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Blame Bernanke
The Fed chairman Ben Bernanke could have acted to burst America's housing bubble – and yet he did nothing
As the senate debates Federal Reserve chairman Ben Bernanke's reappointment, it is striking how the media views blaming Bernanke for the Great Recession as being out of bounds. Of course Bernanke bears much of the blame for America's economic collapse.
He was either in, or next to, the driver's seat for the last seven years. Bernanke was a member of the board of governors of the Federal Reserve since the summer of 2002. He served a six-month stint as head of President Bush's council of economic advisors beginning in the summer of 2005 and then went back to chair the Fed in January of 2006.
This crisis is not a weather disaster like Hurricane Katrina; it is a man-made disaster that was brought about by seriously misguided economic policy. And, after Alan Greenspan, Bernanke was better positioned than any other person in the country to prevent this disaster.
The basic argument is very simple. The US had an enormous housing bubble. This bubble drove the economy ever since the last recession in 2001. It propelled the economy directly through a building boom that sent housing construction to record levels. Indirectly, it led to a consumption boom as people spent money based on the $8 trillion in housing equity that was temporarily created by the bubble.
When the bubble collapsed it was inevitable that it would lead to the sort of disaster that we are now seeing. We lost close to $500bn in annual demand due to the collapse of housing construction. The building boom created an enormous glut of housing. There will be little need for new construction for several years in the future.
The disappearance of trillions of dollars of bubble-generated housing equity led to a plunge in consumption. Annual consumption has fallen by close to $500bn. If we add in a loss in demand of close to $200bn associated with the bursting of a bubble in commercial real estate, the collapse of the bubbles led to a fall in annual demand of close to $1.2tn. The Fed has nothing in its bag of tricks that allows it quickly replace $1.2tn in demand, which is why the country is now mired in double-digit unemployment.
In spite of the heroic efforts at obfuscation by many economists, there is not really much to dispute in the above story. Add in the fact that the bubble was both recognisable and preventable, and you have a very solid indictment of Bernanke.
The bubble was easy to recognise, Bernanke just failed to do it. Nationwide house prices had already experienced an unprecedented 30% increase by the summer of 2002. Since there was nothing in the fundamentals of the housing market to justify this run-up, and no remotely corresponding increase in rents, Bernanke should have already been aware of the housing bubble by the time he joined the Fed in 2002.
The Fed has a large arsenal with which to attack a housing bubble, but the first weapon is simply talk. If Greenspan and Bernanke had used their platform at the Fed to educate Congress, the financial industry, and the public at large about the existence of the housing bubble and the risks it posed, this likely would have been sufficient to pop it.
This is not about mumbling "irrational exuberance," it's a question of using the Fed's full research capacities to document the existence of a housing bubble (they actually did the opposite) and then disseminating this research as widely as possible. If this proved inadequate, the Fed also had substantial regulatory powers to curb the deceptive subprime loans that helped inflate the bubble in its later stages.
If talk and regulation failed, then the Fed could have used interest rate hikes. A policy of raising interest rates with the explicit target of bursting the bubble – for example, a commitment to raise rates until house prices fall, – would almost certainly accomplish its goal in fairly short order.
Bernanke and his sidekick, Greenspan, chose to take none of these measures. Instead they insisted everything was fine the whole time. Things were not fine and the country is paying the price. And yes, it is very much Bernanke's fault.
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31 Comments so far
Show AllThere was zero chance Bernanke was going to regulate anything.
Goldman Sach's needed all those sub-prime loans to collateralize and sell to suckers around the globe.
The Fed works for its own narrow interests and Wall Street.
Mr. Baker seems to be under the illusion that the Fed didn't want the bubble.
In August 2007, when it became 100% clear that the housing bubble had burst, Bernanke lowered interest rates again, providing speculators with cheap cash to inflate commodity costs (food, diesel and gasoline, for example). That action further stressed the finanaces of homeowners who were underwater in the their mortgages, thereby exacerbating the severity of the September 2008 financial meltdown. Impoverished people in third world countries were affected more severely, with Bernanke's actions grooming many more terrorist recruits.
The saga continues with Obama and Bernanke continuing to pander to Wall Street at the expense of Main Street.
The fact that Obama chose Bernanke, Summers, and Geithner as economic advisors/cabinet member says as much about this administration as its betrayal of single-payer health care and its foolish escalation of the Afghan quagmire.
With a change of face and smoother rhetoric, the Corporatists-Militarists are still in charge.
