The American Spectator : Failure Rewarded

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Failure Rewarded

By Joseph Lawler on 8.26.09 @ 6:07AM

The case against reappointing Ben Bernanke.

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The bailout necessitated such heavy-handed tactics because it constituted a brazen power grab. The initial plan stipulated: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." In other words, the plan granted Paulson $750 billion to spend in whatever way he should see fit and absolute power in the financial sphere. Luckily, key members of the Senate Banking Committee and House Republicans kept their heads and refused to give the bailout bill their votes in early drafts. But Bernanke persisted.

For all their insistence that only this plan could save the world if passed right now, Bernanke and Paulson all but abandoned the TARP strategy only two months later. By November 12, Paulson was saying that the best route was not a reverse auction of trouble assets, but direct capital injections into troubled banks. The market immediately tanked again on hearing this bewildering change in policy.

Even worse than constantly changing TARP policies -- the TARP would later be used to fund the auto bailout, be diverted to Obama Treasury Secretary Timothy Geithner's Public-Private Investment Partnership plan, and ultimately go more or less dormant -- Bernanke and Paulson also flouted the rule of law. Within days of the announcement that the TARP would be used for capital injections, word spread that Paulson had gathered the heads of the nine biggest banks into a room and coerced them into selling shares to the Treasury, whether they wanted to or not.

Later, it would come out that Bernanke and Paulson used similar strong-arm tactics to prevent Bank of America from walking out on its merger with the failing investment bank Merrill Lynch. BofA CEO Ken Lewis testified that Bernanke threatened to remove BofA's board if Lewis did not go through with the deal. Lewis also claimed that Bernanke promised him that "[the Fed] want to do something that when the public hears about it [the new government financing], your stock goes up." No wonder, then, that Lewis would complain before Congress that the regulators were "making up the rules as they went along." These events raise serious questions about the rule of law and property rights.

After Paulson's departure, Bernanke worked closely with Geithner to enact policies that prevented market reorganization. In June the president announced a number of financial services regulations reforms, the most important of which was increased jurisdiction over both bank and non-bank institutions for a systemic regulator. Geithner proposed that the systemic regulator should be a new Consumer Financial Protection Agency. Bernanke disagreed, claiming that the expanded powers should be given to -- of course -- the Federal Reserve. Lost in their very public disagreement was the fact that they were discussing whether or not the institution in charge of the money supply should also have final regulatory discretion over firms important in the credit system.

This development poses a subtle threat to the Fed's independence. The Fed has already acted in tandem with the Treasury in deciding which banks to save in crises, and added overlapping regulatory responsibilities with other regulatory agencies -- such as the CFTC and OCC -- bring the Fed even further under the executive branch's indirect power.

Furthermore, in September 2008, in order to improve specific banks' liquidity without introducing inflationary pressure, the Fed relied on hundreds of billions of dollars in loans from the Treasury to finance its liquidity initiatives. Although in practice those loans are harmless, in theory they make the Fed even more beholden to the executive branch. Central bank independence, it has been shown time and again, is crucial to maintaining a stable currency. An unstable currency is just one more regime uncertainty for the financial industry to deal with.

The Fed's inability to prick the housing bubble before a meltdown can be excused. The Fed chair cannot be omniscient. What we do expect is for them to increase the system's stability, not introduce needless volatility.

The Great Depression lasted into the '40s because the banking system never improved enough to finance a comeback in private investment. The crash could not have been avoided, but FDR's bouts of new taxes, undermining property rights, and bullying businessmen could have. For all the other lessons Bernanke has internalized, the lesson of regime uncertainty continues to elude him, as his recent complicity in repeating FDR's mistakes shows.

The U.S. economy is based on free enterprise and the rule of law, not the wisdom of one man. To suffer Bernanke's unlawful and damaging caprices without reprimand is to endorse them and to subscribe to his own cult of expertise. We are blessed with many brilliant economists other than Bernanke; appoint one of them.

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topics:
Federal Reserve

About the Author

Joseph Lawler was formerly managing editor of The American Spectator. Follow him on twitter: @josephlawler.

Letter to the Editor View all comments (23) | Leave a comment

Robert Rosencrans| 8.26.09 @ 7:34AM

The FED is but another shining example of what occurs when the government practices the art of the monopoly. Absolute power corrupts absolutely and nowhere can the effects of that statement can be seen than in the FED. Add to that the element of dishonest politicians like you have in the Obama White House (And they're certainly not the first group like that in the White House) and you have an ideological raid on the Treasury, financing all types of socialist themes while their friends get rich.

