Roger Lowenstein's Profile of Ben Bernanke in The Atlantic April 2012

[txlaw]

and how did we get so leveraged?

 

You're blaming the debt bubble on Bernanke?  Wow.

 

no I a blaming it on the bubble blowing fed and their zero percent interest rates that encourage bubbles. but I guess you don't see any cause and effect.

 

Oh, I thought this was a thread about Ben Bernanke -- not an End the Fed thread.

 

The Fed is partially to blame for the leveraging up pre-crisis.  In fact, they are probably responsible for the most dangerous leveraging up that occurred in the real estate sector. 

 

However, you can't blame everything on the Fed.  And certainly not on Ben Bernanke, who came into his office in 2006, well after the US became overlevered.

 

I never said I was blaming everything on the fed. but I believe the fed and easy money policies were large contributors and set the stage for a massive leveraging.

 

You'll hear no contrary argument from me on that point. 

 

I just think the leap from that to Ben Bernanke only understanding how to print money is a big one.  From the article:

 

There was, I think, another reason for his blindness: Bernanke had an academic’s faith in the market’s essential rightness. He was so skeptical of the notion of mass-market folly that in his scholarly writings, he referred to bubbles in quotation marks. He was not, like Greenspan, ideologically opposed to government intervention, but he was dubious that anyone could identify, in real time, when markets were off course.

 

These criticisms aside, if one is assigning blame, it is important to note that the bubble inflated almost entirely on Greenspan’s watch. The time to avoid a crash was when mortgages were getting written, or when banks could still sell off assets without sparking a panic; by the time Bernanke arrived, a crisis was probably inevitable. In any case, by 2008, Bernanke was confronting the very type of banking meltdown he had spent his academic life studying. No one was better suited to the job; indeed, the Fed adopted the remedies Bernanke had outlined in his 2002 address nearly point for point.

 

And another excerpt:

 

But after talking with the chairman at length (he was generally not willing to be quoted on this issue), I think that, although Bernanke appreciates the intellectual argument in favor of raising inflation, he finds more compelling reasons for not doing so. First is the fear that inflation, once raised, could not be contained. The Fed creates inflation by adding reserves to the banking system (falling interest rates are the market’s way of registering the increasing plenitude of money). If so much money enters the system that wages and prices start ratcheting upward, the momentum can be self-perpetuating. “The notion that we can antiseptically raise the target and control it is highly questionable,” Bernanke told me.

 

This does not sound like someone who believes that money printing is the answer to everything.  Indeed, he sounds almost Austrian in the way that he doubts that the Fed can manage the economy.

 

Let's give the guy some credit.

 

did he not lower the fed funds rate through 2006/2007 as the financial system has it's best bonus period ever?

 

Correct me if I'm wrong, but I believe he raised the fed funds rate in 2006/2007. 

 

And then we started to go into recession and the fed funds rate was lowered in late 2007/2008.

[JSArbitrage]

Lots of people use this BS argument: only hedgies or savvy investors love Bernanke. 

 

I'm not a hedgie, but I think Bernanke did the right thing.  The fact that he did not engage in QE3 also indicates that he does not just know only one thing (i.e., money printing).

 

I'd argue that people who are obsessively focused on the purchasing power of the dollar are the ones who are only concerned with their wealth growing.  Planned inflation is a tax on savers in favor of debtors.  That's not a pro-wealthy policy.  That's a redistributive policy that focuses on the employment side of the Fed's dual mandate.

 

Yes, Bernanke messed up pre-crisis.  So did Hank Paulson.  But both atoned for their prior mistakes they made when the sh#! hit the fan.

 

I don't think I am being clear: To me, Bernanke's legacy will not be determined by the inflation vs deflation academic arguments that economists and us finance-types like to discuss.  It is going to be determined by the Main Street belief that Bernanke saved Wall Street (which he did and that's not really debatable.)

 

Now, the nuanced position is that, by saving Wall Street, Bernanke saved Main Street whether Main Street understands that or not.  I think this argument is largely correct myself but I do put some blame on Bernanke (more on Paulson/Geithner though) for doing it in such as way as to allow bankers to take as much as they could without restraint (e.g., AIG had negotiated with Goldman for a partial payout of the CDS's.  Geithner came in and literally pushed AIG negotiations aside and chose to pay 100% face value unilaterally.)