This dick head belongs in jail with his predecessor Sir Alan Greenspaner. Our government is so corrupt there is no possibility of reforming it. Our government is of, by and for the corporations not the people. The public needs recognize that the government no longer serves their needs and never will. It's time to start over. It won't happen because the public is so fucking dumbed down and preoccupied with chanting yes we can, yes we can, change we can believe in and the rest of the smilely faced hope and crap that brand Obombya's been selling that they have lost their ability to demand justice.
It must have been about 2004 when I heard an NPR program in which this question of whether or not there was a housing bubble was discussed among 5 or 6 panelists--all with excellent credentials. Only one thought there was a bubble. Banks were still making money on it and no matter how sound the analysis no one can argue with that it seems. All Bernake could have done then was voice a dissenting and discredited opinion and resign. If that is the standard then we have to say that very few, in or out ofgovernment lived up to that. I think we should keep Bernacke-- rub his nose in the mess he and his buddies created, get him to admit misjudgement and tell him to get new advisors and clean up the mess. If he agress keep him, otherwise can his sorry ass.
When bubbles pop the rich get richer and the powerful gain more power.
Predictably, Bernanke's handouts to Wall Street have reinflated the Dow bubble.
When it pops the chasm between the haves and have nots will be even wider.
In his January State of the Union address it's being rumored Obama is going to announce IMF-like austerity measures he's taking to narrow the deficit.
Obama, not content with merely living George Bush's third term has decided to live Ronald Reagan's as well.
"IMF-like austerity measures he's taking to narrow the deficit", i.e., Shock Doctrine applied in the good ol' USA, as in gutting the Entitlement programs. The oligarchs appear to be coming in for the kill (of the middle class), having successfully divided the common people with the social/cultural issues, and therefore feeling confident that the chances of a revolution, or even the formation of a viable populist party, are remote.
kivals, you're absofrigginlutely right --- the Global ruling-elite corporate/financial/militarist Empire doesn't want to just go back to the Reagan era (error) in terms of doing away with what they view as a stinking safety net 'social democracy' --- they want to go all the back before American democracy was even a baby in the tub to be drowned, they want to go back to a friggin Feudal, pre-modern state of affairs where there was a simple divide of 'lords' and 'serfs'.
Those draconian measures are not going to be just "Your father's Oldsmobile" type structural adjustments buddy, get ready for some pain "similar to death or destruction of a major organ" as Yoo put it.
"Point of the spear in the face" is going to be a phrase that many will understand more clearly as this GD Global Empire starts to really turn the screws.
Alan MacDonald
Sanford, Maine
PS. for an excellent (though painful) analysis of just this trajectory toward serf-hood, see Mike Whitney's superb economic analysis in today's Counterpunch, "Obama's 'We Got No Money' Rap".
http://www.counterpunch.org/whitney12082009.html
Hey, why blame Bernanke. What's done is done and will be done again. Corruption is a team sport and it too has it's stars. The American culture raised these people to do what they are doing. They are corporate hero's and god's to the rich. The train left the station long ago. The oligarchy rules. If American's are fed enough bananas they will cheer for these people. Is there anything I left out?
several independent economists/investors foresaw the housing bubble. and with the preceding bursting of the tech stock bubble, the fed should have been more cautious of another bubble anyway. in fact , it is entirely possible that the housing bubble was foreseen, and in fact encouraged by low credit rates to make possible expenditures and adventures that would not otherwise be so. with thousands of mathematicians employed by wall street and the fed, how could they miss the exploding real estate prices far above the historical norm, and hence unsustainable?
but commonsense and evidence are to be denied with complex statistics and inventive theories of a new paradigm, particularly if current profits or future pay or adulation depends on denying the existence of a bubble. fleecing those suckers- the main street sheep is terrific - since there is no price whatsoever to pay for the risk to retirement funds, the collapse of the economy, the jobs lost, the falsehoods sermonised. How many captains of wall street or in the fed have had to resign for this colossal fraud at worst/ mistake at best,as compared to the responsibility that regular people bear in their jobs on main street?
There is no need for capture, the Fed was created after 50 years of big banks fighting for it. Right after it was established ABA set up shop next door in DC. It exists for the benefit of the biggest banks and to control competition from smaller banks. Basically the same way all government agencies and regulations work. Handouts to the big corps and regulation and taxes to make it practically illegal to compete with them. That's why the banks wanted it.
That's an interesting train of thought and I like that. Capitalism looks so good on the surface but only when someone sucked into it does its dark side become clear. There is a bright and dark side to every system. I wished there was a way to make the bright side of socialism easily compete with capitalism.
