The Case Against Bernanke

Much of the mainstream press has played the rising opposition to
Senate confirmation of Ben Bernanke as a case of misplaced populist
rage. The fact that the opposition within the Senate began with that
chamber's left (Bernie Sanders) and right (Jim Bunning) seems to
confirm the premise that it's only the fringe that opposes his
reappointment as Fed Chairman. The Boston Globe, for example, recently profiled Sanders
and his case against Bernanke under the remarkable headline, "Sanders a
Growing Force on the Far, Far Left." (I've always thought of the far,
far left as Chairman Mao and Che Guevara. Bernie is a European style
social-democrat.)

In fact, when the Senate votes on Bernanke, Sanders will have a lot of company -- and he should. Bernanke's high-profile speech
to the American Economic Association in Atlanta, January 3, was his
latest effort to redeem himself. But it provides ample evidence for why
the Senate should deny him a second term.

Bernanke devoted most of a remarkable abstruse speech to a straw
man. "Some observers have assigned monetary policy a central role in
the crisis," he said. "Specifically, they claim that excessively easy
monetary policy by the Federal Reserve in the first half of the decade
helped cause a bubble in house prices in the United States."

There are such critics, but of course it wasn't cheap money that
caused the bubble. It was easy money combined with the complete
abdication of the Federal Reserve's role as a regulator that allowed
Wall Street to go nuts, creating a financial house of cards. Low
interest rates can be good for an economy. The post-World War II boom
was built on low interest rates -- combined with tight financial
regulation so that the low cost of capital would enhance real economic
growth and not foment risky speculation.

Bernanke's speech passed up the opportunity to confess any error or
personal learning curve. He was appointed to the Fed by President Bush
in October 2005, and elevated to chairman in February 2006. During the
run-up to the collapse, the Fed possessed ample authority to deal with
the abuses that caused the bubble in sub-prime loans. The Fed was
specifically tasked with enforcing a 1994 law, the Home Ownership
Equity Protection Act, which required all mortgage lenders to use sound
underwriting standards, even if they were covered by no other federal
regulation. No less than a fellow member of the Fed's Board of
Governors, the late Ned Gramlich, an expert in mortgage finance, begged
his colleagues to crack down on mortgage abuses, but first Greenspan
and then Bernanke refused.

The abusive off-balance sheet maneuvers that led to the financial
house of cards were done largely through the holding companies of the
biggest Wall Street banks. These are the regulatory responsibility of
the Fed -- which, under Bernanke, displayed an appalling incuriosity
and instead trusted the genius of markets and financial "innovation."
In his testimony before the Senate Banking Committee on December 3,
Bernanke went through the motions of contrition. "In the area where we
had responsibility, the bank holding companies, we should have done
more," he said. "That is a mistake we won't make again."

But in his Atlanta speech, the closest he came to accepting responsibility was a few lines such as:

Stronger regulation and supervision aimed at problems with
underwriting practices and lenders' risk management would have been a
more effective and surgical approach to constraining the housing bubble
than a general increase in interest rates.

But he followed this with defensive assertions of the actions that
the Fed did take in 2006 and 2007, which proved to be woefully
inadequate. Bernanke also contended that the crisis "revealed not only
weaknesses in regulators' oversight of financial institutions, but
also, more fundamentally, important gaps in the architecture of
financial regulation around the world." But the fact is that the Fed
and other regulatory institutions had plenty of power -- they just
refused to use it.

Bernanke reiterated his call to give the Fed even more power as a
kind of super-regulator. But both the Fed's record and its structure as
a partly industry-owned hybrid make the Federal Reserve the last agency
that should be entrusted with new regulatory powers. Bernanke himself
was repeatedly behind the curve in his bland reassurances during 2007
that nothing was seriously amiss with housing markets or the financial
system.

So one reason to reject Bernanke for a second term is that he really
hasn't learned much from his earlier mistakes. A second, even more
compelling, reason is that he refuses to tell Congress who in the
private sector has been subsidized by the Fed, subject to what ground
rules. Bernanke hides behind the widely-shared premise that Congress
should not "politicize" monetary policy.

But the Federal Reserve really has three distinct roles, of which
monetary policy -- whether to loosen or tighten money generally -- is
the most straightforward. Arguably, if Congress got into the act, the
majority party could pressure the Fed to deliver cheap money to
stimulate the economy prior to elections. But that's not what this
argument is really about. The Fed's other two responsibilities are
regulatory policy and emergency infusions of credit and capital during
severe crises -- a role sometimes known as "lender of last resort." In
these two areas of the public's business, Congress has every right to
demand far greater transparency of the Fed than Bernanke has been
willing to deliver.

