Merkley, Bernanke and A Really Good Book

Steve Novick

I just want to add my praise to Carla's praise of Senator Merkley for his statement on Bernanke. The argument for Bernanke is that he took dramatic action to prevent a complete financial collapse; the strong argument against him is, as Senator Merkley says, that for too long he followed Alan Greenspan's lead and failed to recognize the reckless Wall Street practices that led to the meltdown for what they were. Senator Merkley's bold, independent, DeFazio-like decision reflects a recognition that there must needs be some accountability. ((In other words: Although I will regret losing that primary for the rest of my life, today I'm very proud of our junior Senator so I regret it a little less!)

I'd like to take this opportunity to recommend a terrific book that's not just a book on the crash, but also a great book on economic theory: "How Markets Fail," by John Cassidy. Believe it or not, it's a can't-put-it-down page-turner. Buy it and enjoy it over the holidays. After reading Senator Merkley's statement, I wonder if he read it, too.

Oh, and by the way, to those who attacked me for praising the Oregonian yesterday: Get over yourselves. I'll give the Oregonian hell whenever it's warranted. Plenty of people there will tell you that. I complain all the time. In fact I think I've complained loudly at least twice this week. But we're a heck of a lot better off with it than without it. 

OK, now I'll get back to working to pass Measures 66 and 67. Don't tell Kevin Looper or Jessica Stevens that I took time off to blog about Ben Bernanke. But do go to the campaign web site and sign up to volunteer. I was on the doors Sunday and it was great. Oh, and did you know that the "no" campaign is mostly being funded by Ohio State alumni?     

Comments

  • Bill Bodden (unverified)
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    From The Huffington Post:

    'The script is in place for a failed sequel (to health reform)."

    Curbing Big Banks: Draw the Damn Line

  • Laura (unverified)
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    Yea! Great link. Time for the Dems to "take it to the streets!"

  • backbeat (unverified)
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    RIGHT ON MERKLEY!!!

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    Plus: the revolt of the Community Banks against Wall St. and the American Bankers Association is getting more interesting. Check out this piece, and note especially the pushback against the ABA alert:

    "I don't think we need help from anyone else to tell us how to represent community banks...." The ABA represents both large and small banks and is competing for the lucrative privilege of lobbying against financial industry reform. Some of the trade association's massive clients, however, have different interests than the smaller ones. "We may be the only financial services representative which unambiguously wants a strong bill. Our approach on this bill is: we very much want strong legs to deal with the Wall Street crowd, the non-bank financial providers."
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    I'm disappointed, Steve. I expected this from the know-nothing wing of BlueOregon but I thought you knew better.

    Whatever mistakes were made leading up to 2008--and there were plenty to go around--Bernanke's handling of this crisis has been exemplary. And it's not surprising, since his academic specialty is the Great Depression.

    Instead of opposing Bernanke's renomination, Merkley (and Wyden, DeFazio and Blumenaeur) should be admitting they were wrong to oppose TARP and that Obama and company were right. Now that cooler heads have averted disaster, this is the wrong time for the folks who were wrong to punish the people who were right.

  • mathematician (unverified)
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    The Internal Revenue Service on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government. As a result, Citigroup will be allowed to retain billions of dollars worth of tax breaks that otherwise would decline in value when the government sells its stake to private investors.

    While the Obama administration has said taxpayers are likely to profit from the sale of the Citigroup shares, accounting experts said the lost tax revenue could easily outstrip those profits.

    (U.S. gave up billions in tax money in deal for Citigroup's bailout repayment)

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    Jack - note that I said: "The argument for Bernanke is that he took dramatic action to prevent a complete financial collapse." But if a ballplayer makes four errors in the first six innings, letting in three runs, and then hits a solo homer in the eighth, do you say 'great game'? Sure, there was a lot of blame to go around, but it was Bernanke's JOB to know what was going on. It's the traditional role of the Fed to take away the punch bowl just as the party's getting started. As of the date Bernanke took over, it should have been evident to the guy in charge that the party was out of control. I would not have been appalled at a yes vote on Bernanke, but I think a no vote sends a strong message to the whole Wall Street / regulator community - 'this was not OK. We don't just forget it and move on.'

  • zull2 (unverified)
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    With all due respect, I highly doubt Bernanke could have done anything during the Bush Administration to counter the system that Greenspan put in place and that Bush and his cronies followed unwaveringly. Even now, they still gulp down the supply-side/laissez faire/neoconservative/objectivist kool-aid without a thought that it might be absolutely toxic. Bernanke, at least, was from academia, was a scholar on the Great Depression, understood that Keynesian econ pulled the country through it, and admired FDR for it.

