Fed Chairman Ben Bernanke (Shirley Li)
THE FEDERAL Reserve Board makes verbatim transcripts of its policy-making sessions available after a five-year lag. So the transcripts from these meetings now being released provide a window into just how clueless the government’s own top economists were in the run-up to the financial crash of 2008. The transcripts are also reviving discussion about what the Fed should have done to address the situation in order to prevent the misery that now grips tens of millions of Americans.
Here are some of the more mind-boggling quotes from these transcripts.
In 2006, for example, Federal Reserve Board Chair Ben Bernanke proclaimed, “We are unlikely to see growth being derailed by the housing market.” Bernanke made this obviously “un-prescient” comment at the March 2006 meeting, the first he headed as chief, when housing sales and prices had already significantly fallen.
The March 2006 meeting was the one at which the board said goodbye to outgoing Fed Chair Alan Greenspan. As Janet Yellen, then-president of the San Francisco Fed, gushed during that meeting, “It is fitting for Chairman Greenspan to leave office with the economy in such solid shape.” With respect to Greenspan handing off the position to Bernanke, she employed the analogy of Greenspan giving Bernanke “a tennis racket with a giant sweet spot.”
In retrospect, one (but not I) could remark that she definitely did not serve an ace with that remark.
At the Fed’s June 2006 meeting, then-Atlanta Fed President Jack Guynn placed a lot of faith in some “innovative” home sales techniques, including “providing upgrades such as marble countertops” and “throwing in a free Mini Cooper.”
To present these “techniques” as encouraging signs rather than examples of a housing market desperate to save itself from disaster is all the more mind-boggling coming from someone deemed capable of guiding the nation’s economy.
Then, at the December 2006 meeting, Yellen declared, “There are some encouraging signs that the demand for housing may be stabilizing.” By “stabilizing,” she apparently meant “leveling off” even though the housing market had shown no signs of halting its ongoing decline.
At the same meeting, Kevin Warsh, a Fed governor, offered, “I consider the debt capital markets to be incredibly robust.”
“Incredibly robust!” Incredible, to be sure. It seems our nation’s so-called top economists were in a bubble of their own.
These and other excerpts from the transcripts have provoked exasperated disbelief and frustration among many Americans–and provided ammunition to people from a variety of political camps.
Some conservatives (mainly Reaganites but not many officials from either Bush administration) are using the transcripts to make their case that the Fed should not aim to “manage” the economy beyond ensuring the maximum availability of capital to business on generous terms.
The transcripts have bolstered liberals who argue that the Fed should play a stronger role in developing, implementing and enforcing prudent financial practices in the banking industry.
Some so-called “libertarians,” such as Ron Paul, use the transcripts to back up their view that the entire Federal Reserve system should be eliminated. (The system as a whole consists of the Federal Reserve Board (also known as the Board of Governors) and the Federal Reserve Bank network; while the board is an independent government agency, the Federal Reserve Bank is owned by its member banks, which are the federally chartered, private-sector banks).
These “libertarians” think that interest rates should be solely determined by decentralized economic competition and not by a central authority, and certainly not by an authority influenced by politics. Such “libertarians” think the abolition of the Fed system would go a long way towards “solving” America’s financial and economic woes.
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MOST IF not all socialists see little if any benefit to be gained from focusing on just one aspect of American capitalism as if removing a single brick would bring the whole edifice crashing down. For one thing, the idea that abolishing the Fed would “decentralize” the interest-rate-setting process, and thereby the money-supply-determining process, is naïve and ludicrous.
According to a recent article by David Wheelock of the St. Louis Federal Reserve, there has been “a substantial consolidation of the banking industry” since the mid-1980s. In some markets, this has accelerated with the recent round of bank failures, acquisitions and mergers. Thus, it is difficult to characterize the current banking scene, with national mega-banks dictating market terms, as a purely competitive, decentralized situation.
There are a few instances of lower-level board members expressing reservations about developments such as mortgage-backed securities (MBS), which is a type of investment product known as a “derivative” (the film Margin Call portrays the impact of this phenomenon through the lens of fictional but reality-based financial services firm).
An MBS investment represents a claim on the future performance of a package of mortgages. The MBS does not consist of the mortgages themselves, but is essentially a wager that the mortgages in the package will hit a particular performance benchmark related to the health of the mortgages after a designated time period has elapsed. Hence the term “derivative,” which in itself does not consist of anything that has true economic value, but is “derived” from some specified measurement of something that has value.
