Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Ben Bernanke, The Very Model of a Modern Pliant Bureaucrat

Politics / Central Banks Feb 05, 2010 - 10:24 AM GMT

By: Fred_Sheehan

Politics

Best Financial Markets Analysis ArticleFederal Reserve Chairman Ben S. Bernanke was a safe bet to win the Senate's vote for a second term. "Safe" is what the senators want and Bernanke passed the test. He is not a man inclined to make bold decisions. A former university administrator, his institutional mind will be just as slow to foresee the next financial crisis as it was incapable of forecasting the last.


Despite obvious signs the financial system was about to burst, Congress had no desire to touch Fannie Mae, Freddie Mac, and the banks' expanding mortgage securitization machine (i.e., derivatives), that made Washington and Wall Street so rich.

Having replaced Alan Greenspan as chairman on February 1, 2006, Bernanke performed according to script. He dismissed the worrywarts. In June 2006, Chairman Bernanke told an International Monetary Fund (IMF) gathering: "[O]ur banks are well capitalized and willing to lend." In the same month, he stamped his imprimatur on the most destitute sector of the economy: "U.S. households overall have been managing their personal finances well." In November 2006, he calmed fears about subprime lending. Before an audience promoting community development, Bernanke celebrated the rise of subprime mortgages: from only 5 percent of the market in 1995, 20 percent of new mortgage loans were subprime by 2005. (He did advise "greater financial literacy" for "borrowers with lower incomes and education levels.")

In May 2007, Chairman Bernanke gave an appraisal one expects from a short-sighted bureaucrat: "[W]e believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

Bernanke's specialty is organization. Filing subprime mortgages into a manila folder appealed to the chairman's tidy mind. John Cassidy discussed Bernanke's strength in the New Yorker: "In 1996, Bernanke became chairman of the Princeton economics department, a job many professors regard as a dull administrative diversion from their real work. Bernanke, however, embraced the chairmanship.... [Bernanke] bridged a long-standing departmental divide between theorists and applied researchers...." A colleague explained Bernanke's considerable skill: "Ben is very good at... giving people the feeling they have been heard in the debate...."

Bernanke gives senators the same feeling (with some admirable exceptions, who know Bernanke's cordial and vague representations are a variant on his predecessor's, Alan Greenspan). The IMF did not want to hear America's banks were undercapitalized. The community developers did not want to know subprime lending was an odious racket that was bound to topple. The nation's most revered economist assured audiences that all was fine.

On December 3, 2009, the Senate Banking Committee held a reconfirmation hearing (prior to the full Senate voting on Bernanke's second term). The Fed chairman was given great credit for leading the nation through the recent financial crisis. Committee members congratulated Chairman Bernanke for his brilliant restoration of the U.S. financial system.

He was reprimanded, however, for not anticipating the crisis and expressed requisite contrition. Bernanke thought banks should have held more capital and that the banking system had not employed adequate risk management controls. Committee members nodded in solemn agreement.

In truth, the too-big-to-fail banks are bigger, more unstable, and even more undercapitalized than before the bubble burst in 2007. As for risk management tools, Bernanke is full of talk but has done nothing to restrain either the growth of derivatives or to require reserves be held against derivative exposure.

At the December 3 hearing, the Fed chairman stated that he did not see any asset bubbles emerging. This seemed to reassure the senators who ignored the fatuity of even asking his opinion given that he thought banks were well-capitalized in 2006 and did not see the housing bubble.

As night follows day, Bernanke ignores a signal akin to one the derivative markets offered ahead of the 2007 meltdown. Then, there were wide expectations of loan defaults. Investors hedged this risk in the credit-default swap (CDS) market. The CDS market grew from $14 trillion to $42 trillion from January 2006 to June 30, 2007. Any line of business growing at such a rate should alarm bank regulators.

Ben Bernanke, the nation's leading bank regulator, did not understand that banks could not honor trillions of dollars of claims once the defaults occurred. It was the CDS market that left Bear, Stearns; Lehman Brothers; Goldman, Sachs; and AIG either insolvent or close to it.

Today, galloping derivative growth has moved to interest-rate protection. The fear is of a government bond bubble. Ten-year Treasury bonds yield 3.7% during the greatest money-printing experiment in the nation's history. Investment managers are protecting themselves against a higher 10-year Treasury yield. (With interest-rate derivative contracts, banks will have to pay the purchasers if rates rise to a specified level.)

During the first six months of 2009, the volume of contracts offering protection against rising yields of Treasury bonds with maturities of 5 years or longer rose from $109 trillion to $150 trillion. When rates rise, banks may once again default on their commitments.

Bernanke aims to please. He told the senators in December 2009 a reevaluation of his zero-percent fed funds rate "will require careful analysis and judgment." The chairman will raise the rate "in a smooth and timely way." This paralysis to action fits the stereotype of a municipal data-entry clerk. Bernanke certified his tremulous loyalty when he told an audience on November 16: "It is inherently extraordinarily difficult to know whether an asset's price is in line with its fundamental value.... It's not obvious to me in any case that there's any large misalignments currently in the U.S. financial system."

Only an apparatchik could believe an economy with zero-percent interest rates is in balance. The purchasers of interest-rate protection (which is not cheap) believe differently, but Ben Bernanke is the man for the Senate. The chairman's mandate for his second them is to ignore the obvious, deflect attention from the megabanks' inherent instability, and to accept blame for his ignorance after the deluge.

Frederick Sheehan writes a blog at www.aucontrarian.com

Listen to interviews with Frederick Sheehan:

1 - Thursday, February 4, 4:30 - 5 PM EST, on Bloomberg radio with Pimm Fox on his show Taking Stock

2 - Saturday, February 6 with Jim Puplava at Financial Sense. The one hour interview will be posted at 3 PM EST: http://www.financialsense.com/fsn/main.php

3 - Sunday, February 7, 10 -11 AM EST, with Jim Campbell on Yale University radio WYBC - 1340 AM and streaming live at WYBC.com. Simulcast on Yale's Internet channel: WYBCX.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

© 2010 Copyright Frederick Sheehan - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in