    Let's also be honest...part of the reason why some economists predicted this collapse is because their natural political bias against neoconservatism (and I'm very guilty of being highly biased against the neocons as well) forced them to keep a closer eye on trends than those who bought into that system and had an easier time speaking out about it (though the response wasn't generally very civil). I think there are bigger battles to pick right now than to pick a fight over Bernanke. I just don't think Bernanke is going to be as big an obstacle to rebuilding the economy as someone like Larry Summers would be.

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    Steve, I really don't remember a lot of people crying to higher interest rates when Bernanke came into office. Hindsight is always 20-20, but if Bernanke had started raising interest rates in 2006, he would have been blamed for the recession that started in 2007--and probably would have started earlier if the Fed had put on the brakes.

    I remember people blaming Greenspan for the stock market crash and subsequent recession in 2001 when he was accused of tightening money unnecessarily. It is only in hindsight that some of these things seem so obvious.

    The key to the future is whether people learn from the past. So far, I'd give Bernanke much higher marks in that regard than Greenspan.

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    Jack - there were any number of people who recognized in '05-'06 that there was a housing bubble. It was the Fed's job to recognize that and start looking at the factors that were driving it. I agree with you that he's better than Greenspan but that's a low bar.

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    Actually, Steve, by the time Bernanke came in the housing bubble was already starting to burst. Housing prices peaked in 2005 and started to decline in 2006. Even in hindsight, it's hard to image what he could have done to dramatically change things then. Certainly raising interest rates just as the a lot of the ARMs were due to readjust would have made things worse.

  • Steve Marx (unverified)
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    "RIGHT ON MERKLEY!!!"

    Goodie, I look forward to further lambasting of Barney Frank (head of HR finance commmittee) and Chris Dodd (head of Sen finance committee.) Setting up Bernanke as the sole fall guy is too easy a target Mr Merkley, show some more guts.

    Just as guilty and Dodd only sold out for an interest-free loan from Countrywide. Don't know what it took to make Barney look the other way.

  • Steve Marx (unverified)
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    "It was the Fed's job to recognize that and start looking at the factors that were driving it."

    OK, Mr Novick, you want to be the rep/senator willing to tell the country we can't allow low-income and poor qualifiers to take out loans on the American dream and own a house?

  • Bill Bodden (unverified)
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    Over at Think Progress there is a piece on Maria Cantwell and John McCain introducing legislation along the lines of Glass-Steagall. According to this article Bernanke is opposed to it.

    McCain Introduces Legislation To Repeal The Financial Disaster Created By His Friend Phil Gramm

    Is Bernanke taking his orders from his friends ion Wall Street?

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    Jack -- correct, but as I said, the Fed should have been looking into the CAUSES of the bubble and, having done so, anticipating the potential impact on the "subprime, Alt-A, collateralized debt obligation (CDO), mortgage, credit, hedge fund, and foreign bank markets" (to quote Wikipedia). He didn't see what Warren Buffet saw and Brooksley Born saw. Bernanke himself acknowledges this, to an extent. Here's material from the TIME article:

    "Still, Bernanke was as clueless as Greenspan about the coming storm. He dismissed warnings of a housing bubble. He insisted that economic fundamentals remained strong. In March 2007, he assured Congress that "the problems in the subprime market seem likely to be contained." The day before the global crisis erupted with a run on a French bank, the Fed was still saying its primary concern was inflation. "Bernanke had no idea what was going on," a foreign central banker tells TIME. "Once he got it, he really got it, and he acted swiftly and decisively. But wow! It took a while." (See pictures of Ben Bernanke's office.)

    Bernanke concedes that he failed to anticipate how fragile such an overleveraged and interconnected system could be, how fear about a $1 trillion subprime mess could paralyze a $60 trillion global economy, how overnight-lending markets that got banks and corporations through the day could seize up overnight. He didn't share Greenspan's ideological faith that markets always know best, but he was surprised how spectacularly financial firms misjudged risk in their own portfolios, how collateralized debt obligations, credit-default swaps and other exotic financial weapons of mass destruction blew up in their faces. "None of us appreciated what a jury-rigged thing the financial system had become," he says."

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    Well, this is getting fun. So Jack is in good company, including even Paul Krugman. Indulge me, though, in citing Krugman's one caveat, which he calls the Serious Person Syndrome - "it’s better to have been conventionally wrong than unconventionally right:"

    Thus, you’re not considered serious on national security unless you bought the case for invading Iraq, even though the skeptics were completely right; you’re not considered a serious political commentator unless you dismissed all the things those reflexive anti-Bushists were saying, even though they all turn out to have been true; and you’re not considered serious about economic policy unless you dismissed warnings about a housing bubble and waved off worries about future crises.

    Bernanke is very serious indeed.

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    And Steve, well, you're in mixed company. MoveOn is now opposing Bernanke's renomination - and so is (drum roll, please) the Wall St. Journal!