While most MBS securities are positively structured, there is the infamous example of a bank taking a negative position on its own mortgages–in other words, betting on and profiting from the failure of loans that the bank itself has extended.
Also of importance is that a “derivative” does not directly provide funding (capital) for the production, distribution and delivery of goods and services. It is a wager, pure and simple, no more or less so than any wager placed at a casino. Since stock trades as such do not provide capital (though they determine the price at which a publicly traded concern can raise capital), it is really but a very minor leap from stock (also known as equity) investments to derivatives.
As we now know, the reservations expressed about these derivatives were not taken seriously by the Federal Reserve Board as a whole. Little wonder, as their former guru Alan Greenspan is on record as having had no problem with derivatives, and it was not until after the housing bubble burst that his reputation started to show some cracks among his former devotees.
Greenspan sprang to the defense of derivatives in testifying before the Senate Banking Committee in 2003, asserting that “derivatives have been an extremely useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so.”
This statement was taken as a green light not only by the financial industry but also by those whose role it was to prevent abuses related to these “products.” (And here we are.)
With this kind of support for derivatives from such a legend of monetary policy-making, is it any wonder that any criticism of them would have quickly been put down by the board as a body? Yet mortgage-backed securities ended up being a significant part of the problem.
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IT WOULD be one thing if nobody at all recognized the growing bubble in the housing sector. Yet there were those who did. Among these was Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. He writes about the whole mess in his book Plunder and Blunder: The Rise and Fall of the Bubble Economy. And Baker was not alone in recognizing the nature and magnitude of the developing problem.
The fact that independent analysts were able to identify the looming economic problems that somehow eluded the top economists and financial experts appointed by the government has led many to draw the conclusion that the government-appointed “experts” weren’t so expert after all. In fact, they are frequently characterized as a bunch of drooling morons. Many find this a very satisfying characterization, especially the millions of Americans who have suffered as a result of the whole fiasco.
As we working Americans know, if we had so completely failed to properly perform our jobs, as the Fed members appear to have done, it would not be long before we would find ourselves at the unemployment office.
The members of the Federal Reserve Board were presumably hired to analyze economic developments and anticipate problems. As such, with a modicum of research and just a tiny bit of brainwork, they could easily have discovered the extent to which the lending industry had relaxed its standards to qualify people to purchase houses–despite unheard-of leaps in housing prices.
But they didn’t.
One would be hard-pressed to imagine these supposed brainiacs receiving a rating as generous as “poor” on a performance appraisal. Compared to their official job specifications, they have been abject failures. Truly, how could anyone have performed worse?
With that in mind, let us see how these people have fared in the years since their failures have become headline news the world over.
For one, no member of the Fed has suffered any consequences for his/her poor stewardship. To the contrary.
Ben Bernanke? He is still chair of the Federal Reserve Board.
Janet Yellen, who gushed about Alan Greenspan? She has been promoted–to vice-chair of the board.
So today, the Fed’s top two leadership positions are held by individuals who issued absolutely no warnings about the coming crisis despite the gathering economic storm clouds, and who, when the severity of the situation finally dawned on them, took no steps to mitigate the effects of the crisis other than getting behind the bailout.
What is the conclusion that a logical person can draw from this? That analyzing economic and financial developments, and taking steps to troubleshoot problems, is no longer part of the expected job performance of the members of the Federal Reserve Board.
And that is exactly the situation.
Simply re-read the above quotes from our “esteemed” economic gurus. What are they really saying? Nothing more than what a college football cheerleader might say to try to sustain momentum. That’s right: The role of what used to be our nation’s top government-appointed economic and financial experts has deteriorated to the extent that they are now nothing more than glorified cheerleaders. And God forbid they should say anything that might “alarm the markets.”
“Get ahead of potentially negative developments?” “Relax. No big deal. Enjoy your oatmeal.”
“Institute measures to counteract problems?” “Don’t strain yourself. The taxpayers are good for it!”
One can imagine the musical accompaniment to Fed meetings, as directed by the financial industry. “Don’t rain on my parade!”
For the Fed to conduct itself in this way is the result of messages they have obviously received–loud and clear–from Corporate America and from both of the major political parties of Corporate America.
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OF COURSE, the Fed doesn’t see things this way. But if the perpetrators of this debacle aren’t those ostensibly managing the economy, who is to blame?