I only watched part of the Bernanke re-confirmation hearings on C-Span and turned it off because of the sickening sweet exchanges. Did members of the Senate ask him to explain the 17-23 trillion dollars that the FED has loaned or guaranteed to cover the losses caused by the wild speculation in hedge funds and credit default swaps by investment banks and AIG.This is over and above the hundreds of billion given out in TARP money. They literally bought up trillions of dollars worth of smelly sub-prime loans at 100% of the original value. They also allowed the unregulated investment banks to become bank holding companies, which allowed them to receive bail-outs to keep from going belly-up. For those decsion alone he should have been given the boot. Did anyone ask him if he thought the Graham-Leach-Bliley Act of 1999 should be repealed? That Act cancelled the provisions of the Glass-Steagall Act that prohibited banks from getting into other businesses. One House committee has voted to do an audit of the FED, which Bernanke fears and he is already trying to sabotage that audit. Congressman Barney Frank was doing the cheerleading for an audit along with Ron Paul. Frank has already been turned to the dark side and is now the lapdog for Bernanke. We need to call, E-mail our members of Congress and insist that serious reforms be taken. No more pontificating and charades.
we're in the death throes of the end of the nation-state as we know it....... it used to be that the ultra-wealthy viewed themselves as a citizen of a country- for example Henry Ford thought of himself as an American.
WE now live in a budding era in which the wealthy view themselves as above national politics......global profits are more important.... these wealthy will change citizenship just to save 5% on their tax bill.....
they'll blow up the bubble and then blow up the economy for a nickle.....
so bailouts in the USA go to help the manufacturing sector in China directly leads to increased profits for the wealthy here in America.
And I blame Obama for not firing Bernanke from the start.....and for geitner, summers,etc....
and let's look at Sonya Sotomayer- she was a federal appointee by Bush Sr- and she's a liberal? give me a break!!!!!!!!!!!
just look at his "JOB SUMMIT" - now there was a joke......ZERO talk of fair trade and fair tariffs, ZERO talk of manufacturing, ZERO talk that doesn't give the mega-corporations even more power -
but lots of talk on "only the rich can save us!
And if we look at all the October surprises then we have to look at the Oct surprise of the crashing economy brought about by Goldman Sachs - obama''s largest donor and the largest contributer to his staff..... there are now more than 30 Goldman Sachs ex-employees on Obama's economic staff....and McCain was ahead of Obama up until then......
so Obama is the heir apparent of the Reagan/bush revolution - in office by stealing it!
Obama is now the enemy......
wow that honeymoon lasted a long time.....
"it used to be that the ultra-wealthy viewed themselves as a citizen of a country- for example Henry Ford thought of himself as an American."
Not all of the ultra-wealthy have viewed themselves as a citizen of any particular country. The financial elites of Europe (along with its monarchs) have always been more mobile (like capital has become under free-trade agreements) than the people who make everything with their labor.
According to Cong. Ron Paul's website, he's a Republican Libertarian, not a 'progressive,' and most of his proposals are regressive (i.e. return to the Gold Standard, abolish the Dept of Ed and NEA,) not progressive.
Maybe you confused RP with Ralph Nader? Also, how did you manage to misspell Bernanke when it's in the title of the piece?
Okay, I blame Bernanke.
Now what the f**k do I do?
http://act.boldprogressives.org/cms/sign/supportsanders/?source=caf
Barf. The crash was due to four things Bernanke had no control of:
1) Millions of houses being sold to people who couldn't come close to affording them.
2) Ratings agencies lying about the safety of of very risky securities.
3) Banks bundling bad mortages and selling them as low risk,
high interest securities.
4) The export of manufacturing jobs and collapse of the American automobile industry.
Bernanke can be thrown to the wolves but that will not solve all our problems.
keith campbell
Denver
And now it's time to break the Bernanksters!
Federal banks exist for two reasons:
1) Corporate socialism for big banks while controlling competition from small banks.
2) Funding war and genocide.
The system is not corrupt. It is working exactly as intended.
Glad to see CD publishes an article that doesn't just stupidly blame "deregulation." It is simple just like the author says: More easy money, more speculation. The government has been pushing easy money, federal guarantees of debt and all other kinds of speculation since the New Deal and especially after WW2. We could be at the beginning of a collapse from a boom that started as early as the Fifties. Hang on because we still might have a long way to go.
Dean, sorry to disagree, but it's worse than that.
They (Greenspan and Bernanke) did not just "stand-by" and do "nothing to stop it" -- they did not commit a lie of omission, rather they actively 'enabled' and promoted it, thus the sin was of commission.
