Excerpts: Fed Failures by Joseph Y. Calhoun, III
Any dispassionate appraisal of Ben Bernanke’s term as Chairman of the Federal Reserve would have to conclude that it has been a colossal failure. The Fed is tasked with several areas of responsibility and the Bernanke Fed has failed at all of them. As a bank regulator, the Bernanke Fed presided over the formation and collapse of quite possibly the biggest credit bubble in the history of the world and the largest number of bank failures since the S&L crisis. At the same time they were busy ignoring the shenanigans of the banking sector, the Bernanke controlled Fed also managed to push the inflation rate to its highest year over year change in nearly two decades (+5.5% in the summer of 2008) and then also allow it to turn negative (nearly -2% in the summer of 2009) for the first time in a half century. Bernanke’s Fed also deserves at least partial credit for oil at $145 and gold at $1200 since those were a result of monetary policy as well. Finally, since the Fed’s dual mandate also includes maintaining full employment, the current unemployment rate of 10% must be included in Mr. Bernanke’s application for continued employment . .
Those who favor Mr. Bernanke’s reappointment primarily cite his performance during the crisis portion of his term as their reason for favoring his retention. . . I suppose it must be comforting to these Bernanke supporters to know that the chairman knows more than anyone about how to recover from such economic calamities, but has it not occurred to them that he apparently knows absolutely nothing about how these situations are created? He has yet to acknowledge in even the slightest way his and the Fed’s role in creating the very crisis he claims to be qualified to solve.
If anything, Mr. Bernanke’s performance since the first inkling of sub prime trouble in the summer of 2007 is the strongest case against his reappointment. The actions of the Federal Reserve since that time may have been in the best interests of the financial industry, but claiming they were in the best interests of the country as a whole is a more dubious position.
Whose interests did it serve when the Fed provided funding - and assumed the risk of potential losses in the process - for JP Morgan to take over Bear Stearns? Whose interests did it serve when the Fed paid off AIG’s counterparties in full? Whose interests does it serve when the Fed purchases Fannie Mae and Freddie Mac debt in the open market? Whose interests does it serve when the Fed is the mortgage backed securities market? Is it even Constitutional for the Fed to purchase such securities if there is a potential for loss? Doesn’t that cross over into fiscal policy that should be voted on by Congress? Whose interests does it serve when the Fed purchases newly issued Treasury notes?
Bernanke - and many others - claim these actions were necessary to prevent the collapse of the entire financial system. Treasury Secretary Geithner has made similar claims and yet neither can offer anything other than their personal assurance that their actions averted disaster. One thing we do know for sure is that the biggest beneficiaries of their actions were the owners and creditors of the largest financial institutions. Why were losses dispersed among the public considered preferable to losses concentrated among this smaller group? Is this smaller group somehow more important economically than the much larger group that was forced to accept their losses? Why? How?
More important than Bernanke’s past performance is how he will perform in the future. What has he learned from this experience that will allow him to perform better in the future?. . . the Fed maintains a steep yield curve that benefits no one so much as the banking industry bottom line. The economy is just coming off life support, but at least the financial industry will have a good bonus season. Surely our contributions to the golden calf that the financial industry has become will trickle down to the rest of us mere citizens eventually.