Sunday, November 29, 2009

Bernanke Defends Self, the Federal Reserve

in a very ineffectual op-ed piece.

Big Ben (Bernanke), aka the chairman of the besieged Federal Reserve, wrote an op-ed piece that appeared today in Washington Post. The arguments that he gives in support for his institution are the same old, tired ones he's already given elsewhere already. I'm wondering why he has bothered to write them up as an op-ed.

The danger that I see is this: He sounds rather anxious to keep his job and keep his institution intact, and he may intentionally let the next market crash happen sooner than later so that the Fed retains its credibility. ("See what happens when you try to mess with the Fed?") You can read it for yourself, by clicking on the link below:

The right reform for the Fed (Ben Bernanke, 11/29/09 Washington Post)

Ben wants to design a system of financial oversight that will embody the lessons of the past two years. Past two years? Only two years, during which you insisted that there was no big problem in just about everything - from subprime to soundness of nation's banks to commercial real estate.

He believe the legislative proposals circulating in Congress are "out of step with the global consensus". What global consensus? Of the like-minded central banks and B.I.S., bank of central banks which is totally unaccountable to anyone?

He also believe that the Fed played a major role in arresting the crisis last year and that now it's time to preserve the Fed's ability. He just wants to keep all the goodies (policy tools) that he grabbed last year with the help of Hank Paulson, then Treasury Secretary. Kevin Warsh of the Fed board already said as much.

Whenever I hear that argument that the total meltdown was averted thanks to the Fed, it reminds me of some rogue firefighters setting fire intentionally so that they can "fight" it. The Federal Reserve withdrew liquidity from the market just when such liquidity was needed in September last year. (See this post by Karl Denninger of the Market Ticker from last year.) It was after the Lehman Brothers bankruptcy and huge withdrawal from money market funds, and after Ben and Hank went to Congressional leaders to demand $700 billion. It was right before the market started a spectacular crash. Yes, the Fed the hero.

Curiously, he seems to think the Fed's expertise conferred "stress tests" done in spring this year a great deal of credibility and clarity. I guess he didn't watch Saturday Night Live.

He makes statements without citing actual examples that justify such statements. He says that "Many studies have shown that countries whose central banks make monetary policy independently of such political influence have better economic performance, including lower inflation and interest rates." Ok, where? Can anyone name one country?

A central bank was born in Great Britain in 1694, so that the British government would have endless supply of money (Britain was near-broke from the Nine Years' War) as the central bank monetized the sovereign debt. Flush with newly minted money, Great Britain went on to fight the War of Spanish Succession. Not the paragon of independence to me. The Federal Reserve was modeled after the Bank of England.

Also, this particular statement in the article, that "[the Fed's] supervision is also informed by the grass-roots perspective derived from the Fed's unique regional structure and our experience in supervising community banks", is highly dubious and misleading. Majority of the U.S. banks ARE NOT the Federal Reserve member banks. (See the chart on this wiki page.)

Again, why did he write a lame article like that? Why now?

Ben Bernanke seems to lack the tact and finesse of the bankers before the Glass-Owen act (that became the Federal Reserve Act) was enacted. Big bankers, who wanted the Federal Reserve, publicly spoke vehemently against the Glass-Owens act. The public perception was that if the greedy bankers opposed, it was because they would be hurt by it, so let's pass it. Total opposite was true, and we are where we are today, with the U.S. dollar's purchasing power having plummeted by more than 95%. If Bernanke wants to be the top dog in the new monstrous financial regulation organ, he should oppose it.


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