 

But Main Street doesn't really believe this nuanced position that Wall Street had get trillions for Main Street to survive and I don't blame them.  Whether us technocrats believe Bernanke a hero is irrelevant.  I think Main Street will write history on this one.

[racemize]

(e.g., AIG had negotiated with Goldman for a partial payout of the CDS's.  Geithner came in and literally pushed AIG negotiations aside and chose to pay 100% face value unilaterally.)

 

So, when I read the AIG congressional testimony, that is not how any of the witnesses painted it, even with direct questions to that effect (though perhaps they could have been putting it in the best light that they could get away with).  Is there somewhere I can get more details on that?

[vinod1]

Bernanke had been wrong in his views, spectacularly wrong in things like "great moderation" in setting up monetary policy. I do not think there is much of an argument on this.

 

During and after the Crisis however, his performance is spectacular. He is probably the pre-eminent expert on the Great Depression and has authored several papers on that topic (See the book "Essays on Great Depression") and many people agree that the current environment has many parallels with GD. You might disagree with his views, but he has done exactly, I cannot emphasize this enough, exactly as he said a central banker ought to do during a similar crisis. He did not have great political support for all this but he did what he thought needed to be done. What more can you ask?

 

Vinod

[txlaw]

I don't think I am being clear: To me, Bernanke's legacy will not be determined by the inflation vs deflation academic arguments that economists and us finance-types like to discuss.  It is going to be determined by the Main Street belief that Bernanke saved Wall Street (which he did and that's not really debatable.)

 

But Main Street doesn't really believe this nuanced position that Wall Street had get trillions for Main Street to survive and I don't blame them.  Whether us technocrats believe Bernanke a hero is irrelevant.  I think Main Street will write history on this one.

 

I see.  Yes, that's a different position.

 

Unfortunately, you may be right, at least in the short to medium term.  In the long run, however, Main Street will lose its memory of the distasteful bailouts that had to occur, and they may be more swayed by historians.

 

Sort of like how FDR was viewed as Socialist by half the population during his presidency but is now viewed as one of the best presidents ever.

[bmichaud]

Lots of people use this BS argument: only hedgies or savvy investors love Bernanke. 

 

I'm not a hedgie, but I think Bernanke did the right thing.  The fact that he did not engage in QE3 also indicates that he does not just know only one thing (i.e., money printing).

 

I'd argue that people who are obsessively focused on the purchasing power of the dollar are the ones who are only concerned with their wealth growing.  Planned inflation is a tax on savers in favor of debtors.  That's not a pro-wealthy policy.  That's a redistributive policy that focuses on the employment side of the Fed's dual mandate.

 

Yes, Bernanke messed up pre-crisis.  So did Hank Paulson.  But both atoned for their prior mistakes they made when the sh#! hit the fan.

 

I don't think I am being clear: To me, Bernanke's legacy will not be determined by the inflation vs deflation academic arguments that economists and us finance-types like to discuss.  It is going to be determined by the Main Street belief that Bernanke saved Wall Street (which he did and that's not really debatable.)

 

Now, the nuanced position is that, by saving Wall Street, Bernanke saved Main Street whether Main Street understands that or not.  I think this argument is largely correct myself but I do put some blame on Bernanke (more on Paulson/Geithner though) for doing it in such as way as to allow bankers to take as much as they could without restraint (e.g., AIG had negotiated with Goldman for a partial payout of the CDS's.  Geithner came in and literally pushed AIG negotiations aside and chose to pay 100% face value unilaterally.)

 

But Main Street doesn't really believe this nuanced position that Wall Street had get trillions for Main Street to survive and I don't blame them.  Whether us technocrats believe Bernanke a hero is irrelevant.  I think Main Street will write history on this one.

 

Well put.

[vinod1]

Lots of people use this BS argument: only hedgies or savvy investors love Bernanke. 

 

I'm not a hedgie, but I think Bernanke did the right thing.  The fact that he did not engage in QE3 also indicates that he does not just know only one thing (i.e., money printing).

 

I'd argue that people who are obsessively focused on the purchasing power of the dollar are the ones who are only concerned with their wealth growing.  Planned inflation is a tax on savers in favor of debtors.  That's not a pro-wealthy policy.  That's a redistributive policy that focuses on the employment side of the Fed's dual mandate.

 

Yes, Bernanke messed up pre-crisis.  So did Hank Paulson.  But both atoned for their prior mistakes they made when the sh#! hit the fan.

