Senators Blast Bernanke on Monetary Policy Failures
I posted something earlier about this... and this is the offical transcript of Senator Jim Bunning.
As Prepared For Delivery:
Thank you, Mr. Chairman. I know we have a lot of ground to cover today, but I want to say a few things on the topic of this hearing and of the next.
First, on monetary policy, I am deeply concerned about what the Fed has done in the last year and in the last decade. Chairman Greenspan's easy money the late nineties and then following the tech bust inflated the housing bubble and created the mess we are in today. Chairman Bernanke's easy money in the last year has undermined the dollar and sent oil to new record highs every few days, and almost doubling since the rate cuts started. Inflation is here and it is hurting average Americans.
Second, the Fed is asking for more power. But the Fed has proven they can not be trusted with the power they have. They get it wrong, do not use it, or stretch it further than it was ever supposed to go. As I said a moment ago, their monetary policy is a leading cause of the mess we are in. As regulators, it took them until yesterday to use power we gave them in 1994 to regulate all mortgage lenders. And they stretched their authority to buy 29 billion dollars of Bear Stearns assets so J.P. Morgan could buy Bear at a steep discount.
[B]Now the Fed wants to be the systemic risk regulator. But the Fed is the systemic risk. Giving the Fed more power is like giving the neighborhood kid who broke your window playing baseball in the street a bigger bat and thinking that will fix the problem. [/B]I am not going to go along with that and will use all my powers as a Senator to stop any new powers going to the Fed. Instead, we should give them less to do so they can do it right, either by taking away their monetary policy responsibility or by requiring them to focus only on inflation.
Third and finally, since I expect we will try to get right to questions in the next hearing, let me say a few words about the G.S.E. bailout plan. [B]When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turns out socialism is alive and well in America.[/B] The Treasury Secretary is asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed's purchase of Bear Stearns' assets was amateur socialism compared to this.
And for this unprecedented intervention in the markets what assurances do we get that it will not happen again? None. We are in the process of passing a stronger regulator for the G.S.E.s, and that is important, but it allows them to continue in the current form. If they really do fail, should we let them go back to what they were doing before?
I will close with this question Mr. Chairman. Given what the Fed and Treasury did with Bear Stearns, and given what we are talking about here today, I have to wonder what the next government intervention in private enterprise will be. More importantly, where does it stop?[/QUOTE]
Hate to rain on the Paul Parade, but I think Bernanke is correct. Yes, the Federal Reserve should indeed have the powers he is arguing for. The financial markets, especially the mortgage industry, is a disgrace. It requires oversight and transparency, just as he has stated (see below). Bunning is just a pop-in-jay quacking the usual nonsense about socialism and France. He's frankly an idiot.
July 8, 2008, 8:45 am
Bernanke: If Fed Gets More Responsibility, More Power Needed Too
U.S. financial markets need to be made more resilient and stable, Federal Reserve Chairman Ben Bernanke said Tuesday, possibly by giving the central bank much broader authority to collect information and exercise authority over the nation’s financial firms. Bernanke made the remarks at a Federal Deposit Insurance Corp. conference on mortgage lending. Here are excerpts from the portion of his remarks on new regulatory powers that might be needed.
As I have noted, I believe that the Federal Reserve’s actions to facilitate the acquisition of Bear Stearns … were necessary and warranted to head off serious damage to the U.S. financial system and our economy. That said, the intended purpose of Federal Reserve lending is to provide liquidity to sound institutions. We used our lending powers to facilitate an acquisition of a failing institution only because no other tools were available to the Federal Reserve or any other government body for ensuring an orderly liquidation in a fragile market environment. As part of its review of how best to increase financial stability, and as has been suggested by Secretary Paulson, the Congress may wish to consider whether new tools are needed for ensuring an orderly liquidation of a systemically important securities firm that is on the verge of bankruptcy, together with a more formal process for deciding when to use those tools. …
The details of any such tools and of the associated decisionmaking process require more study. As Chairman Bair recently pointed out, one possible model is the process currently in place under the Federal Deposit Insurance Corporation Improvement Act (FDICIA) for dealing with insolvent commercial banks. The FDICIA procedures give the Federal Deposit Insurance Corporation (FDIC) the authority to act as a receiver for an insolvent bank and to set up a bridge bank to facilitate an orderly liquidation of the firm. ….
Designing analogous rules for the prompt and orderly resolution of securities firms is not straightforward, as these firms differ significantly from most commercial banks in their financing, business models, and in other ways. Despite the complexities of designing a resolution regime for securities firms, I believe it is worth the effort. In particular, by setting a high bar for such actions, the adverse effects on market discipline could be minimized.
Another possible step to reduce the incidence and severity of financial crises, recently proposed in the Treasury blueprint for regulatory reform, would be to task the Federal Reserve with promoting the overall stability of financial markets. To some extent, the Fed already plays that role, and indeed its founding in 1913 was prompted largely by the desire of the Congress to address the problem of recurring financial panics. …
That said, holding the Fed more formally accountable for promoting financial stability makes sense only if the institution’s powers are consistent with its responsibilities. In particular, as a practical matter, I do not think that the Fed could fully meet these objectives without the authority to directly examine banks and other financial institutions that are subject to prudential regulation. During the recent financial turmoil, the ability of the Fed to obtain information directly from key institutions and from supervisory reviews has been invaluable for understanding financial developments and their implications for the economy. … In particular, the recent experience has clearly illustrated the importance, for the purpose of promoting financial stability, of having detailed information about money markets and the activities of borrowers and lenders in those markets.
