Busch: The Case Against Ben Bernanke
Today Federal Reserve Chairman Ben Bernanke testifies at a House of Representatives Oversight Committee hearing on the central bank's involvement in the Bank of America Corp.'s acquisition of Merrill Lynch & Co.
CNBC had the big interview yesterday with the top Republican on the committee who said the Federal Reserve sought to hide its involvement in Bank of America's acquisition of Merrill Lynch as Merrill's financial condition worsened.
Here's what Issa's office released yesterday about the hearing today: " At this hearing, the Committee will be able to question Federal Reserve Chairman Ben Bernanke directly about his role in the Bank of America-Merrill Lynch merger, whether he personally threatened to fire Bank of America’s management directly, and whether this threat was an appropriate use of government authority. His answers to these questions will provide an important opportunity to consider whether the Administration’s proposal to give him and the Federal Reserve even more power is wise."
Many pundits criticized this release and the perceived grandstanding by Rep. Issa in the timing of the announcement. Fair enough. But take the time to read what Issa wrote as it lays out the facts of what transpired and establishes important questions over the role of government in the private sector.
Truth be told, Bernanke and Paulson misread the signals from the markets back in 2007. As Stanford professor and former Undersecretary of the US Treasury John Taylor points out in his book, " Getting Off Track ", the initial crisis was credit not liquidity. (Taylor points out that Bernanke and Greenspan cut interest rates too low and kept them their too long from 2001-2004. In additions, I believe they elongated the housing boom by slowing raising interest rates 17 times until 2006. Remember, most of the bad mortgage loans were made between 2005-2007.) Therefore, the policy actions taken in late 2007 & early 2008 were wrong and elongated/prolonged the crisis into a panic in the fall.
The other major mistake that contributed to the panic in the fall of 2008 was the merger between Bear Stearns and JP Morgan in the beginning of the year. This created the appearance of "Too Big Too Fail" for investment firms that imprudently depended on massive leverage and short term borrowing. How different would the outcome had been for Lehman/AIG/Fannie/Freddie/money market funds/risk and counterparty analysis had Bear been allowed to fail and the bailout put been allowed to expire?
Most importantly, what were the decision metrics to save Bear, but let Lehman fail? It was apparently ad hoc and this contributed to the massive uncertainty surrounding the markets in December and forced the actions by the Federal Reserve and the US Treasury Department. The best outcome for today would be for the Oversight Committee to ask the Fed (and Treasury) to establish clear guidelines for intervention.
The IMF's EAF (exceptional access framework) program is the best example of what the US should be trying to establish in avoiding future crises. The EAF provided a deliberative and predictable framework to respond to financial crises. It told the world the guidelines for when the IMF would exceed their normal limits of assistance and provide large scale assistance. This strips away uncertainty and provides confidence to the markets. The lack of these metrics is where Bernanke has failed and where he needs to step up.
If not, then the case against him will grow stronger and stronger.
Andy Busch, along with Reuters Money & Politics Columnist James Pethokoukis (a.k.a. "Jimmy-P"), share their insights on whether more regulatory powers for the Fed might politicize it today at 12:30 ET onPower Lunch .