 

I don't think I am being clear: To me, Bernanke's legacy will not be determined by the inflation vs deflation academic arguments that economists and us finance-types like to discuss.  It is going to be determined by the Main Street belief that Bernanke saved Wall Street (which he did and that's not really debatable.)

 

Now, the nuanced position is that, by saving Wall Street, Bernanke saved Main Street whether Main Street understands that or not.  I think this argument is largely correct myself but I do put some blame on Bernanke (more on Paulson/Geithner though) for doing it in such as way as to allow bankers to take as much as they could without restraint (e.g., AIG had negotiated with Goldman for a partial payout of the CDS's.  Geithner came in and literally pushed AIG negotiations aside and chose to pay 100% face value unilaterally.)

 

But Main Street doesn't really believe this nuanced position that Wall Street had get trillions for Main Street to survive and I don't blame them.  Whether us technocrats believe Bernanke a hero is irrelevant.  I think Main Street will write history on this one.

 

Paying the counter parties whole and not allowing bond holders to take cuts are the two things that can genuinely be argued. I felt it was wrong at that time but have since revised my view once I realized that the number 1 goal they had in mind is to make all the big financial institutions as strong as possible and using all the tools they can. If you hear Neil Kashkari in his FCIC testimony and read Paulson's book you can sympathize with this view.

 

Vinod

[bmichaud]

it was 4.5% when he started and 4.25% at dec 2007.

 

 

It was 5.26 July 2007 - if I'm not mistaken this was the exact month the Bear mortgage hedge funds blew up. Rates rose into the crisis, effectively accelerating it before easing began in August.

[txlaw]

it was 4.5% when he started and 4.25% at dec 2007.

 

Ben Bernanke assumed his office in Feb. 2006, at which point the fed funds rate continued to go up.

 

It peaked at 5.25% and then went down as the subprime debacle started to show its face.

[JSArbitrage]

So, when I read the AIG congressional testimony, that is not how any of the witnesses painted it, even with direct questions to that effect (though perhaps they could have been putting it in the best light that they could get away with).  Is there somewhere I can get more details on that?

 

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7T5HaOgYHpE

 

Basically, AIG executives claim they had negotiated the payout down to some of their creditors, which is normal for this kind of settlement (maybe not Goldman; I said that off of the top of my head.)  NYFED takes over, pays out 100c on the dollar.  Also pays AIG bonuses and Geither later claims that ok because "the US is not Bolivia." (whatever that means)  Congress asks for NYFED to send information to investigate.  NYFED redacts information about discounts from terms sheets.

[txlaw]

it was 4.5% when he started and 4.25% at dec 2007.

 

Ben Bernanke assumed his office in Feb. 2006, at which point the fed funds rate continued to go up.

 

It peaked at 5.25% and then went down as the subprime debacle started to show its face.

 

except it wasn't a crisis in 2007. I recall it was wall street's best year ever. the crisis began late summer of 2008.

 

Sure.  But the Fed typically lowers rates in a preventative manner to prevent crisis from occurring.  Right after Sep. 11, for example, Greenspan lowered interest rates.

 

It's not as though Bernanke was purposefully lowering interest rates so that Wall Street could have its best year ever.

[JSArbitrage]

Paying the counter parties whole and not allowing bond holders to take cuts are the two things that can genuinely be argued. I felt it was wrong at that time but have since revised my view once I realized that the number 1 goal they had in mind is to make all the big financial institutions as strong as possible and using all the tools they can. If you hear Neil Kashkari in his FCIC testimony and read Paulson's book you can sympathize with this view.

 

Vinod

 

Well, aside from the fact that of course Paulson is going to defend Paulson in his own book, I do understand that, for the sake of expediency, some things had to get messy and you couldn't haggle contract by contract over a fast enough period.  They had to act fast and hind-sight is 20/20.

 

But some stuff just shocks the conscience.  For example, bonuses were paid out all around, regardless of the failure of the firms (AIG/C/BoA, etc paid out bonuses with bailout money, ML paid them out AND were told by Paulson to lie about their loses to the ML/BoA deal could go through, Freddie/Fannie are STILL paying million dollar bonuses despite being in receivership, etc.)

 

It's pretty clear that, when Freddie/Fannie are still paying bonuses RIGHT NOW, high-level government officials have an unspoken "blue line" if you will about bonuses.  Paulson knew to protect his own.  Unless you think it's just a wild coincidence that the bonuses flowed like a river when infinite capital came into play.

