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Ben Bernanke: Supernanny?
We all know the story of the "nanny state." That is what conservatives call a government that ensures people have basic necessities like decent childcare and decent health care. Conservatives deride the idea the government should have to provide such services to people, because people really should be able to look out for themselves. In the view of conservatives, people don't need the government to act like a nanny to ensure they are protected.
If a government that acts to protect ordinary people can be dubbed a "nanny state," then a government that protects the superrich certainly deserves the title of a "super nanny state," making its top officials "supernannies." The question for the moment is whether Federal Reserve Board Chairman Ben Bernanke now qualifies as a "supernanny."
His immediate claim to this title stems from his decision to have an emergency cut of 0.75 percentage points in the Federal Reserve Board's overnight loan rate. This rate cut came in response to the financial panic that had descended on Asian and European financial markets. It seems the sophisticated traders in these markets had finally discovered the $8 trillion housing bubble in the United States and realized its collapse would throw the US economy into a recession.
This knowledge sent these markets plummeting. The fear was about to spread to the US markets when Chairman Bernanke announced the dramatic rate cut. This cut spurred a turnaround, stabilizing financial markets for at least a few more days.
The Fed has no business using its interest rate policy to prop up financial markets. High prices in financial markets redistribute wealth from people who don't own large amounts of stocks and bonds to people who do. That is not the job of the government or an agency of the government, like the Fed.
In this particular case, Bernanke's decision was also the right decision for the economy as a whole. After ignoring the housing bubble as it expanded to ever more dangerous levels, the Fed is now trying to counteract the harm that will come from its collapse. Lower interest rates can be part of the story (aggressive fiscal stimulus is another part).
However, there is a limit to what the Fed can accomplish through lower rates. First, it can't bring its overnight rate below zero. Thus far, Bernanke has lowered the rate by 1.75 percentage points from 5.25 percent to 3.5 percent, that doesn't leave much more room to go down.
More importantly, the overnight rate has very little direct impact on the economy. The interest rates that most directly affect the economy are longer-term rates, like the 30-year mortgage rate. Typically long-term rates move together with the overnight rate set by the Fed and other short-term rates, but this is not always the case. If investors begin to anticipate higher inflation rates, then it is possible lower short-term rates could actually lead to higher long-term rates. This could already be happening. Long-term rates actually rose the day after the Fed's rate cut. If the Fed cuts rates further, and this leads to higher long-term rates, then we will know Bernanke is playing the role of supernanny. The logic of this is simple: Banks borrow short-term; they lend long-term. If the gap between short-term rates and long-term rates increases, then this will allow the banks to make back some of their big losses in the mortgage markets. This would be good news for the banks, but bad news for the economy.
Of course, Bernanke has not yet pushed rates to levels that clearly raise this spread. However, the public should be wary of this possibility.
In the same vein, it should also be concerned about the Fed's decision to create a new mechanism, the "term auction facility (TAC)," through which banks can secretly borrow reserves from the Fed. Ordinarily, banks have to disclose their borrowing, but due to the extraordinary crisis facing the banking system, Bernanke thought it best to create a mechanism through which the banks could conceal their borrowing.
While there may be nothing illicit about the conduct of these banks, there is little reason to have confidence in the integrity of the financial markets and the major actors within them. At the least, the TAC offers the opportunity for insiders to make large gains at the expense of those who rely only on publicly available information. To eliminate this possibility, the Fed should open the TAC. Too much transparency is not the cause of the current crisis.
Ben Bernanke may not have yet earned the title of "supernanny," but the public is right to be wary. A "nanny state" provides real benefits for the vast majority of its people. A "supernanny state" only benefits the rich at the expense of the vast majority.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.
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14 Comments so far
Show All"Again, again! The helicopter! Again!"
After the dot-com bubble and 9/11, we lowered rates too much and too long----for political reasons. Now Bernanke is making the same error in response to nervous markets---for political reasons. Everybody else in the world, it seems, knows America's dollar is going down in value and knows Bernanke is going the wrong way. When it is impossible (and has been for years) for insured bank savings to earn interest that even equals real inflation, your country is being misled very very badly. An MBA is not needed for you to know this intuitively. Elect Democrats and get a mindset change from the top.
Daniel, you make great sense, but that last sentence I find quite confusing.
I keep wondering if the house of cards is being propped up so the fat cats can locate their own liabilities and collude to dump as much as they can onto the State investment accounts, pension plans, and the small investors. They said nobody knew where the bad debts were buried but given enough time can they be dug up and reburied elsewhere? Now that our courts have become corporate boardrooms what would be the downside?
No corporation or rich person should be left behind.
It was cheap credit that created the dot com and housing bubbles. It is not the solution. You cannot avoid a financial collapse created by cheap credit and the longer you delay it by even cheaper credit the worse it will be when it finally comes. Fiscal stimulus will not save the economy when it is driven by debt on top of more debt. The U.S. is the greatest debtor nation in the history of the world. Debt is the inevitable end of fiat money and imperial foreign policy. It signals economic collapse. America is doomed.
Wonder no more, gin ! Public pension funds nationwide are rapidly revising their standards to allow them to purchase more risky investments. This will result in two train wrecks. The first wreck will be when the pension participants and their employers get stuck bailing out the pension funds and the second wreck will be when the employees vote to dissolve the mismanaged pension plans.