Well naturally, the perpetrators are the victims themselves! According to the Federal Reserve Board and the rest of the financial industry, it is the “irresponsibility” of homebuyers who purchased property they couldn’t afford that was responsible for the financial crisis.
Talk about damned if you do, and damned if you don’t. When we working people don’t “spend enough,” we are criticized for not doing our part to help the American economy.
And when we get suckered into buying into the “American Dream” with its cathedral ceilings, multicar garages, and yes, marble countertops (what’s not to like about marble countertops?), then we are criticized for that.
If the main criterion for loan qualification is the loan officer’s question, “Do you think you can handle this mortgage?” it’s not hard to figure out how a person buying into the American Dream is going to answer that.
Of course, there are a load of “if’s” behind that “yes” response, such as, “If the car doesn’t need a repair,” “if nobody gets sick,” “if we don’t take any vacations,” and perhaps most vitally, “if I don’t get laid off.” But “stuff” happens, and when housing prices have been juiced up to the point where they exceed the income limits formerly imposed, it doesn’t take much for it all to come crashing down.
Not a single borrower pointed a gun at a loan rep’s head and forced him or her to grant a mortgage. It’s the responsibility of the lending institution to either approve or reject a loan application. The extent to which some of these mortgages were not financially sound is not the borrower’s fault. The lending institutions are supposed to be the financial experts, not the borrowers.
So what did the members of the Federal Reserve Board actually do about the housing bubble? For one thing, they were responsible for the development of the bubble in the first place. And once it got going, they kept it going, as long as they could. Some analysts estimate that without the cheerleading of the Fed, the housing bubble would have collapsed approximately two years earlier than it did.
The Fed nursed the bubble, and the longer it did so, the more people were sucked into the resulting misery, as into a black hole.
While Fed officials can say one of their motivations was to help Americans buy homes, it doesn’t take an advanced degree to know that a better way might be to focus on keeping housing affordable. An even better solution would be a socialist society, in which housing would become a basic human right, not a commodity to be bought and sold.
There is a fallacy that the housing bubble just “happened.” But it was made to happen. It was brought about by by financial institutions which assumed that, regardless of the high degree of risk they were undertaking (with corresponding ultra-high profits), the government would use taxpayer resources to cover their losses in the event that it all came crashing down.
The housing bubble has also brought the pain of the boom-and-bust cycle, always an inescapable aspect of capitalist markets, into that aspect of economic life that for generations of American workers encompassed their largest asset–their homes.
Housing prices had until 2008 been largely immune from overall business cycle fluctuations. Did anyone ever think there would ever be a widespread collapse in home values across the nation? It seemed an impossible idea. Yet what is more nightmarish than the situation in which the mortgage balances on many Americans’ homes actually exceed the current market value?
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AMERICAN POLITICS is no enemy of boom and bust. Despite some politicians and government officials paying lip service to “maintaining equilibrium” and “stable growth,” the party in office loves a boom come election time, and the other party hopes for a bust. President George W. Bush at least was honest when in early 2006 he said, “Economies should cycle.”
He made this comment specifically in relation to the housing market, but it reflects a reasoned realization that, if one is to support the capitalist economic system, one is obliged to accept an economy-wide boom-and-bust pattern.
Honesty aside, however, Bush’s statement reflected the heartlessness at the core of capitalism. As part of his same remarks on the bubble, he said, “If houses get too expensive, people will stop buying them.” He meant this statement to be a defense of the idea that boom-and-bust is a good thing–the implication being that if people stop buying houses, prices will eventually come down.
But as we’ve seen, as long as the bubble lasted, many Americans anxious to buy a home became impatient. How long can you expect a young couple starting a family to defer getting into a family home? Why should a significant segment of a generation be expected to suffer due to the timing of their coming into young adulthood? (This phenomenon has its counterpart in the employment field, when a large segment of a generation comes of employment age during a period of high unemployment.)
And after all this, the Fed has also been made whole, if not in reputation at least in terms of position. The Federal Reserve Board has deteriorated into being nothing more than a public-relations branch of the financial system. Cheerleaders for a capitalist financial system that can no longer serve the interests of us working people, and hasn’t the slightest interest in doing so.
So if you happen to see Ben Bernanke in a blonde wig, miniskirt, stockings and high-heeled white boots, carrying pom-poms, don’t assume he’s going to a costume party. He’s probably just on his way to a Fed meeting.