Opinion: The financial crisis – another look


Since the first time I wrote on the financial crisis, I have read almost everything relevant I could find. What really got me going was a call I placed to the Treasury Department in the fall of 2008 during the midst of the crisis to get some very basic mortgage data for a column I was working on. The woman from their Office of Public Information first told me that the information was private, and when I laughed out loud at that ridiculous assertion, she told me that they didn`t have it and I would have to call the Mortgage Bankers Association. Apparently the Treasury was its subsidiary.
As former Fed chair Alan Greenspan admitted, he operated as if Wall Street was self-regulating. Ben Bernanke is another case in point. In my opinion, his performance demonstrates how badly things work when financial officials think that little regulation is needed, and that the welfare of banks is more important than the welfare of the citizens.
During the run-up to the disaster, both while acting as Bush`s economic adviser and as Fed chairman, Bernanke supported overly low interest rates, failed to properly regulate derivatives, allowed lax mortgage lending standards, and did not impose strict bank capital requirements, all of which have been cited as major causes of our economic mess.
When the crisis hit, Bernanke was caught flat-footed. All of the many accounts that I read of the period when Bear-Stearns was taken over and Lehman Brothers went under confirm that he was totally surprised, in spite of the predictions by some economists that a major storm was brewing. (Former Secretary of Treasury Henry Paulson was likely well aware of the coming danger, since shortly after he left Goldman Sachs to go to the Treasury in June 2006, Goldman Sachs started selling off or hedging their mortgage securities.) When the banking system was seizing up, these two never went to Congress to demand emergency powers to put banks, hedge funds, big insurance companies (like AIG), etc., into receivership — a crucial omission — but instead asked for $700 billion to fund their first of many bailouts.
Bernanke did the minimum necessary to prevent a total meltdown. But he did it in a way that cost the taxpayers enormously and did little to prevent future disasters. The Fed threw away any remaining leverage by giving money to AIG before negotiating with its counterparties, and ended up paying them 100 cents on the dollar as part of the bailout. (It`s an interesting contrast that AIG was saved at a taxpayer cost of some $180-plus billion with a large chunk of that ending up at Goldman Sachs and other big banks, but General Motors was allowed to go into bankruptcy.) Per reports, the Fed bought roughly $2 trillion in toxic assets from the banks and quasi-banks at inflated prices, but failed to get any agreement in return to support necessary reforms, such as a return to the Glass-Steagall separation of commercial and investment banking (which ex Fed chair Paul Volker and the current head of the British central bank are now pushing) and transparency in derivative trading.
Bernanke also failed to push Congress to pass a bill granting the courts power to write down the principal on mortgages, which had the potential to give ordinary folks who were “underwater” a reason to keep paying on their mortgages and stay in their homes; instead, they protected the bankers. So the bill failed.
Since things have calmed down, Bernanke has continued to hold down interest rates without limiting banks` trading or investments. This has led to the totally counterproductive situation of big banks borrowing from the Fed at negative real interest rates (nominal rates minus inflation) to buy government and other debt and thereby make huge profits on the interest differential, leaving them little incentive to lend to real businesses.
Some commentators have said that if Congress didn`t re-approve Bernanke, then the Fed would have lost its vaunted independence. This leads to the absurd conclusion that the Fed chairperson must in effect have a lifetime appointment with no accountability. From my perspective, it`s time to stop thinking that central banking is so esoteric, because it isn`t, and put some people in office who care more about the citizens than about their buddies.


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