December 13th, 2010 at 7:31 pm
I would differ with the opinion of the author on the competence of Bernanke & Co. I tend to side with what Barry Ritholtz wrote recently on the incompetence with which the financial crisis was handled, in first looking at the Obama adminstration (putting aside the competence of Bernanke). Ritholtz has said he felt that Obama essentially missed an opportunity to really deal with crisis in a way that would have made a real difference, with new and innovative ideas and an approach that originated outside of Wall Street rather than from within it. When Obama appointed advisers from the very group of Wall Street cronies that brought the system down and brought the world to the brink of financial collapse, he missed the opportunity to have really created a difference.
To make Ritholt’z point clearer I would suggest we not forget recent history. It was the former Head of the CFTC, Brooksley Born, who attempted to initially open up regulation of over-the-counter derivatives late in the Clinton administration. It was Born and her staff that were desperately trying to warn the public of the dangers in the unregulated OTC markets. Every effort made by Born and the CFTC staff was opposed by the Wall Street crowd, and chief among those opponents were Greenspan, Summers and Rubin. Some 10 years before the financial crisis began, a mini-meltdown occurred in the unregulated OTC derivatives markets involving the failure of Long Term Capital Management (LTCM). The near collapse of LTCM issued a flashing warning sign to those who had thought that OTC derivatives markets were in no need of regulation. Yet the response was to quietly handle it from the inside by a few large banks who were coaxed by Greenspan into purchasing it. The failure was a warning of what would eventually happen and yet when it was absorbed everyone was assured and felt there was no cause for alarm.
Bernanke had often been in agreement with Greenspan on policy. And Summers later became one of Obama’s chief financial advisers.
Born said this recently in a media interview:
“We had no regulation. No federal or state public official had any idea what was going on in those markets, so enormous leverage was permitted, enormous borrowing. There was also little or no capital being put up as collateral for the transactions. All the players in the marketplace were participants and counterparties to one another’s contracts. This market had gotten to be over $680 trillion in notional value as of June 2008 when it topped… And that is an enormous market. That’s more than 10 times the gross national product of all the countries in the world. I think the profits made by the over-the-counter derivatives dealers, by our largest banks and investment banks, were the upside…. at the expense of all the people who have lost their jobs, who have lost their retirement savings, who have lost their homes.”
I have strong feelings on Bernanke’s basic incompetency, and I believe he should never have been reappointed as Fed Chair for numerous reasons… just one among many is his responses to questioning put to him by congress relating to the over-the-counter derivatives markets.
In November of 2005, Mr. Bernanke was questioned by then-Senate Banking Committee Chairman Paul Sarbanes.
Sarbanes: Warren Buffett has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast-growing market remain real. How do you respond to these concerns?
Bernanke: I am more sanguine (confident) about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable. They provide methods by which risks can be shared, sliced and diced, and given to those most willing to bear them. They add, I believe, to the flexibility of the financial system in many different ways. With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.
On February 27, 2008, Fed Chairman Bernanke said, “If you have two investment banks doing an over-the-counter derivatives transaction, presumably they both are well-informed and they can inform that transaction without necessarily any government intervention.”
As late as February 28, 2008, Fed Chairman Bernanke said, “Among the largest banks, the capital ratios remain good, and I don’t expect any serious problems … among the large, internationally active banks that make up a very substantial part of our banking system.”
In a July 2005 interview with Bernanke on the housing bubble:
Interviewer: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying, “Oh, this is a bubble, and it’s going to burst. And this is going to be a real issue for the economy.” Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?
Bernanke: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.
On March 28, 2007, Fed Chairman Bernanke said, “The impact on the broader economy and financial markets of the problems in the sub-prime markets seems likely to be contained.”
On May 17, 2007, Fed Chairman Bernanke said, “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”
On February 27, 2008, Fed Chairman Bernanke said, “By later this year, housing will stop being such a big drag directly on GDP…. I am satisfied with the general approach that we’re currently taking.”
A few of Bernanke’s comments on the Financial Crisis:
On February 15, 2007, Fed Chairman Bernanke said, “The Federal Reserve takes financial crisis management extremely seriously, and we have made a number of efforts to improve our monitoring of the financial markets to study and assess vulnerabilities, and to strengthen our own crisis management procedures and our business continuity plans.”
On July 16, 2008, Fed Chairman Bernanke said that Fannie Mae and Freddie Mac are “adequately capitalized” and “in no danger of failing.” Since then, Fannie Mae and Freddie Mac have received massive bailouts and have been taken over by the federal government with an open checkbook from the US Treasury.
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