by Nomi Prins

December 1, 2010

from AlterNet Website


Nomi Prins is a senior fellow at the public policy center Demos and author of It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street.

The Federal Reserve chief has recklessly bailed out our financial system - we shouldn't wait the 10 years before his term expires

to toss him overboard.

On Wednesday, the Fed disclosed its highly anticipated report about which banks got the most perks during the Great Bank Bailout and Subsidization period.


Long story short, the report, spanning 21,000 transactions from December 2007 to July 2010, did not reveal which banks borrowed what from the Fed's discount window (the part we wanted to know), but confirmed that the biggest banks got the most help from various facilities (the part we already knew).


The report is parceled out through a maze of different pages and spreadsheets for inconvenient viewing.


But hey - the future of the free world was at stake, the Fed did what it had to do, and things would have been much so worse without fearless Ben, Tim and the boys intervening with trillions of manufactured dollars.


Now, Bernanke will breathe a sigh of relief. Why? Because there will be nothing else for him to weather.


That is, until the true ramifications of the reckless banking system subsidization and securities inflation manifests in a broader, scarier version than last time.

Here are ten reasons this dire economic fate is likely, and we'd be better off getting rid of Bernanke long before his term ends in 2020.


1) The Banks Bernanke Made Bigger are Still Bigger

When Bernanke was called to testify before the Financial Crisis Inquiry Commission earlier this fall he declared that,

"The single most important lesson of this crisis is we have to end the 'too big to fail' problem."

Now, he was the guy that had the power as Fed Chairman to prevent the biggest banks from getting any bigger.


Yet, during the fateful fall of 2008, the Fed approved JPM Chase's government-backed acquisition of Bear Stearns and Washington Mutual, Bank of America's acquisition of Merrill Lynch and Wells Fargo's acquisition of Wachovia - making the biggest banks, bigger.


Existing size limits were ignored, allowing these banks to surpass or hit the 10% concentration limits that had been specifically designed to keep a lid on the 'too-big' notion. Similarly, it was Bernanke's Fed that approved the re-classification of Goldman Sachs and Morgan Stanley into bank holding companies - which they still are - which made the prospect of major bank collapse all the riskier.


If he really wants to make the banks smaller, keeping them bigger isn't the way to go.

2) The Great Depression Scholar Act is Getting Old

Bernanke's big claim to economic godliness is that he studied the Great Depression.


It just doesn't seem like he studied what lead up to it or exacerbated it. Then, as still now, Wall Street banks were overleveraged. They were sitting on too many risky loans. The Fed was one of their key subsidizing lenders then, as now, and by the middle of 1929, the Fed was worried.


So it began raising interest rates (this, according to Bernanke, was the main problem he didn't want to repeat, but he's oblivious to the fact that it was the reckless lending and manipulating, not the interest rate moves, that did the most damage and hid the most problems).

Back in the '20s, the NY Fed began extending more loans to the big banks at the same time they were trying to restrain them from speculative activities. Which of course didn't work.


Nicely asking banks not to speculate with cheap money is like asking a hungry lion not to roar. The Fed could have put on the brakes and checked the borrowing of the Wall Street banks, but it didn't. It didn't during the years that Bernanke first took the helm.


And, it doesn't now.

3) Even if Bernanke understood the causes of the Great Depression, he didn't apply them

If he did, Bernanke would have put more blame where it's due. Banks did not merely lend predatorily - they pushed, scooped up, repackaged, and resold loans to the Nth frenzied degree.


You can't continue to blame 'the economy' for that. (That's what people like Class A New York Fed director, and JPM Chase CEO, Jamie Dimon do, while pocketing more profits from fees to offset loan related losses.)


The underlying financial process has not been terminated.

In 1930, the Fed pushed for the creation of, and funded, new 3-month Treasury bills, to give banks another avenue to access short-term money as their loans and trusts were imploding. It worked for the biggest banks that had the most access. The smaller banks folded.


Sort of like what is still happening now.

4) Scholarly Talk Doesn't Equal Wisdom

Bernanke has avoided other current comparisons to the asset speculation, faux bank evaluations and cheap money fuel that led to the Great Depression, including the conflicts of interest in inherent to the nature of the Fed itself - its directors are its main benefactors and do dangerous things to keep themselves afloat.


Class A New York Fed director (and simultaneous head of Citibank, predecessor to Citigroup) from 1927 through 1931, Charles Mitchell pumped $25 million into the market in March, 1929, creating artificial demand to lift prices, for a second.


Six months later, the five most powerful bankers pumped a collective $1 billion into the market, while getting loans from the Fed. Now, bankers didn't have to contribute to their own survival. The Fed and Treasury footed the bill. As did we.

Bernanke uses academic garble to deflect attention from the Fed's regulatory responsibility for monitoring the banking system, something it demonstrably failed to do. When Time magazine dubbed him man of last year, it and others gave Bernanke credit for stopping a second Great Depression.


And sure, if our definition for a healthy economic outcome is more unemployment, more foreclosures, more individual and small business bankruptcies, and a higher stock market, set of corporate profits and bonuses, then yeah - he was awesome.


If you dump trillions of dollars into anything, it's probably going to perk up, for the recipients and their record bonuses.


That's not wise, that's irresponsible.

5) The Fed is still subsidizing Wall Street at Main Street's Expense

When the Fed initiated its asset purchase program in late 2008 and early 2009, it subsidized the declining value of those assets on Wall Street's behalf.


It provided a market when there was none. But, the Fed did nothing to examine the loans backing those assets. It still hasn't.


