Cowering Under Bernanke’s Corpse
The drive to off Bernanke, like 99.9 percent of the stuff we hear coming out of Washington right now is just one more part of the great cover-up of the government’s responsibility for the mortgage crisis and the crash itself.
The simple truth is that at no time in the history of the United States have the nation’s big banks been more compliant with the government’s wishes, nor has government been more effectively in control of big-bank behavior, than in the years from 1992 through today. We don’t mean just the pressure to write more mortgages for people who could not afford them, though that was a huge factor in the disaster.
Throughout this period banks undertook a massive shift in both the way they performed their primary businesses of making commercial loans and mortgages and in the accounting and risk control measures used to govern those businesses. As we detail in Panic, every single one of these changes was approved, urged, or effectively required by both the U.S. and global banking regulatory regime, including the IMF, the Basel group, and the governments and central banks of the great economic powers.
We have no interest in defending the mega-banks. It is an outrage that Citicorp still exists, and that hundreds of senior bank executives who deserve at best unemployment and at worst jail are still collecting salaries, never mind bonuses. But these men are but one half of the financial establishment that created the machinery of disaster and resisted every warning of the catastrophe to come. The other half, alas also still employed, sit in Washington contemplating throwing Bernanke to the wolves to distract attention from their own guilt.
Hey, let’s beat up the smart kid!
If that isn’t reason enough to re-confirm Bernanke, consider that most of the really boneheaded and corrupt policies pursued from August of 2008 through the end of that year are rightly laid at the feet of Hank Paulson, George Bush, and Congress.
It was Paulson—with support from Messrs. Frank and Dodd–who proclaimed Fannie and Freddie saved in July and bankrupt in August forfeiting much of the government’s credibility with markets.
It was Geithner backed by Paulson who let Lehman go down.
It was Paulson who designed TARP as an aid program for the worst banks focused on buying their worst paper, rather than a program to stabilize terrified credit markets directly by buying good commercial paper at panic prices, which would have put a floor under commercial credit and protected sound firms in the real economy.
It was Paulson who made TARP even worse by abandoning the already flawed notion of buying up bad bank paper and instead pumping money into the worst banks directly, and Congress that let him get away with defying its express instructions.
It was Paulson who, having seized effective control of the banks, allowed (required?) them to cut off credit to hedge funds and other buyers of commercial bonds, driving thousands of otherwise sound commercial firms into severe distress. It was this cut-off of credit to bond buyers that drove the prices of bonds of perfectly sound companies down to pennies on the dollar, sending their effective interest rates from 5 percent in August to 15 and 20 percent in October.
Paulson’s mismanagement is the principal reason securities markets kept falling well into March 2009 rather than beginning to recover within weeks of the initial crash, which is what should have happened. (We cover all this rather more extensively in the book, especially in the Chapter titled “Sucked into the Green Zone.”)
The Fed, meanwhile, under Bernanke, actually did go out into credit markets and buy some paper, (even if not the right paper) trying to put some kind of a floor on bond prices and some kind of a ceiling on yields. Moreover, both before and after the crash Bernanke did about as well as one could expect just the sort of things one can expect a central banker to do under such circumstances: hand out free money to any banker he could find wandering the streets. It did not work especially well, which was predictable, but it was exactly what theory says a central banker is supposed to do.
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Andrew Redleaf is the founder and CEO of Whitebox Advisors. Celebrated by the New York Times and others for predicting the mortgage crisis long before it happened, Redleaf’s monthly client letter is avidly read and quoted not only on “the Street” but also in the financial press.
Richard Vigilante is the communications director of Whitebox Advisors and also the publisher of Richard Vigilante Books. He has served as editorial director of Regnery Publishing and as an editor of National Review.
Tags: Andrew Redleaf, bankers, banking crisis, Bernanke, Congress, Geithner, George Bush, government agents, Hank Paulson, Mortgage Crisis, Richard Vigilante
