Bernanke Sees Light in the Darkness
By
On December 1, Ben S. Bernanke, Chairman of the Federal Reserve, delivered a major address on the state of the economy that seems to have been lost in the media whirl on the first day of the final month of 2008, a year’s demise most Americans will surely cheer on New Years Eve.
The Chairman’s competition for attention was a lost cause as everyone seemed to believe the first of the month, being on a Monday, was a good day for pronouncements. President Elect Obama announced the foreign policy and security team for his administration. This, of course, by itself, would have sucked all of the air out of the newsroom, even though the choices were not a surprise, having been “leaked” to the press over the past two weeks.
Then there was the announcement by the National Bureau of
Economic Research that the country has been in recession, not since this past
summer but actually since the last quarter of 2007. Here again this was not a surprise. If there are people still out there who
actually believed that the
Lastly, the Secretary of the Treasury, Henry Paulson, was let out of the locked cabinet the department has been keeping him in on weekends so that he won’t upset worldwide stock markets in anticipation of a Monday opening, only to have him give his usual disjointed, depressing pronouncements, not after the markets closed but one hour beforehand.
I suppose the logic Treasury was using was that since the market was already down by 400 points, just anticipating his speaking to the press had already done its damage and what more harm could there be? One should never underestimate the effect of bad timing as the market proceeded to lose almost an additional 300 points as he spoke.
But back to Bernanke, who had some of the most interesting comments to make, far more so than the events receiving the dominant coverage, especially as they were clearly anti climatic though news-grabbing.
Chairman Bernanke’s speech is entitled “Federal Reserve Policies in the Financial Crisis,” a title only an academic could love, and lays out not only the actions that the Federal Reserve has taken during the past year to stem the downward spiral in the financial system of the United States but also the reasons it was unable to do more. He also clearly and thoughtfully explains why Treasury has had difficulty in dealing with the crisis due to the limitations by which they have been constrained. This is a very carefully crafted document that needs to be analyzed in great detail by our Legislative branch of government as they pursue their efforts to craft new financial rules and regulations for the future.
One has the view of the Chairman sitting at his desk, alone on a dimly lit room, carefully reflecting on the financial world around him – the failures, the successes and the frustration.
He laid out the “…Federal Reserve’s strategy for dealing with the financial crisis and its economic consequences….” by outlining the components used as tools: a mixture of monetary policy, coordination with other governmental agencies and use of liquidity management.
Admitted, he reflected, while preventing complete financial meltdown, they have been frustrated at each turn by not being in a position to take some of the actions that would have been even more beneficial and offers some food for thought for Congress.
“As a general matter, I agree that
preserving market discipline is extremely important, and, accordingly, the
government should intervene in markets only in exceptional circumstances.
However, in my view, the failure of a major financial institution at a time
when financial markets are already quite fragile poses too great a threat to
financial and economic stability to be ignored. In such cases, intervention is
necessary to protect the public interest. The problems of moral hazard and the
existence of institutions that are "too big to fail" must certainly
be addressed, but the right way to do
this is through regulatory changes, improvements in the financial
infrastructure, and other measures that will prevent a situation like this from
recurring. Going forward, reforming the system to enhance stability and to
address the problem of "too big to fail" should be a top priority for
lawmakers and regulators.”
“In particular,
recent events have revealed a serious weakness of our system: the absence of
well-defined procedures and authorities for dealing with the potential failure
of a systemically important non-bank financial institution. In the case of federally insured depository institutions,
the FDIC has the necessary authority to resolve failing firms; indeed, in
situations in which the failure of a firm is judged to pose a systemic risk,
the FDIC's powers are quite broad and flexible. No comparable framework exists
for non-depository financial institutions.”
Unfortunately, systemic solutions can only go so far. While the current crisis was triggered by short sighted, greed motivated, corporate policy it has now morphed into a business cycle downturn which, as history has told us, is a self correcting, natural, economic phenomenon. All we can do is wait it out. Let’s hope we have enough time.