wall Street on the so called "Greenspan PUT". Whenever Wall Street needed a boost, Alan was there. But you went even farther than that when you bowed to the political pressure of the Bush and Obama Administrations, and turned the Fed into an arm of the Treasury.

"Under your watch the "Bernanke PUT" became a bailout for all large financial institutions, including many foreign banks.

"And you put the printing presses into overdrive to fund the government's spending and hand out cheap money to your masters on Wall Street.

"In short, you are the definition of a moral hazard.

"You are repeating the same mistakes as Japan in the 1990's on a much larger scale while sowing the seeds for the next bubble.The AIG bailout alone is reason enough to send you back to Princeton.

"I will do everything I can to stop your nomination and drag out this process as long as I can. We must put an end to your and the Fed's failure and there is no better time than now.

"Your Fed has become the creature from Jekyll Island."

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Case Against Ben Bernanke

Big Ben Bernanke's Senate confirmation hearing has started.

I am not too thrilled to have him around any longer, or for that matter to have the Federal Reserve.

This is the person who proclaimed there was no housing bubble. Bernanke insisted that the subprime mortgage problem was contained and there would be no spill-over into other mortgage types. Into a broader economy? Of course not, are you kidding? He insisted that banks had a credit/liquidity problems and nothing more, while all along it was a solvency problem. He told the Congressional leaders that unless they gave him and buddy Paulson $700 billion the world would collapse and cease to exist, and then yanked the liquidity from the struggling financial market which facilitated the fantastic tanking of global stock markets and then economies, as some speculated.

After the crash of the stock market and credit market, he proceeded to double the balance sheet of the Federal Reserve supposedly to help the economy recover. The economy at large has done no such thing, decidedly not because of the money thrown by the Fed. Bulk of Bernanke's money went to the nation's biggest commercial banks (including hastily converted banks like Goldman Sachs and Morgan Stanley, and a host of insurance companies and credit card companies), who simply parked the money at the Fed as "excess reserves".

By the Fed's own admission, that excess reserves were not meant to be loaned out from the beginning when the Fed started buying up assets other than Treasury bills/notes/bonds last fall. The Fed immediately started paying interest on the excess reserves so that the banks would keep the money at the Fed. It has been the Fed's policy that the excess reserves be kept at the Fed. New York Fed has even produced a research paper discussing why banks are holding so many excess reserves. The Fed needed the money there on the Fed balance sheet so that they could justify the ballooning asset portfolio of agency bonds (that no one else wants) and agency MBS (that no one else wants), commercial papers, corporate bonds, whatever else they took in as collateral, even a shopping mall and a hotel chain.

He claims it is important for the Fed to be "independent" from meddling politicians but if you look at his institution's balance sheet it is full of fiscal policy items to expressly assist the government: monetization of the government debts through open market operations; buyer of last resort for agency bonds and MBS in order to lower the mortgage rates; various lending programs to help financial firms. Definition of "financial" seems pretty broad, as John Deere, a tractor company, issued bonds with FDIC debt guarantee program, which is supervised by the Federal Reserve.

In this administration, just like the previous one, incompetency is to be rewarded. So I have no doubt that he will be confirmed for his second term. Never mind that only 21% of likely voters support his confirmation, according to Rasmussen. But when have the general public counted for anything to the politicians, other than to collect taxes from?

(Zero Hedge's poll is even worse. Only 11% think he should be reappointed.)

I am still wondering why Bernanke wanted the second term so badly. I guess it's the face issue. His predecessor, Alan Greenspan, had the job for 19 years. Paul Volcker had 8 years. A one-term Fed chairman who presided over the worst stock market and economic collapse since the Great Depression doesn't look too good on his resume.

(I would much like to see him as the last chairman of the Fed.)

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Ron Paul & Alan Grayson to Chris Dodd: No Bernanke Confirmation Until...

... the Federal Reserve releases documents of their activities ...

Ron Paul and Alan Grayson Want the Answers
(10/8/09 Lewrockwell.com)

Congress of the United States
Washington, DC 20515
10/7/09

Chairman Chris DoddUS Senate Committee on Banking, Housing, and Urban Affairs
534 Dirksen Senate Office Building
Washington, DC 20551

Dear Chairman Dodd and members of the Banking Committee,

We are writing to ask you to postpone the confirmation of Ben Bernanke until the Federal Reserve releases documentation that will allow the public and the Senate to have a full understanding of the commitments that the Federal Reserve has made on our behalf. Without such an understanding, it is impossible to know whether Chairman Bernanke is fit to serve another term and fulfill the Federal Reserve’s dual mandate to ensure price stability and full employment. A list of said documentation is enumerated below.

Since 2007, the Federal Reserve has expanded its balance sheet by $1.2 trillion and taken on substantial credit, interest-rate and foreign exchange risk. It has lent immense sums to some financial institutions against overvalued collateral, while refusing to lend to others with no clear standards as to who was rescued and who was not. It has set up holding companies using no-bid contracts, and guaranteed substantial liabilities of Citigroup, all the while keeping information about its actions secret from the public and Congress. This is in stark contrast to the analogous period in the 1930’s, when the Reconstruction Finance Corporation fully disclosed loans and collateral to Congress.