As Senator Byron Dorgan put it January 7, shortly after announcing his decision to retire after this year:

For the first time in history they said to the big
investment banks, you can come and get direct lending from the Federal
Reserve Board. We're trying to find out from the Fed, who'd you give
the money to, how much money did you give? My point is, what did you do
with our money? And the Federal Reserve Board says "none of your
business." Well, I tell you what, it is our business, and I'm not going
to let the Bernanke nomination to head the Fed for another term go
through until he tells, what did he do with our money, the American
people's money.

Six weeks ago, Bernie Sanders was agonizing over whether to try to
kill Bernanke's confirmation. He resisted pressure from the White
House, and finally announced on December 2 that he was putting a hold
on Bernanke's confirmation. Since then, Sanders has been clear that his
goal is not to slow down the nomination but to kill it, and six other
senators have joined him, meaning that it will take 60 votes for
Bernanke to be confirmed. Bernanke's nomination was reported out of the
Senate Banking Committee with a majority of the Committee's Republicans
opposed, and Chairman Chris Dodd supporting Bernanke personally but
rejecting a larger regulatory role for the Fed.

With the disappointing job numbers for December just released, and
the rising populist rage against the favoritism shown to Wall Street
over Main Street, the opposition to Bernanke will only grow. And it
would be a severe mistake to read this as senators needing a scapegoat
or a sacrificial lamb. The Fed's policies are deplorable, Bernanke
shows no sign of learning from his mistakes, and the Fed continues to
hide behind its semi-secret status as not quite a public agency.

As recently as mid-December, when the House Oversight Subcommittee,
chaired by Dennis Kucinich, was trying to figure out whether the
Treasury was letting shaky banks exit the TARP program early so that
they could resume paying exorbitant bonuses, Treasury Assistant
Secretary Herb Allison hid behind the Federal Reserve (which is not
obligated to explain itself to Congress.) Huffington Post's Ryan Grim reported this exchange:

Kucinich: "So it's the Federal Reserve that decides when to
exit the TARP and the Federal Reserve does it at their choosing, or who
chooses? How do we know who makes the choice whether to exit the TARP?
How do we know if it's the banks that are deciding or the Federal
Reserve? Do you know?"

Allison: "The regulators decide, Mr. Chairman, on when it's appropriate for a bank to repay the Treasury."

Kucinich: "Is that a transparent process, Mr. Allison, or is that pretty much done over at the Fed without any report to you?"

Allison: "That's a matter for the regulator, that's --"

Kucinich: "Well, they're the regulator, but we're the shareholder.
When do we find out? When do you find out? Do you find out when you
read about it in the newspaper?"

Allison: "When the regulator informs us...

This claim is complete malarkey. Treasury, since the program began,
has been the prime agency supervising the distribution of the TARP
money. And the negotiations over when the banks are strong enough to
quit the TARP program (and escape its limits on executive pay) have
been with the Treasury. But the ease with which Treasury officials have
hidden behind the non-transparent Federal Reserve is a prime example of
why the Fed needs both a complete overhaul and new leadership.

In October 2008, when Republican Treasury Secretary Hank Paulson's
TARP legislation was railroaded through Congress, it was Republicans
more than Democrats who nearly killed it, and the Democrats who saved
it. Now, many Democrats are having second thoughts. In this climate,
Republicans are playing the preposterous role of the more populist of
the two parties. And, as the fight over a badly flawed health bill
shows, Obama's policies are making their jobs easier.

With a majority of Republican senators apparently ready to vote
against Bernanke, Democratic senators risk finding themselves on the
wrong side of another populist backlash. If half of the Democrats
decide to vote against him, his nomination could go down.

I have argued in this space, along with such good progressive friends as Peter Dreier,
that Democratic legislators ought to hold their noses and vote for a
badly flawed health bill. To kill the bill would hand a huge victory to
the Republican right.

But the Bernanke re-nomination is another story. It is not a
signature, make-or-break initiative of the administration. Bernanke's
defeat would be a repudiation of President Obama's close alliance with
Wall Street -- but it would be extremely salutary for him and for us.
It might even get the president's attention for the proposition that
his presidency and America's economic future depend on an entirely
different strategy of economic recovery. Bernanke is not just the
symbol of everything that's wrong with Wall Street's dominance of
economic policy, but the substance.