December 18, 2009
December 18, 2009
By Patrick Emerson
Oregon Economics Blog
From the Wall Street Journal: “Sen. Jeff Merkley of Oregon became the first Democratic member of the Senate to announce that he’ll vote against Ben Bernanke’s nomination to a second term as Federal Reserve chairman. In a statement ahead of Thursday’s Senate Banking Committee vote of President Barack Obama’s nominee, Merkley said Bernanke “failed to recognize or remedy the factors that paved the road to this dark and difficult recession. Following our economic collapse, it is also apparent that he has not changed his overall approach to prioritizing Wall Street over American families.” “For too many years, federal regulators turned a blind eye to signs of an impending financial crisis,” Merkley continued. “Tricks and traps proliferated in the credit card and consumer lending industries. Predatory mortgage loans exploded, fueling an unsustainable housing bubble. Regulators lifted rules requiring banks to keep adequate capital, and a laissez-faire approach to securitization, derivatives, and proprietary trading encouraged excessive risk-taking on Wall Street. As a member of the Board of Governors, Chair of the Council of Economic Advisers, and then ultimately as Chairman of the Board of Governors, Dr. Bernanke supported each of these decisions, failing to take the necessary precautionary steps that could have averted or mitigated financial collapse.”
Patrick Emerson: Never mind the fact that Bernanke has never worked on Wall Street, comes from a family that ran a small business (on Main Street no less) and, oh-by-the-way may be the reason we did not have a global collapse of the banking industry that would have left main street mired in depression for years thanks to stunningly bold and swift action.
To lay the blame of all of the excesses of Wall Street at his feet is just plain stupid, to accuse him of acting in the interest of Wall Street and in so doing hurting Main Street is just plain ignorant, and to do both in this manner is crass populism. What I would like from my Senators is leadership not pandering and political theater.
NB: It appears to be playing well to the intended audience. Interesting that lefties that understand economics, like Krugman and DeLong, support him and understand his contribution.
In response to my post yesterday castigating Jeff Merkley for his outspoken stand on Ben Bernanke, a few commentators have stated that they may be willing to accept that his actions post-crisis are commendable, but what about his pre-crisis actions? To this I have four responses:
1. The liberalization of the nations banking laws, most notably the Gramm-Leach-Bliley Act, which repealed parts of the Glass-Steagall Act in 1999 and allowed the merger of commerical and investment banks, and that played a major role in the crisis, were done far before Bernanke’s time as a public servant. The lack of regulation of collateralized debt obligations is ostensibly under the SEC’s purview, not the Fed’s so to pin that on Ben is also misguided.
2. The idea that he should have seen the bubble for what it was and ‘popped it’ basically suggests that he should have had more foresight than millions of investors that controlled investments in the trillions. For if the bubble really was so obvious to everyone, short-sellers should have popped it long before the crisis. Why didn’t they? It is easy for a lot of people to look and say, wow housing prices seem too high – but how do you really know, by your gut instinct?
3. In order to ‘pop’ the bubble Bernanke would have had to raise interest rates to very high levels which would have given us, perhaps less painful, but very real recession and would have hurt main street for which he would have been roundly condemned – ‘who is this guy to decide the economy needs correcting when everything is going fine?’
4. The idea that Bernanke needs to look out for consumers and main street represents a misunderstanding of what the Feds role in the economy is: promote full employment and control inflation. During the real estate boom both were just fine, thank you very much. What he has done since the crisis is to do just that, prevent a depression which disproportionately hurts the most vulnerable in society.
I am troubled by the suggestion in general that we want some technocrat in the Fed who feels that they need to be an economic ‘oracle’ and act on feelings about the future of the economy. What I think is that we need regulations and reforms that control the ability of any one or few financial entities to leverage up so much and to take on so much risk as to pose a threat to the entire financial system should those risk turn out to be too great.
Thus to damn Bernanke for not doing enough to prevent the crisis is unfair. A good thought experiment for those who do is to ask just exactly who would have been better and what exactly would you have had them do? And don’t forget that financial innovation, while run amok in other areas, did manage to get credit in the hands of individuals that would not have otherwise have had access – read the working class and the poor. Yes, it got to the point of over-extension, but it was not just the fat cats on Wall Street that were benefitting.