Today, big banks are being bailed out and have a substantially lower cost of capital through an implicit government backstop even as Americans themselves are seeing their pay cut. This lower cost of capital – at government expense – coupled with increased scarcity of credit is resulting in the banks recapitalizing by charging American consumers higher credit costs, including record overdraft fees and much higher credit card rates.

As you know, the Federal Reserve has a chartered mandate of both price stability and "full" employment. Since 2002, the Bernanke joined the Federal Reserve board has aligned himself with Alan Greenspan’s activities, the incomes of Americans have actually declined in absolute terms, with incomes projected to decline a further 5% in 2009. One quarter of all mortgage holders owe more than they own, with that number projected to rise to nearly 50% by 2010. Consumer asset prices, most importantly housing, continue to fall, and unemployment continues to rise. This raises real questions about Bernanke’s tenure as Federal Reserve chairman, and about where trillions of dollars have gone.

Federal Reserve secrecy must be understood in the context of an intellectual dogma which Alan Greenspan inculcated into the fabric of the Federal Reserve and the economic profession, and which has severely harmed ordinary Americans. Bernanke’s "Great Moderation" speech in 2004 didn’t even consider the idea that the economy was becoming more unstable, even as risks were being built into the system by the politics he encouraged. He ignored evidence of a crisis, saying in 2007 that the turmoil was contained to subprime mortgages, ignoring the bankruptcy of over 100 mortgage originators, and the clear evidence the crisis would spread. Now, even as the crisis is said to be subsiding, we still do not have credit markets that are able to function without substantial government support, we have not addressed institutions that are "too big to fail" which the Fed oversees, bank credit availability is again shrinking (posing risk of further increasing already high unemployment), and toxic assets in the system on the books of both private banks and the Federal Reserve have still not seen price discovery.


Chairman Bernanke’s policy-making errors might be chalked up to errors of judgment, and it’s possible to argue that he has been chastened by the last few years of turmoil. What is more disturbing is how the Federal Reserve has refused to disclose the details of its commitments to the bankers who came close to destroying the economy. The Bernanke Fed’s execution of its dual mandate cannot be judged without consideration of those commitments, which would require the Fed to disclose documents which it still contends the public has no right to see. Specifically, we ask that you postpone the confirmation of the Chairman until after the Federal Reserve discloses:

(1) Information that Bloomberg reporter Mark Pittman has requested via a Freedom of Information Act Request on the Bear Stearns rescue and that the Federal Reserve is contesting in the courts,* and which Manhattan Chief US District Judge Loretta Preska has ordered be turned over by the Federal Reserve.

(2) Information that Rep. Grayson requested in February at a hearing and the follow-up letter on which institutions received the $1.2 trillion added to the Federal Reserve’s balance sheet, how much each institution received, and what was promised in return.

(3) All Federal Reserve documents that went to Attorney General Andrew Cuomo’s office relating to the Bank of America/Merrill Lynch merger in which potentially illegal and coercive activity might have occurred, as well as all Federal Reserve documents relating to the lawsuit pursued by the Merrill Lynch shareholders in the US District court for the Southern District of New York.

(4) Transcripts of all Open Market Meeting Minutes up to and including that of June 2009, transcripts of which are normally withheld from the public for five years.

(5) Full disclosure of all terms and conditions of all off-balance sheet Fed Transactions in the past three years.

The Federal Reserve must become transparent and open with Congress and the public about its behavior during the financial crisis. Thank you for your consideration of this matter.

Best,

Alan Grayson, Member of Congress
Ron Paul, Member of Congress

Cc: Richard C. Shelby Tim Johnson Robert F. Bennett Jack Reed Jim Bunning Charles E. Schumer Mike Crapo Evan Bayh Mel Martinez Robert Menendez Bob Corker Daniel K. Akaka Jim DeMint Sherrod Brown David Vitter Jon Tester Mike Johanns Herb Kohl Kay Bailey Hutchinson Mark Warner Jeff Merkley Michael Bennet

*For all securities posted between April 4, 2008 and May 20, 2008 as collateral to the Primary Dealer Credit Facility, the discount window, the Term Securities Lending Facility, the Term Auction Facility (the "Relevant Securities"), we request copies of:

1. All forms of other documents submitted to the party posting the Relevant Securities as part of the application for the loan;
2. All receipts and other documents given to the party posting the Relevant Securities as part of the application for the loan;
3. Records sufficient to show the names of the Relevant Securities;
4. Records sufficient to show the dates that the Relevant Securities were accepted and the dates that the Relevant Securities were redeemed;
5. Records sufficient to show the amount of borrowing permitted as compared to the face value, also known as the "haircut";
6. Records sufficient to describe whether valuations or "haircuts" for the Relevant Securities changed over time;
7. Records sufficient to show the terms of the loans and rates that the borrower must pay;
8. Records Sufficient to show the amount that the Federal Reserve has accepted of each of the Relevant Securities;
9. Records sufficient to show which, if any Relevant Securities have been rejected as collateral and the reasons for the rejection;
10. All databases and spreadsheets that list or summarize the Relevant Securities; and
11. Records, including contracts with outside entities, that show the employees or entities being used to price the Relevant Securities and the conduct the process of lending.

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