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.