Bernanke, Fed lousy watchdogs

 

Long before Republicans scored a surprise victory in Massachusetts and long before some Democrats started backing away from Federal Reserve Chairman Ben Bernanke, Bakersfield, Calif.’s former Republican Congressman Bill Thomas expressed doubts.

Thomas, who now is the vice chairman of the congressionally established Fiscal Crisis Inquiry Commission, was interviewed in December about the commission’s upcoming hearings on the nation’s economic meltdown. The interview appeared in The Bakersfield Californian on Dec. 26, 2009. It can be read online at http://tinyurl.com/ThomasFCIC

A lot of Thomas’ heat was directed at federal regulators, including the “watchdogs” at the Federal Reserve, who let Wall Street banks run amuck, creating schemes that included bundling of undervalued and sometimes worthless mortgages, and reselling them to investors.

“Everyone kept talking about how great Ben Bernanke was because he had studied the Great Depression, and how he wasn’t going to let that happen twice,” Thomas said. “But the problem with the Great Depression was one of liquidity. They puckered up. So when they made runs on the banks – and these were banks that were perfectly sound – no one carried the cash-deposit capability to meet everyone wanting their money all at once. And they couldn’t get loans.”

The lack of liquidity did not cause the latest meltdown. Instead, the cheap money Bernanke and the Fed allowed to pour into the economy was pouring “gas onto the fire,” Thomas said.

Thomas criticized Bernanke and the Fed, which is the nation’s central bank that manages the money supply and supervises commercial banks, for allowing the housing bubble to inflate and then drag the economy down when it imploded.

Bernanke’s four-year term as the Fed chairman ends Jan. 31. Nominated in 2005 by Republican President George Bush, Bernanke has been nominated for a second term by Democratic President Barack Obama.

Many are interpreting last week’s Republican victory in Massachusetts’ special election to fill the seat of the late Sen. Edward Kennedy as evidence of growing voter anger over the economy. Bernanke’s Senate confirmation has been swept up in the political fallout.

Since the Fed was created in 1913, the Senate has never rejected a president’s nominee for chairman. The last time a nominee faced significant opposition was in 1983, when then President Carter’s Fed chairman, Paul A. Volcker, faced reappointment. Volcker won a second term by a vote of 84 to 16.

Several Democrat and Republican senators have declared their opposition to Bernanke’s continued leadership. But leaders in both parties and President Obama are running to his rescue. A vote on Bernanke’s reappointment could come as early as today.

But even Bernanke’s supporters are lukewarm. They warn rejecting Bernanke would destabilize the stock market and send a disastrous message to global partners. Besides, candidates waiting in the wings to replace Bernanke may not be any better. Most critics and supporters agree that when Bernanke and the Fed finally acted to shore up the economy last year, bigger problems were averted.

Under Bernanke’s leadership, the Fed failed to respond to signals that the economy was in trouble. Even now, many believe Bernanke has done little to acknowledge or atone for the unresponsiveness, and has turned a deaf ear to jobs creation and banking reform.

While Bernanke likely will be confirmed, doubts have been cast over his political independence and his ability to set the brakes.

Thomas noted that it is the Fed’s job to “take the punch bowl away from the party.” Instead, Wall Street bankers were allowed to just keep drinking. Thomas is concerned that as the initial crisis has passed, banks are returning to their same old tricks.

Will Bernanke in a second term be more vigilant, responsive and politically independent?

“It’s always easy to be a Monday morning quarterback,” said Thomas. “Clearly there was an unwillingness to stop this structure because it appeared to be okay and it was very lucrative.”

Thomas’ commission will shine an intense light on the meltdown players, including Bernanke and Treasury Secretary Timothy Geithner, who headed the New York Federal Reserve Bank during the meltdown run-up. Its findings will help Congress and the president identify causes and craft safeguards.

Americans vowed “never again” after the Great Depression. But memories and political will faded as the good times followed. The punch bowl was left too long at the party.

This article written by Dianne Hardisty appeared first in The Bakersfield Californian on Jan. 28, 2010. Contact Hardisty through her webpage at http://www.svs2help.com/