Bye-Bye Bernanke: Let's Get Bush's Banker Out of the Federal Reserve

Much of the mainstream press has played the rising opposition to Senate confirmation of Ben Bernanke as a case of misplaced populist rage. The fact that the opposition within the Senate began with that chamber's left (Bernie Sanders) and right (Jim Bunning) seems to confirm the premise that it's only the fringe that opposes his reappointment as Fed Chairman. The Boston Globe, for example, recently profiled Sanders and his case against Bernanke under the remarkable headline, "Sanders a Growing Force on the Far, Far Left." (I've always thought of the far, far left as Chairman Mao and Che Guevara. Bernie is a European style social-democrat.)

In fact, when the Senate votes on Bernanke, Sanders will have a lot of company -- and he should. Bernanke's high-profile speech to the American Economic Association in Atlanta, January 3, was his latest effort to redeem himself. But it provides ample evidence for why the Senate should deny him a second term.

Bernanke devoted most of a remarkable abstruse speech to a straw man. "Some observers have assigned monetary policy a central role in the crisis," he said. "Specifically, they claim that excessively easy monetary policy by the Federal Reserve in the first half of the decade helped cause a bubble in house prices in the United States."

There are such critics, but of course it wasn't cheap money that caused the bubble. It was easy money combined with the complete abdication of the Federal Reserve's role as a regulator that allowed Wall Street to go nuts, creating a financial house of cards. Low interest rates can be good for an economy. The post-World War II boom was built on low interest rates -- combined with tight financial regulation so that the low cost of capital would enhance real economic growth and not foment risky speculation.

Bernanke's speech passed up the opportunity to confess any error or personal learning curve. He was appointed to the Fed by President Bush in October 2005, and elevated to chairman in February 2006. During the run-up to the collapse, the Fed possessed ample authority to deal with the abuses that caused the bubble in sub-prime loans. The Fed was specifically tasked with enforcing a 1994 law, the Home Ownership Equity Protection Act, which required all mortgage lenders to use sound underwriting standards, even if they were covered by no other federal regulation. No less than a fellow member of the Fed's Board of Governors, the late Ned Gramlich, an expert in mortgage finance, begged his colleagues to crack down on mortgage abuses, but first Greenspan and then Bernanke refused.

The abusive off-balance sheet maneuvers that led to the financial house of cards were done largely through the holding companies of the biggest Wall Street banks. These are the regulatory responsibility of the Fed -- which, under Bernanke, displayed an appalling incuriosity and instead trusted the genius of markets and financial "innovation." In his testimony before the Senate Banking Committee on December 3, Bernanke went through the motions of contrition. "In the area where we had responsibility, the bank holding companies, we should have done more," he said. "That is a mistake we won't make again."

But in his Atlanta speech, the closest he came to accepting responsibility was a few lines such as:

Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates.

But he followed this with defensive assertions of the actions that the Fed did take in 2006 and 2007, which proved to be woefully inadequate. Bernanke also contended that the crisis "revealed not only weaknesses in regulators' oversight of financial institutions, but also, more fundamentally, important gaps in the architecture of financial regulation around the world." But the fact is that the Fed and other regulatory institutions had plenty of power -- they just refused to use it.