Melvin| 8.26.09 @ 7:39AM

"Failure" but that is what government does best. Everything and everyone that government comes into contact with turns to instant failure.
Government failure is allot like King Midas, instead of turning to gold with the Midas touch, our lives turn to crap with the government touch.
Hell people, we cannot even win a damn war any more.

Indiana Alex| 8.26.09 @ 8:09AM

I believe that The Fed was primarily responsible for the current recession.

Having said that we could do worse. Look to the appointment in NY.

Yosemeti Sam| 8.26.09 @ 9:26AM

Oy, - the cliche of following the money is
just too rich.

How many Democrats on Wall Street have
raked in the money from the bulldozed
'stimulus' legislation - courtesy of the
democrat-controlled Congress?

Ex aedibus| 8.26.09 @ 9:31AM

Although Bernanke is not the best choice, Obama could have done far worse. He could have appointed Paul Krugman as chairman of the Fed.

Mike| 8.26.09 @ 9:40AM

This article is a classic in Monday morning quarter backing. More important than anything Bernanke did or didn't do leading up to the economic meltdown are: (1) the actions of Alan Greenspan (2) deregulation (3) underfunded regulatory commissions (4) regulatory commissions staffed with people of questionable competence. Mr. Lawler writes: "Although mainstream economists are right to say that Bernanke's aggressive monetary policies avoided a repeat of Great Depression-style deflation, ...." There is no although! He, aided by President Bush and Secretary Paulson who fortunately were able to take off their ideological blinders, saved us from disaster. Enough said. With all due respect, I am infinitely more comfortable with Mr. Bernanke in charge of deciding when to unwind current policies than I would be with peanut gallery critics like Mr. Lawlor

Joshua Price| 8.26.09 @ 11:12AM

"His Fed misidentified the root causes of the financial meltdown, and failed to stem the contagion early on. More importantly, he aided Treasury Secretary Hank Paulson in the disastrous bailouts, overstepped the limits of his office and the law in dealing with the banks, and undermined the Fed's sacrosanct independence."

That last sentenced is the only justification needed for not reappointing Bernanke. He was, in my opinion, willing accomplice to Hank Paulson's plan to make Goldman Sachs even stronger by helping weed out some of its competitors.

Josh Price-- theconservativebeacon.net

Louis Jenkins| 8.26.09 @ 11:25AM

Madness: Doing the same thing over and over hoping for different results.

Bob| 8.26.09 @ 12:04PM

What Lawlor recommended was not possible, which leads me to believe he knows little about the banking sector. Lawlor thought the Fed should take the toxic assets off of the balance sheets of the financial institutions. This would have caused a worse financial crisis for these companies because these assets would have to be written down to purchase cost. That would have surely sent these institutions into bankruptcy. These were leveraged on the order of 40 to 1 and AIG was leveraged on the order of twice that. Mark to market accounting was abandoned precisely to prevent this from occurring.

Lawlor clearly doesn't understand the corporate side of this. Yes, Bernanke made some mistakes, but not as many as his predecessors. Instead of bailouts, I would have liked to see prearranged bankruptcies primarily to eliminate promissory contracts to other companies and management. This would have kept the sector relatively stable while the Fed lowered interest rates and pumped capital in to the market. Even now, the banks will not sell their toxic assets because of what it will do to their balance sheets.

Regarding the stimulus bill, this is highly overstated as only 15% of the stimulus money has been spent to date. The housing bubble was obvious to many of us who follow and chart the markets. But Bernanke could have done little to stop it other than to call for re-regulating non-bank financial institutions to keep proper capital reserves and to put instruments like default swaps under scrutiny. Even now, these kinds of instruments are still possible and unregulated.

Joe| 8.26.09 @ 1:41PM

Should we not sue the government on constitutional growns for what Bernanke, Paulson and liberal democrats did. Put them in jail. That is where they belong. And if they want Bush, find he is the one who pick these 2 idiots. So, long as Obama, Pelosi and Reid are there too.

Joe B| 8.26.09 @ 1:46PM

Failure rewarded. No two words better describe the career of Barack Obama.

J.E. Davis| 8.26.09 @ 3:40PM

I really hate it when writers attempt to opine on subjects that are clearly outside their grasp. I like Lawler, but he doesn't understand banking.

J.E. Davis| 8.26.09 @ 3:40PM

I really hate it when writers attempt to opine on subjects that are clearly outside their grasp. I like Lawler, but he doesn't understand banking.