Like Doctors in early cigarette ads, these guys knew as economists that the negative externality cost being dumped in our financial lungs was cancerous -- and yet they helped sell the shit.
No, Dean, this financial 'shock doctrine' attack was planned and preemptive, a scheme, a known fraud, a looting if not a murder.
Like scheming tobacco corporations foisting cigarettes that they knew scientifically caused cancer, but wanting to make the profits despite the pain, these financial predators knowingly set-up the biggest negative externality cost dumping scam in history --- and they knew that it was based on the known 'market flaw' / 'market failure' of being able to get away with dumping 'debt bombs' on the market and making the casualties into 'gold' for themselves. That's the real revelation that Greenspan said shocked him, but then failed to reveal to the dummies in Congress. Hell, any half-smart economist knows that you can make a killing easier by externalizing costs than by raising your direct revenue and profits --- hiding costs makes money "Big Time" as Cheney might say.
Dean this was a pre-planned scam just as much as a classic Three Card Monte is --- and all the apparent participants are in on the con, except for the rube. The dealer, the other initial players, the causal observers, and the guy in the crowd who prods the rube that he can 'beat the system' are ALL in on the con, with their full knowledge of what's going on and their supporting roles. Then they collapse their tent and set-up elsewhere --- with some of them maybe playing rear-guard and distracting the police by claiming they didn't know what was going on --- just like Greenspan.
This was a set-up, just like Doctors selling cigarettes in old ads, or like the Reichstag fire, or like 9/11.
It can even be proved. The very banksters who pulled the scam had already researched and understood that their older negative externality scams of socializing costs and privatizing profits with industrial products like cigarettes, weapons, and oil were getting thread-bare and too visible, and that their exceptional investment profits and grwoth in valuations were going to be stepped-on by 'polluter-pays' settlements and legal judgments if they didn't move their externality scams to more ethereal and hard to detect products like CDOs and CDSs.
The biggest cons even wrote about it before the crash; "Citigroup, Lehman Brothers, and UBS Report on Climate Risks and Opportunities for Investing".
"The UBS and Lehman Brothers reports concur that climate change represents a classic market failure where company valuations neglect to take into account negative externalizations--in this case, predominantly the emission of carbon dioxide CO2, the primary greenhouse gas (GHG).
"The free market fails to limit climate-damaging emissions sufficiently, because polluters do not have to pay for the damage they cause," states John Llewellyn, senior economic policy advisor at Lehman Brothers, in The Business of Climate Change: Challenges and Opportunities. "A basic role of policy in such cases is to 'internalize' such costs into emitters' cost structures--the 'polluter pays' principle."
"If climate change, one of the most studied environmental phenomena, represents a market failure, one can only wonder to what degree the legion of lesser-studied environmental and social externalities are not being priced into corporate valuations." --- to which Citi, Lehman and UBS must have said in unison, "Well let's just invent some more complex negative externality scams that will be harder to understand and impossible to make us internalize" -- because that's just exactly what they did, with Alan and Ben's complicit help.
http://www.socialfunds.com/news/article.cgi/2237.html
Alan MacDonald
Sanford, Maine
Well said.
True
Brilliant Alan thanks. peace
I am disappointed and disgusted with Obama. Obamas's appointments and reappointments of Bernanke, Geithner, Sommers, and SO MANY others are embarassing, humiliating and a very bad joke. There are endless areas of concern with Obama's policies. It seems to me that (sadly) he is no different than most of the the others who we have elected to the presidency, Senate, House of Representatives and every other office, in that they become convinced the only salvation for us all is to have them re-elected. Again and again and again.
We need to change our election financing, and just about everything else. The corporatocracy issue just rears its ugly head endlessly. It is very difficult to maintain a sense of hope. For what? Another "Yes We Can" and "Vote For Change" advocate? Right....
Yes it is Bernanke's fault. Only his?
Is it really necessary to write that the rot goes deep?
I have been writing on these pages for weeks and speaking and writing elsewhere amongst others for years that there is something wrong in America. It is clearly the structure of governance called the USA.
It was adequate and necessary at one stage. It is now a corpse full of maggots.
Americans must take it down. Relationships between States on the North American continent must be redefined to give independence in legislative and fiduciary powers, the White House commissioned as a museum and the Pentagon dismantled.
Columbia, Princeton, MIT, and the chief architect of the fall of the US empire. Not bad for a kid from South Carolina.
This POS won Time's Person of the Year.