Same old story, socialism for the rich, capitalism for the poor. My savings rate is way up. I haven't spend one dollar in two weeks.
"......Chairman Bernanke announced the dramatic rate cut. This cut spurred a turnaround, stabilizing financial markets for at least a few more days."
Did you notice that the cut arrived just in time for George Bush's State of the Union Address? Shall we give them an A+ for masterful planning?
Expatincebu (in the Philippines, eh? How do I know that?) is dead on. When the problem is multibillions in debt, how can borrowing another couple billion and spreading it around, whatever the divy-up formula ends up being, can only make things worse quicker.
Years ago, during my yuppie days, I worked for a large multinational banking corporation, and since then I have been telling people that large financial institutions are without exception criminal conspiracies, and they would all be perp-walked if they weren't rich enough to buy all the legislators they need to keep the laws on their side. The whole thing is and has always been a shuck and a crock. People interested in how it works might consider watching this:
http://video.google.com/videoplay?docid=-9050474362583451279&hl=en
Or, the same thing can be seen here:
http://www.paulgrignon.netfirms.com/MoonfireStudio/MoneyasDebt/Money_as_Debt.html
If more people understood how this worked (I know; dream on), it might be possible to work out some sort of workaround before the meager savings of those of us who have managed to work our way out of debt disappears in a puff of doubt.
"The Fed has no business using its interest rate policy to prop up financial markets. High prices in financial markets redistribute wealth from people who don't own large amounts of stocks and bonds to people who do. That is not the job of the government or an agency of the government, like the Fed."
Whaaaaa? Mr. Baker is under the impression that the Fed is an "agency of the government"? That is the intended impression a Fed chairman like to create when he chats with Congress, but the Fed is actually a privately owned operation that has never been nor will ever be audited and subjected to the vulgar scrutiny of the public. The Congress doesn't tell a Fed chairman what to do. The Fed chairman tell the Congress what the Fed is going to do. Period.
We do not know the names of the owners of the Fed, either. The American people do not own the Fed and certainly do not partake of the interest Fed loans to the government create. WE PAY the Fed. It is completely opaque and if it wishes to run a new TAC program, it can so that the members of this conspiracy, this federal reserve system, can hide this malfeasance. The FED can act with impunity. The Fed is not, nor has it ever been, nor will it ever be, transparent. It is a private club that does a certain amount of public service work in terms of its half-assed management of this economy, for which it is handsomely paid. Half-assed is a generous assessment.
My god, man, the Fed employs its monetarist power to control financial markets, whether that purpose is deflationary, as with Paul Volcker's draconian policy of 1979-83 that created depression era levels of unemployment, or inflationary, as Alan Greenspan's gambit following the dot.com bust that created this housing bubble. The Fed CONTROLS financial markets! It CREATES bubbles and busts. It controls the financial machinery in the interest of its constituency, the rich, since it is owned and operated by the rich.
From the perspective of the Fed, the public interest IS the interest of the rich, for it is from their "investment" activity that wealth trickles down to the people. Ben Bernanke is a supernanny, that is the definition of his role, and he is already supporting the elite financial interests that have created this speculative bubble in the first place! Many billions have already been made available to the banks and the brokerages to protect them from their own excesses and forestall a deflationary rigor mortis, and if these bail out operations were not taken, if the TAC were transparent, if the financial system itself were transparent, the house of cards would collapse on us all and the people would lynch Bernanke and any other rich fuck they could get their hands on.
BECAUSE WE ARE THE FED'S INDENTURED SERVANTS, IT IS ESSENTIAL THAT THE FED USE WHATEVER POWER IT CAN TO SHORE UP THE FINANCIAL MARKETS OF OUR BETTERS, THE PRIME MOVERS, THE SUPER CAPITALISTS. If these markets collapse, we're screwed. Most of them will survive, but we the people are screwed.
Really, Dean Baker, you are a common sense, level-headed sort of guy, but at the same time you are remarkably ignorant. Your heart is in the right place, but you're seriously misinformed about the nature of this financial system.
And actually, that's what I think government is for - setting general guidelines and policies, rebalancing imbalances, setting and enforcing the rules of the game. The government is supposed to work for you; you should demand it do so.
All Bernanke is doing is creating inflation and shrinking the USD. That can't make all those foreign investors happy, can it? Along with the rebate - chump change for the common man.
Way back in the 70's already, people were laughing about privatizing the gains and socializing the losses.
I just wanted to take issue with Baker's language: the Fed is beyond accountability, and it has been well-stated in previous posts that there is socialism for the rich and capitalism (even "disaster capitalism") for the poor and middle-class.
Let us call them as we see them: THEY AREN'T "conservatives"; they are reactionary, regressive and reckless, in the grand tradition of Reagonomics (wreckonomics). The Bush gang is anything but conservative!
Don't be meely-mouthed about what is really going on. It has been one long colossal screw-job. Check out David Cay Johnston's latest book "Free Lunch". (He's also been on Democracy Now" and Bill Moyers' Journal in the past two weeks.
Amen. As for yuppie days, I worked for Morgan Stanley once upon a time, and rewrote "analysts" reviews hyping the stocks including Enron and Worldcom, on a weekly basis. Best paying job I ever had working for Satan.