If the Congress chooses to go in this direction, attention should be paid to the risk that market participants might incorrectly view the Fed as a source of unconditional support for financial institutions and markets, which could lead to an unacceptable reduction in market discipline. If the Federal Reserve’s formal mandate were broadened to encompass financial stability, it would be particularly important to make clear that any government intervention to avoid the disorderly liquidation of firms on the verge of bankruptcy should use clearly defined tools and processes, along the lines I discussed earlier.
[QUOTE=long island leprechaun;2628811]Hate to rain on the Paul Parade, but I think Bernanke is correct. Yes, the Federal Reserve should indeed have the powers he is arguing for. The financial markets, especially the mortgage industry, is a disgrace. It requires oversight and transparency, just as he has stated (see below). Bunning is just a pop-in-jay quacking the usual nonsense about socialism and France. He's frankly an idiot.
First of all, have you ever heard of the concept of moral hazard?
Secondly, anyone who understands the nature of this crisis understands that too much regulation is precisely what caused this crisis in the first place.
When you have a central bank artificially fixing the rate of interest at 1% like the Federal Reserve did earlier this decade, a crisis like this is inevitable.
It's only a question of WHICH INDUSTRY the malinvestment will occur in. Not a question of "if."
The Federal Reserve System itself is fascism in its truest form. It is a marriage between the Government and a cartel of private banks. Anyone who supports a system like this would have had tons of fun in 1930s Italy.
Last edited by JetsCrazey; 07-15-2008 at 11:30 PM.
Paulson and Bernanke Bailout Friends on Wall Street, a Disaster for US Tax Payers
Just more of the privatizing of profits and the socializing of losses for the corporations
[QUOTE]Jason Simpkins writes: Standing on the steps of the U.S. Treasury building across the street from the White House, Treasury Secretary Henry Paulson asked Congress for the power to prop up Fannie Mae ( FNM ) and Freddie Mac ( FRE ), the two failing mortgage giants involved with nearly half of the $12 trillion U.S. mortgage market.
"The president has asked me to work with Congress to act on this plan immediately," Paulson said Sunday. "Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction."
But half a world away - in his new home in Singapore - peripatetic investing guru Jim Rogers blasted the federal government for its new activist approach, which conflict with the very idea of a free market. A rescue of Fannie Mae and Freddie Mac - the second federally sponsored corporate bailout in four months after the Treasury Department rode to the rescue of The Bear Stearns Cos. Inc. ( BSR ) in March - is shifting the cost of errant financial strategies away from shareholders and onto U.S. taxpayers.
"I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae," Rogers, the best-selling author and famed investor told Bloomberg News . "These companies were going to go bankrupt if [the feds] hadn't stepped in to do something, and they should've gone bankrupt with all of the mistakes they've made. What's going to happen when you … put some Band-Aids on it for another year or two or three? What's going to happen three years from now when the situation's much, much, much worse?"
Clearly, a sweeping rescue of the government sponsored entities, such as the one planned, will bring with it a broad new range of liabilities for the American taxpayer, who will be financing institutions that are widely regarded as insolvent.
The debt securities issued by Fannie and Freddie are widely owned by pension funds, mutual funds, institutional investors, and even foreign governments. So a collapse of the two government-sponsored enterprises would send shockwaves through an economy that is already struggling to overcome the worst housing recession in a quarter-century, tight global credit markets and soaring inflation thanks to rising food and energy prices.
Paulson asked Congress for the authority to buy equity in - and lend to - the companies, while also substantially increasing their lines of credit.
The Treasury Department did not specify the amount of credit that would be made available to Fannie Mae and Freddie Mac, but those briefed on the plan told the International Herald Tribune that administration officials are lobbying Congress to extend the line of credit to $300 billion .
Each company currently has a $2.25 billion credit line that was established close to 40 years ago. At the time, Fannie Mae had only $15 billion in outstanding debt according to IHT . Now, Fannie has a total debt of about $800 billion and Freddie has roughly $740 billion.
Many on Capitol Hill, particularly Senator Charles Schumer (D-NY), greeted the plan with enthusiasm.
"The Treasury's plan is surgical and carefully thought out and will maximize confidence in Fannie and Freddie while minimizing potential costs to U.S. taxpayers," Schumer said.
"While Fannie and Freddie still have solid fundamentals, it will be reassuring to investors, bondholders and mortgage-holders that the federal government will be behind these agencies, should it be needed."
But Rogers - who contends that the U.S. economy is in the midst of its worst recession since World War II - referred to Paulson's plan as an "unmitigated disaster."
"They're ruining what has been one of the greatest economies in the world," Rogers said, making a collective reference to both Paulson and U.S. Federal Reserve Chairman Ben S. Bernanke.
Said Rogers: Paulson and Bernanke "are bailing out their friends on Wall Street … but there are 300 million Americans that are going to have to pay for this."
[ Editor's Note : For an insider's explanation of the catalysts for the Fannie Mae/Freddie Mac financial crisis - as well as the long-term fallout investors can expect - check out Contributing Editor Shah Gilani's " Inside Wall Street " column also contained in this issue of Money Morning . Global Investing guru Jim Rogers has been particularly critical of the U.S. government's willingness to bail out Wall Street's financial miscreants.
Indeed, in an exclusive interview with Money Morning earlier this year , Rogers predicted the failure of the U.S. Federal Reserve for this very reason. And while that's very bad news for U.S.-focused investments, there is an alternative - Asia, and more specifically, China, Rogers says. For more details of this global investing game plan, and to obtain a free copy of Rogers' new bestseller, " A Bull in China ," check out this investing report .] [/QUOTE]