    Of course, WSJ's rationale is a bit different from MoveOn's. Think of it as the Roach Motel argument: they think Bernanke's been great an injecting money into the economy, but don't think he's up to pulling it out, which is what they want to do now.

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    Steve, you are making my point but, obviously, reaching a different conclusion. I admit that Bernanke lack prescience, although he was hardly alone in this. What I respect is that he admits he was wrong and appears to be learning from it. Would that more people in positions of authority had that ability.

    And that, Dan, is what I think saves Bernanke from the ""Serious Person Syndrome." I don't think Bernanke was trying to go along because he's a go-along kind of guy. I think he genuinely missed the implications of what was happening at the time and I think he's learned from it.

    And, Bill, with all respect to Maria Cantwell and John McCain, I don't think the U.S. can revive Glass-Steagall in a global financial marketplace which, frankly, is what led to its repeal in the first place. As much as we might like to go "back to the future" I think we'll find that's impossible.

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    I think he genuinely missed the implications of what was happening at the time and I think he's learned from it.

    So here's a question: TARP clearly has helped the big banks/holding companies back to profitability - but not by fulfilling what was purportedly the (or one of the) most critical needs during the crisis: getting credit flowing. Or at least in getting credit flowing to Main St. Do you not believe this can be laid at Bernanke's feet? Did he get enough quids for his quos?

  • Tim S. (unverified)
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    I just like to add my praise to Steve's praise to Carla's praise of Senator Merkley.

    And I'd like to recommend a good book: "Reformism or Revolution: Marxism & Socialism of the 21st Century" This should be required reading in all public schools. Fisting Kits should be included as part of this program.

    Oh, and by the way. Anyone attacking me is obviously a right wing extremist, homophobic and racist.

  • Jake Leander (unverified)
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    Jack Roberts wrote:

    I don't think the U.S. can revive Glass-Steagall in a global financial marketplace which, frankly, is what led to its repeal in the first place.

    Well, isn't that convenient, as the Church Lady would say. Global conditions make effective financial regulation, along with protection of labor rights and the environment, impractical. Much of the world has now concluded that such globalist rhetoric is poppycock, but Mr. Roberts is much too serious for such thinking.

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    Dan, the principle purpose of TARP was to keep the financial system from going into free fall. It succeeded. I distinctly remember Barney Frank telling us the money would be paid back. It has been.

    The idea that credit would immediately start flowing more freely again is a little bit of revisionism. It is a sign of the better times that we have already forgotten how bad things could have been and are complaining that the banks aren't making risky loans again yet.

    And Jake, you should go back and review the developments that ultimately led President Clinton to sign the Glass-Steagall repeal, which was passed by a bipartisan majority after much negotiation and modification.

  • Bill Bodden (unverified)
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    A few minutes ago at the senate banking committee hearing on reappointment of the federal reserve bank chairman Senator Jim Bunning (R-KY) ripped Bernanke apart. Jeff Merkley followed with a more temperate criticism but said he would vote against reappointment.

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    complaining that the banks aren't making risky loans again yet

    Jack, that's a clunker in the league of, say, a Chris Dudley free throw. You know that's not what people are complaining about: it's that the Fed's giving them free money which they're using not to get the economy going again but instead to beat the spreads with investments & reap the profits. Jon Stewart's got that down perfectly:

    Clusterf#@k to the Poor House - Flight Delay

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    Of course, Dan, what was I thinking? Instead of listening to local bankers, I should be talking to comedians. Apparently the bankers are lying to me when they tell me they have plenty of money to loan but can't find qualified borrowers under the new standards.

    Actually, the current situation isn't unprecedented. We went through something similar in the recession of the early 1990s and its aftermatch, which came on the heels of the S&L crisis. The pendulum then swung from too-risky lending to too-conservative lending thereby exacerbating the recession and slowing down the recovery.

    But then, that's just my memory of it. I haven't checked with John Stewart or Pee Wee Herman to make sure if I've got it right.

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    they have plenty of money to loan but can't find qualified borrowers

    I've heard the same from some, but others say they could indeed make more loans with more funding. But assuming the lack of qualified borrowers is the main factor, then why is the Fed continuing to provide free money to banks?

    (BTW - it seems Pee Wee's trying to make a comeback.)

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    P.S. - re. the credit piece, very relevant article from Business Week: As Banks Exit TARP, Obama Seeks New Ways to Boost Credit.

    Of course, I'll have to reserve judgment 'til I hear what Stewart & Pee Wee have to say.

  • Bill Bodden (unverified)
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    In the unlikely event Bernanke isn't approved by the senate, the only real difference will be in who takes his place. Wall Street will nominate a replacement for Obama and the senate banking committee to approve to continue business as usual and take care of their campaign donors from Manhattan.

  • Send a video (unverified)
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    Senator Merkley will be on Morning Meeting on MSNBC to discuss financial regulatory reform at 6:30 am PST

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