Thursday, December 3, 2009

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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