Thursday, March 7, 2013

Crony Bureaucrat

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

The bureaucrat is similar to the cockroach. Both "species adapt readily to a variety of environments, but prefer warm conditions found within buildings." Both "are among the hardiest insects." (Wikipedia's descriptions, for interested entomologists) Madonna (the exhibitionist) captured the nexus: "I am a survivor. I am like a cockroach, you just can't get rid of me."

            Federal Reserve Chairman Ben S. Bernanke is the consummate bureaucrat. His pretense of expertise (economics) is of minor interest. As a thoroughly modern, American bureaucrat, he and his institution are seemingly indispensable. His is no different than the Department of the Interior; both constantly hire staff, convene committees, expand budgets (although, the Federal Reserve has no budget: the envy of its contemporaries), pass rules, mandates, laws, more rules, create more paperwork, and pass new rules regulating the new paperwork. In the Fed's case, it specifically expands money growth, credit facilities, regulatory responsibilities. The only possible change to the Fed's monetary policy is if it purchases $170 billion securities a month, from $85 billion now. It must never change course, but smother earlier contretemps by expanding the same.

In a different sphere, the Fed has refused to puncture Too-Big-to-Fail banking. In fact the Big Five banks hold a much larger proportion of bank assets today than when they became insolvent in 2008.

            Over the course of human experience, the failure of Chairman Bernanke to foresee and dispose of the worst miscreants during the 2008 crisis would have ended his career, at the very least. But he is an American bureaucrat. A survivor. He snuggled in the Eccles Building, then issued statements that satisfied his handlers and spared him the roach trap.

      Before the Financial Crisis Inquiry Commission, on November 17, 2009, Chairman Bernanke testified: "First, is that 'too big to fail' is a very, very serious problem, and one that was much bigger than expected. And I think it's absolutely critical that if we do one thing in financial reform, it is to get rid of that problem. It has to be possible for firms to fail...."

            Note: Too-Big-to-Fail [TBTF] was
the top problem. Bernanke told the FCIC to emphasize this. In fact, Simple Ben never intended to act. He may not have - and may not still - understand his aimlessness since he is a survivor. No matter what he does or does not do, we can not get rid of him. (Vice Chairman Yellen would be worse.) If you listen when he speaks, his is a world of processes - of agendas, of "measuring, monitoring, assessing activities" of "establishing rules", of "developing orderly authorities" of "moving in the right direction," but of never, ever succeeding at what he sets out to accomplish.

            This does not matter. See for yourself in Bernanke's testimony before the Senate Committee on Banking, Housing, and Urban Affairs on February 26, 2013. The quoted portions concentrate on Too-Big-to-Fail. We could read his responses to bubble fears (he has none). Or, the Fed's exit strategy (we learned he doesn't need one). But, he identified TBTF as the "absolutely critical" problem to solve, three-and-one-half years ago.


Bernanke has not shied from the claim since. This is the lovely situation of the bureaucrat. He can bore his audience with procedural guidelines but never need accomplish a thing. Americans are suckers for 12-step-plans, white papers, blue-ribbon panels, think-tank studies, all of which could be launched to the Moon without being missed.

Bernanke spoke on his home turf, the campus of Princeton University, on September 24, 2010, two-and-one-half years ago: "Prior to the crisis, market participants believed that large, complex, and interconnected financial firms would not be allowed to fail during a financial crisis.... As a result...firms thought to be too big to fail tended to take on more risk, as they faced little pressure from investors and expected to receive assistance if their bets went bad.... The resulting buildup of risk in too-big-to-fail firms increased the likelihood that a financial crisis would occur and worsened the crisis when it did occur."

Here, Bernanke identified a failing that was important to correct. He then went on to describe the Federal Reserve's efforts to address Too-Big-to-Fail: "One response to excessive risk-taking is stronger oversight by regulators, and the recent legislation and the rules and procedures being developed by the Federal Reserve and other agencies will subject systemically critical firms to tougher regulatory requirements and stricter supervision.... The financial reform legislation took an important step in this direction by creating a resolution regime under which large, complex financial firms can be placed in receivership, but which also gives the government the flexibility to take the actions needed to safeguard systemic stability."

In other words, he was full of words, and he survives. He is eternal. This is one of the most serious problems in the United States today: the crushing weight of the immobile bureaucracies that enslave us. If half the government and quasi-government workers were laid off tomorrow, the GDP would jump 400%.

What follows is the to-and-fro of senators questioning Simple Ben at the February 26, 2013 Senate Committee on Banking, Housing, and Urban Affairs. To ponder: Do you think this guy is going to wake up some morning and say: "Hey, I was wrong about QE. Let's back off and let the market set interest rates."?

Chairman Ben S. Bernanke, Semiannual Monetary Policy Report to the Congress, Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C., February 26, 2013:

Senator Jeff Merkley (D-OR):

CHAIRMAN BERNAKE: "...Too-Big-to-Fail [TBTF]: we also agree that that's something that really needs to be addressed and that many of the parts of Dodd-Frank are intended to address that and we're pushing those as hard as we can."