Mike| 8.26.09 @ 4:05PM

Joe B
Actually, the two words better describe Bush.

whyyeseyec| 8.26.09 @ 4:21PM

Scary thought Ex aedibus!!. Paul Krugman would be a disaster too horrible to imagine.
Don`t say things like that outloud anymore. You may give BHO ideas.....

aware| 8.26.09 @ 4:27PM

Has the writer actually read the (and other) Robert Higgs book(s)? He seems to accept the role of the Fed in the economy that Higgs certainly does not.

It is way to soon for the Masters of the Universe to be patting themselves on the back for "saving us from the Great Depression". The day may come soon when they will regret claiming ownership of the "recovery" prematurely.

When the effects of the cures (quantitative easing, fiat money, deficit spending, etc.) finally make themselves felt we may wish we'd taken a depression.

The Bankrupt America| 8.26.09 @ 7:06PM

The American National Debt is growing faster than the debt of any other world nation, it currently owes in excess of $2.7 trillion to foreign governments and other private investors. The debt equates to around 20% of the countries total GDP. This quick hub will give you the low down on who America owes and how much money they owe them, you should perhaps bear in mind that interest payments will make the true figure much higher - so who is profiting from America's overspending? Lets take a look.....

See all 5 photos
1. Japan - $585.9bn
You think that your mortgage is big? Try telling that to the Japanese government, who are owed an astonishing $585.9bn by the American government - a sum which is difficult for any of us to even comprehend. Based on a rough American population estimate of 313 million people, this equates to $1,871 per American citizen. I find it quite frankly astonishing that America's biggest creditor is a country with whom it was at war just half way through the 21st Century.

2. China - $541.0bn
Close behind Japan in the list of creditors is China who are owed some $541bn by America. That is another $1,728 that each American citizen owes to Asia. To think that America owes so much money to a country that it imports so much from is quite frankly economic suicide; Americans are purchasing many of their consumer goods from China, only for China to lend their money back to America and charge them interest on it. Thats like buying a new sofa for $1000, then having the shop lend you back your $1000 but charge you.... say 10% APR on your own cash. Debt is power, and China certainly has a lot of power over America, it is believed that Chinese funding was used to meet the significant costs of the Iraq war. Taking over a country to topple one man that posed no direct threat to world safety was certainly an expensive exercise.

3. United Kingdom - $307.4bn
To be honest, this one suprised me greatly; particularly as the British have racked up significant national debts themselves. I wouldn't be suprised to see the UK calling in this debt in order to pay its own creditors, but this is still a sour debt for American people. America flourished after the first World War because of the huge UK debts that itself owned. It appears that the tables have turned however, and each American citizen now owes the UK $982. Since the population of the UK is about one-fifth of the size of the USA's, I will take a total of $4,910 from five of you please (paypal or cheques accepted).

4. OPEC Nations - $179.8bn
The OPEC Nations, this stands for the Organization of the Petroleum Exporting countries are basically Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, U.A.E. and Venezuala. I don't really understand this one, but I do fidn it rather amusing that the Americans owe Iraq money - having pretty much chosen to blow the place to bits, I suppose it is only fair that they pay the costs of damages. If your kid smashes your neighbours window whilst playing baseball, then you have to pay for the window, same rule applies to global politics it seems. To owe money to Angola, one of the developed world's poorest countries, seems ludicrious. I doubt that America could sink too much further.

5. Caribbean Banking - $147.7bn
America also owes $147.7bn to the Caribbean Banking centres. This debt is basically owed to Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, Panama, and British Virgin Islands. To think that the USA owes so much cash to places with.... well, hardly any money themselves, is perhaps testimony to how low the country has sunk. The good news is that Obama intends to reduce America's debt, so hopefully Americans will no longer face the embarrassment of owing money to a bunch of tiny islands.

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Lloyd| 8.27.09 @ 12:26AM

I know who should head the Fed:

BOB!!!!!!!!!!!

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Tim Pruse| 8.30.09 @ 10:49PM

With all due respect, the TARP funding of banks demonstrates one fact more than all others: the Federal Reserve is not controlled by the U.S. Government, let alone We the People, but rather is owned and operated by the Wall Street banks that have controlled it to their benefit since its founding. This ongoing economic crisis (which is headed for worse before a recovery, despite the pollyanish pronouncements of Bernanke and Obama) is related to the continual redistribution of wealth between the productive American people and companies and the parasitic, usurious paper-pushers in Washington and Wall Street. Bernanke is surely complicite, but no more so than anyone else in banking, investment, or government. This country MUST return to fiscal sanity or my generation (I'm 26) and those following will be overcome by our national debt and general financial irresponsibilty. The best solution is not to fire Bernanke, but rather to fire the entire Federal Reserve and return to the Gold Standard and the republican form of government!

Mary M| 2.15.10 @ 12:07PM

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