Four More Years of Bailout Ben
posted by: Cynthia Samuels 104 days ago
By Zach Carter, TMC MediaWire
After Ben Bernanke allowed an $8 trillion housing bubble to ravage the global economy and nearly destroy the U.S. financial system, President Barack Obama has decided he deserves another term as Chairman of the Federal Reserve. (The UpTake has video of Obama’s announcement here.) As the Fed Chair, Bernanke has more economic power than any other person on the planet. By heading the committee that sets interest rates, he can control the economy’s rate of growth or contraction; as head regulator of the largest banks, Bernanke has more influence over the rules of the economic game than anyone else.
Why is the Bernanke reappointment a mistake? Matthew Rothschild of The Progressive turns to Sen. Bernie Sanders, an independent democratic socialist from Vermont. Put simply, Bernanke is completely culpable for allowing an economic crisis to foment.
“Like the rest of the Bush administration, he was asleep at the wheel during this period and did nothing to move our financial system onto safer grounds,” Sanders said.
Corporate media generally neglects to mention Bernanke’s role at the Fed prior to 2008, and instead credits him with stopping a second Great Depression. It’s true that the Fed has done everything possible to keep Wall Street from imploding, but Bernanke also repeatedly insisted that the subprime mortgage crisis would be “contained” as late as 2007 and made no plans for a situation that might prove worse than his rosy forecasts.
As William Greider explains for The Nation, it’s a bit too soon to celebrate our economic salvation at Bernanke’s hands. Small banks are failing at an alarming rate, job losses remain heavy and households are being squeezed by plummeting property values and growing credit card debt.
Greider emphasizes that Bernanke repeatedly bailed out financial giants without demanding anything in return, which bodes poorly for any future economic crisis. Kenneth Lewis remains Bank of America’s CEO, even though the company has needed $45 billion in taxpayer funds to date, and high-level Fed officials think Lewis may be guilty of securities fraud. On the one bailout where the Fed did assume ownership of the company and discharge it’s top-level management, AIG, the deal was structured to funnel no-strings-attached money to other Wall Street companies. Goldman Sachs raked in $12.9 billion from the arrangement. It’s one thing to funnel money to financial firms in the name of economic necessity. It’s quite another to allow executives at those companies to be paid like princes and subsidize their shareholders.
As economist James K. Galbraith discusses in a piece for The Washington Monthly, it’s not clear if Bernanke and Co. actually saved the economy. Even if the financial system gets back to normal functioning, that stability has been purchased with massive taxpayer support. In order to do just about anything involving finance in the United States, a company now needs a very explicit government seal of approval to convince investors that they’re safe to do business with. Just ask Colonial Bank, which failed earlier this summer after being denied bailout funds under the Troubled Asset Relief Program.
But there has been secret support as well. Bernanke’s Fed committed over $2 trillion in emergency loans to keep the financial system from collapsing during the crisis, and has refused to tell the public who got the money, and on what terms. We don’t know who we saved, or at what the consequences of this massive bank support operation will be. Bernanke always believed that rescuing Wall Street would prevent major damage to the broader economy, but Galbraith questions whether the economy would be stronger if policymakers had focused more on direct aid to workers and homeowners, including an earlier, more robust economic stimulus package.
“Perhaps the right thing would have been less focus on saving banks, and much more on saving jobs, families, and homes.”
Writing for In These Times, Roger Bybee profiles a new group called Americans for Financial Reform, which is pushing for changes on Wall Street and fighting against business-as-usual at the Fed. The bank lobby is probably the most powerful interest group on Capitol Hill. Unfortunately, there hasn’t been a strong and consistent voice urging lawmakers to protect the entire economy, rather than the banks. The very structure of the Fed makes it more responsive to Wall Street interests than those of the general public. Private-sector banks like Citigroup and Bank of America are shareholders in each of the Fed’s regional branches, while private-sector bank executives sit on the board of directors at each branch. Since the boards get to name the regional presidents, private-sector bank CEOs are given major power to name their own regulators. Regional presidents also rotate through positions on the Fed’s monetary policy board, making decisions to set interest rates.
The Fed’s institutional structure, and its reliance on mainstream economists overly acquiescent to the financial sector has helped fuel the boom-and-bust bubble economy, as VIDEO:the Real News explains in this video piece:
In addition to the turmoil surrounding the Bernanke appointment, the recent budget deficit projections have been receiving a lot of attention lately. By throwing around a lot of big numbers that end in “trillion,” deficit hawks have created the impression of crisis where none exists. The government will have a $1.6 trillion shortfall this year, equal to about 11% of the U.S. economy. That’s the highest such number since the U.S. economy started to soar in the years after World War II, high enough to mobilize CNBC pundits to warn of financial apocalypse and a bankrupt U.S. government.
But as Robert Reich notes for Salon, it’s not really worth getting too worked up over the current deficit projections. In a recession, countries want to run a deficit: the government needs to fill hole created by the drop-off in private-sector economic activity. If the U.S. doesn’t run a big deficit, it will shed millions of additional jobs. And the country is nowhere near losing control of its currency. The federal debt stands at about 54% of our economic output right now, and is projected to reach 68% by 2019. But Reich notes that in 1945, the number was far higher: 120%. This number shrank dramatically over the next few years, not because of draconian cuts to government programs, but because the economy grew so much that the debt burden became less severe. We are nowhere near a crisis with the budget that compares to the current unemployment crisis, so pulling back spending right now doesn’t make much sense.