That's why the foreclosure fraud that's coming out now is only the tip of the iceberg of trillions of dollars of securitized assets rife with fault and fraud. As I've said before, you don't create $14 trillion of assets out of $1.4 trillion of loans, without cutting a lot of corners.

Meanwhile, remaining Fed subsidies include:

  • $1.25 trillion of mortgage-backed securities purchases

  • $175 billion of GSE debt purchases

  • $900 billion of Treasury purchases

Banks have parked around $1 trillion of excess reserves at the Fed instead of lending it since the bailout, and have received thus, about $47 billion of excess interest for their tight-fistedness.

6) Bernanke wouldn't know a bubble if he were living in one

The Fed under Alan Greenspan was certainly complicit in creating bubbles, but Bernanke is more proactive at it, he threw much more money at them.


When serious signs of loan problems were surfacing as early as 2006 and 2007, the securitized asset market was on a coke-bend. He did nothing. Since then, no reports have linked continued loan decay and the massive asset pyramid partially funded by the Fed still sitting on top of those loans to further potential problems.

Bernanke has ingeniously hedged himself against his ability to do anything about these sorts of asset bubbles. He has spoken at length, and for years, about the difficulty of identifying or predicting asset bubbles.


In his first speech after reconfirmation, he warned that "monetary policy can be problematic to pop asset bubbles," that constraining the bubble that was growing in 2003 and 2004 could,

"have seriously weakened the U.S. economy at just the time when the recovery from the previous recession was becoming established."

He truly believes in the power of asset appreciation, whether real or artificially inflated, and that his job is not to screw around with anything that 'looks' like it might be working. In Ben's world, the Fed can do no wrong.


It can't pop bubbles, because that will damage - the bubbles, ergo, following a policy of easy money and securities purchases (and guarantees and facilities) is the only thing to do to keep the party going.

7) The QE100 thing is dangerous

Two weeks ago, Bernanke stressed that the Fed latest cheap money program isn't really quantitative easing, but rather "securities purchasing"

"Securities purchases work by affecting the yields on the acquired securities and, via substitution effects in investors' portfolios, on a wider range of assets."

Last week, Bernanke continued easing (sorry, intended verb) away from the term 'quantitative easing' trying a different description claiming,

"additional monetary policy accommodation was needed to support the economic recovery and help ensure that inflation, over time, is at desired levels."

Whether you call it monetary policy accommodation, securities purchasing, credit easing, or Bob - it's buying assets to artificially inflate prices and reduce rates, and it has so far, not translated into similar help for Main Street.


Bob may not cause rampant inflation given the anemic environment, but it also doesn't push banks to lend more money to small businesses to increase payroll and jobs, or to borrowers to restructure mortgages. There is no magical job-creation tunnel connecting the trading floors of JPM Chase or Goldman Sachs to the small businesses of America. Besides, our economy doesn't work in isolation from our banking system.


Thus, financial markets still suck up excess money from whatever source they can get it (think: water in a desert) and invest it in whatever seems like it will rise the most coffee, oil, gold, whatever, causing those prices to spike and related products to rise in tandem.

8) Ben isn't talking about the real causes of Europe's problems

In the wake of the Irish bank bailout, Bernanke has been quiet. Perhaps, he's happy that the pressure is off the US and focus is on the Euro currency's survival and various national bailouts across the Atlantic.

But, while the notion of austerity measures is being pushed onto the population in ailing countries like Greece and Ireland, the real reason for their economic woes, is that national governments chose to ignore and then to subsidize their banks rather than levy them with austerity measures.


Irish banks were over-extended in real estate loans and related speculation, as are Spanish banks to a far larger degree. Local governments tried to help their banks with direct aid, and when the banks sucked up their help and asked for more, all hell broke lose.

As the leader of the world's biggest 'Central' bank, it would be nice if Bernanke presented a realistic take on this, or would somehow learn from it.


Keeping banks as they are, and giving them temporary federal relief problems inherent to global finance's structure and rapaciousness will not create long term stability or stronger main street economies.

9) China isn't an errant Child

Regarding China, Bernanke recently said,

"currency undervaluation inhibits necessary macroeconomic adjustments and creates challenges for policymakers in both advanced and emerging market economies."

Translation: China is artificially undervaluing its currency and the rest of the world is having no fun competing or trading with it. China could have responded, Yes, Ben, exactly, but the irony would be lost on him.

Yet, issuing these sorts of couched demands won't work, absent some kind of acknowledgement that our policies (regulatory, money-printing, etc) are simply not attractive to other nations and don't promote faith in our dollar. His willful disregard for other national interests is accelerating an international turning away from the dollar and new trade and currency partnerships like the one between Russia and China.

The only incentive China has to play even a little ball is that it holds such a high portion of its reserves in dollar denominated bonds. Dumping all of them would deflate their prices too quickly, which would lose China money.


That's why China is strategically diversifying instead, creating more alliances with other trading partners, and reducing the percents of dollar assets it holds gradually.

10) Words aren't enough

If Bernanke were truly a scholar of the Great Depression and concerned about the financial system (domestically or globally), he'd advocate the enactment of similar laws created after the great depression, such as Glass-Steagall.


That would entail a thorough autopsy and dissection of the biggest banks, and an end to inflating the value of securities and deflating the value of the dollar in the process.


Bernanke would also cease trying to convince us and the rest of the world that this is all in our collective 'best interest.'


Unfortunately, without a lot of public pressure and political will, we are stuck with his unrestricted actions until 2020 or the next leg of this crisis, which will come sooner than that.