SENATOR MERKLEY: "Thank you and I think it does certainly say to us we're a long way from getting there [from eliminating TBTF - Bernanke had just ducked Markley's interrogation regarding large banks' regal status as "Too-Big-to-Go-To-Jail-for-Their-Crimes" - FJS] if we're afraid of any form of shakiness of these large banks. .....There's another aspect too.... It continues to tell folks it's safer to invest in large banks rather than community banks. The community banks would have been shut down or at least investigated thoroughly.... Is this sort of bias counter-productive to the overall health of our economy?

CHAIRMAN BERNANKE: Absolutely. It means the playing field is not level. It means there's not market discipline so there's too much risk-taking. ...., So, getting rid of Too-Big-to-Fail is, I think, an incredibly important objective and we're working in that direction."

Senator Bob Corker (R-TN):

SENATOR CORKER: "We watch regulator capture take place here, where basically the regulators end up working for the people they regulate....Upon exit [when the Fed unwinds the securities it has accumulated - FJS], do you concern yourself at all with the Fed being viewed as not as independent as it used to be, and working so closely with many of these institutions you regulate?"

CHAIRMAN BERNANKE: "Well we're concerned about perception, but none of things you've said are accurate."

SENATOR CORKER: Oh, yes they are."

CHAIRMAN BERNANKE: ".... [The Federal Reserve] paying interest [to the banks] on beneficial for the taxpayer...."

SENATOR CORKER: ".... It's really helping the institutions...."

CHAIRMAN BERNANKE: ".....It's not helping the banks."

SENATOR CORKER: "When you exit, when you draw the money supply in...."

CHAIRMAN BERNANKE: "There is no subsidy involved."

Senator Elizabeth Warren (D-MA):

SENATOR WARREN: I'd like to start with a question about Too-Big-to-Fail: We haven't gotten rid of it yet. Now we have a double problem. The big banks - big at the time that they were bailed the first time - have gotten bigger. And, at the same time, investors believe with TBTF out there, it's safer to put your money into the big banks and not the little banks, in effect creating an insurance policy for the big banks. The government has created this insurance policy, [that is] not there for the small banks... Bloomberg [calculated the subsidy that is received by the large banks from borrowing at lower rates than small banks] is $83 billion that the big banks get... in what is essentially a free insurance policy. They borrow cheaper than the small banks do. I understand we're all trying to get to the end of TBTF [Not so fast, Liz - FJS] ....Until we do, should the big banks be repaying the American taxpayer that $83 billion subsidy they are getting?

CHAIRMAN BERNANKE: "The subsidy is coming because of market expectations that the government would bail out those firms if they failed, those expectations are incorrect...."

SENATOR WARREN: "The $83 billion says that...there really will be a bailout for the largest financial institutions."

CHAIRMAN BERNANKE: "That's the expectation of markets, but that doesn't mean we have to do it."

SENATOR WARREN: "....But I don't understand. It is working like an insurance policy. Ordinary folks pay for homeowner's insurance. Ordinary folks pay for car insurance and these big financial institutions are getting cheaper borrowing, to the tune of $83 billion in a single year, simply because people believe the government would step in and bail them out. I'm just saying if they're getting [this subsidy], why shouldn't they pay for it?"

CHAIRMAN BERNANKE: "I think we should get rid of it." [Huh? - FJS]

SENATOR WARREN: "....We've now understood this problem [Too-Big-to-Fail] for almost five years. So when are we going to get rid of it?"

CHAIRMAN BERNANKE: "Well, some of this, you know, ah, as we've been discussing, some of those rules, uh, ah, take time to develop, uh, ah, the [FDIC's] orderly liquidation authority, we've got the living wills. I think we're moving in the right direction. If additional steps are needed then Congress can obviously discuss this but we've got a plan and we're moving in the right direction."

SENATOR WARREN: "Any idea when we'll arrive at the right direction?"

"CHAIRMAN BERNANKE: "It's not a zero-one thing. Over time....this is a problem we've had for a long time, and we're not going to solve it immediately."

SENATOR WARREN ".... What's happening is the big banks are getting a terrific break and the little banks are getting smashed on this. They are not getting that kind of break. And that has a long term impact for the whole financial system."

Senator David Vitter (R-LA

SENATOR VITTER: "My top concern is actually exactly the same as Mrs. Warren's and I think that is a statement in and of itself. That there is growing bi-partisan concern across the whole political spectrum, about the fact - I believe it's a fact - that TBTF is alive and well....."

SENATOR VITTER went on to read from an FDIC study that stated the TBTF banks receive a subsidy. This is separate from the academic study Bloomberg drew upon in calculating the $83 billion subsidy.

CHAIRMAN BERNANKE said nothing worth repeating.

One lesson from all this (coming to mind as I finish) is the difficulty even those thought to possess great power - the senators, in this case - have in getting some cockroach bureaucrat to
do something!