Bernanke has always argued that the Fed chair’s only duty is to control inflation. But managing the economy means not only attending to inflation, but making sure the true engine of economic growth—financially secure households—isn’t sacrificed to the short-term interests of a few Wall Street elites. Bernanke failed to block that economic predation early in his tenure as Fed Chairman. If Bernanke is going to be with us for another four years, President Obama needs to find other ways to restore our economic balance.
This post features links to the best independent, progressive reporting about the economy and is free to reprint. This is a project of The Media Consortium, a network of 50 leading independent media outlets.
Read more: politics, economy, recession, Bernanke, federal reserve, ben bernanke, economic meltdown
comments
I am curious how the Fed is able to create money out of thin air, to the tune of 3 Trillion. How is that much money put into circulation NOT going to cause huge inflation and other distortions in the marketplace... At what cost did we 'rescue' a few corrupt financial institututions that are strangling our democracy?
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We will never get past this as long as we buy into the "trend of the economy" argument that lets those who were part of the greed and blunder mechanism that built up the house of cards that our economy lives on. To demand more responsible behavior means you need to make it clear. Keeping on those who were on watch and let the thieves in only lets them know we are not serious about taking our economy back from those who would treat it like gambling chips on a poker table. I say no, and please put together a petition.
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There's enough blame to given to all who misjudged, fell asleep or actively involved in manipulations that led to this disaster.The last thirty years, there has been a trend toward deregulation because Wall St. and the rest of the banking industry were tied up, unable to work out their framework. It isn't a mystery what happened after deregulation. The Glass-Steagall Act was removed and the Gramm-Bliley Act replaced it, thereby allowing the banks, brokerage firms, insurance companies, and mortgage companies to interact. Congress, Greenspan, a host of people within the last thirty years made it happen. This was the new trend and the people involved in these businesses were going to make a fortune.
Oops! I think greed got in the way. The vehicles were put into place with derivatives, hedge funds, the horrible mortgage bubble created a disaster that couldn't be remedied. But yes, in the end the president and all his people, including Bernanke, are continuing down the wrong path. The TARP funds bailed out the wrong people at the expense of the common man and as we move forward, the only leaps and bounds will be within the financial institutions. The rest of us will see this recession for some time.
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It seems that people are quick to blame the man at the helm at the time of a crisis but if they realized that the mortgage and finacial crisis was caused by legislation enacted by Congress and signed into law by President Clinton at the insistence of Bernanke's predicessor, Alan Greenspan in the final days of the Clinton administration. George W. Bush took the fall for this as all administrations in power (both Republican and Democrat) have in past history because he was in power when the effects of this legislation took effect. Bernanke is doing a very difficult job and second guessing his performance is so easy when you don't have to make the decisions yourself. We have been going though the worst recession since the Great depression. Many of the banks that were bailed out are now paying back the TARP money to the fed with interest, so I would say that the TARP program is currently working as Bernanke forecast.
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@ Doug: Congress doesn't rule the Fed. No one does.
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No he shouldn't retain the position. It really amazes me that no one was put on watch to guard the fox in the hen house. There were no safeguards or regulations in place regarding use of the funds. The so called college grad dopes just handed over the money with no guidelines!!!! Bernake, Congress, big bank instituions, AIG and the Big 3..have shown we, the nation of sheep, that there is truly no honor amoung theives.
Baah
Ms. Sheep
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It's Congress that is really to blame. Congress makes the rules under which all regulators and agencies operate; and are responsible for oversight of them. But congress is beholden to special interests; not the people. Compounding the problem, Congressmen are not very smart. Most of them (especially Barney Frank) were out of their depth during this fiasco.
Doug Franks
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Its Greenspan and Paulsen that did the damage. Bernacke will help our ravaged taxpayers. What gets me is the big bonuses that are still being given when unemployment is so high. We need to revolt so the robber barons listen. We can do the talk all right but how about the walk?
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The stimulus funds are being sent to the wrong places. They are giving it to people who don't produce anything verifiable, but just gobble it all up for themselves and are not to date; doing anything collectively productive with these funds. Should the stimulus funds be viewed as a sort of federal grant program whereby officials are accountable to show progress regarding what is being done with the money? I am personally tired of these egotistical pricks who think they are above the law and not accountable to anybody. If these funds were generously allocated to the public, and to the people hardest hid by the economy, you'd see this recession/depression disappear. But then the big crooks and the banks wouldn't like that because their free ride would be over. Something is wrong when the American taxpayer is paying for companies to move their operations overseas to avoid taxation and outsource American jobs. Something is wrong when the American taxpayer entirely funds a merger between two very wealthy banks. Is the American taxpayer being forced to support monopolies that further supress small business?
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The author stupidly got the name and person wrong...wrong...and triple wrong. The name was Greenspan. He kissed the rich Wall Streeters' and Republicans' behinds for many years.
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