 

But I don't think Bernanke really had a big hand in that stuff.  I think he took the 40,000 foot view of saving the system and left the rest up to the politicians/on-the-ground regulators.  I don't think Bernanke should take too much blame for that.

[bmichaud]

it was 4.5% when he started and 4.25% at dec 2007.

 

Ben Bernanke assumed his office in Feb. 2006, at which point the fed funds rate continued to go up.

 

It peaked at 5.25% and then went down as the subprime debacle started to show its face.

 

except it wasn't a crisis in 2007. I recall it was wall street's best year ever. the crisis began late summer of 2008.

 

 

Look up Cramer's infamous screaming video where he's yelling "They're nuts, they're nuts, they know nothing" -  August 2007.

 

Burke you must be right. The crisis was completely unknown at that time....

[Santayana]

The beginnings of the crisis were pretty clear in 2007 to anyone that was paying attention.    Bernanke on the other hand said it was all "well contained", there was no danger of the subprime issues affecting the larger economy.    My question is did he really not see it, or was he just avoiding yelling Fire! in the theater?

[txlaw]

The beginnings of the crisis were pretty clear in 2007 to anyone that was paying attention.    Bernanke on the other hand said it was all "well contained", there was no danger of the subprime issues affecting the larger economy.    My question is did he really not see it, or was he just avoiding yelling Fire! in the theater?

 

The latter, I believe.  At some point, I think it will come out in the history books that the Fed understood that there was risk of blow up, and that they didn't want to create a catalyst for that blow up.

 

But we won't know for sure until some time passes.

[JSArbitrage]

The beginnings of the crisis were pretty clear in 2007 to anyone that was paying attention.    Bernanke on the other hand said it was all "well contained", there was no danger of the subprime issues affecting the larger economy.    My question is did he really not see it, or was he just avoiding yelling Fire! in the theater?

 

That's a good question.  We do know Ben didn't believe a housing bubble existed.  It's hard to argue that they knew a crisis would occur when they thought economic fundamentals were so strong that a bubble didn't exist.

 

http://www.washingtonpost.com/wp-dyn/content/article/2005/10/26/AR2005102602255.html

 

Also, if they knew it as far back as 2007, then we really can't excuse their heavy-handedness on the bailout; they would have had two years to prepare.  It really changes how one interprets their beheavior during the crisis if they knew it was coming for many years.

 

I would also like to note that Buffett said that sub-prime would be contained at the same time and he openly admits he didn't see such a massive crisis coming.  He still says that now.

 

[txlaw]

The beginnings of the crisis were pretty clear in 2007 to anyone that was paying attention.    Bernanke on the other hand said it was all "well contained", there was no danger of the subprime issues affecting the larger economy.    My question is did he really not see it, or was he just avoiding yelling Fire! in the theater?

 

The latter, I believe.  At some point, I think it will come out in the history books that the Fed understood that there was risk of blow up, and that they didn't want to create a catalyst for that blow up.

 

But we won't know for sure until some time passes.

 

the all knowing Fed right? the same fed that never saw a developing bubble in housing? And the same fed that got the crisis anyway! maybe even a worse one because markets saw the fed doing unprecedented things. the fed funds rate basically Followed the stock indexes lower.

 

Nobody thinks the Fed is all knowing.  Nor does Ben Bernanke, who expressed a healthy dose of skepticism of what the Fed can actually do in that Lowenstein article.  He's also expressed this skepticism in his testimony to Congress, noting that it is up to them to get the economy going and reduce the national debt to a more sustainable level.

 

There was nothing wrong with Bernanke lowering rates in 2007.  What was messed up was the fact that, as a bank regulator, the Fed prior to and after Bernanke did nothing about derivatives, structured products, problems associated with disintermediation, and rampant fraud.

 

In other words, the Fed should have been more interventionary -- a stronger regulator.

[txlaw]

Bernanke lectures:

Stream Videos

 

And here are links to Dallas Fed President Richard Fisher's interviews on CNBC:

http://video.cnbc.com/gallery/?video=3000081820

http://video.cnbc.com/gallery/?video=3000081818

 

Fisher is a very reasonable guy, and I really like to hear his reasoned critiques of the Fed's actions.  I actually agree with him that there should be no more QE.