Bernanke Making Greenspans Financial Crisis Mess Worse

Stock-Markets / Credit Crisis 2010 Jan 08, 2010 - 11:24 AM
By: Tim_Iacono
Stock-Markets

Best Financial Markets Analysis ArticleIf there is one man in the nation's capitol who maybe isn't too unhappy about Treasury Secretary Tim Geithner being in the news today, it's probably Fed Chairman3 Ben Bernanke who delivered a speech titled Monetary Policy and the Housing Bubble over the weekend, a topic that continues to generate a lot of discussion at mid-week, little of it positive.

In what clearly appears to be an attempt to work backwards from a conclusion (based on its contents, a better title for the speech would have been "Monetary Policy was not Responsible for the Housing Bubble"), the Fed chairman demonstrates an incredible lack of understanding about the financial and political world in which he lives and exhibits some disturbing character flaws that have not been on display before to this degree, namely, a dangerous reliance on economic models and a disingenuous use of the English language to sway public opinion. So as not to repeat what others have already written about a speech that, one day, will probably rival (if not exceed) in ignominy the Fed chairman's "helicopter speech" from early in the last decade, a brief recap of others' observations is in order. But, before even that, it is worth noting that, in a sign of how quickly things may be changing for the central bank chief, Google now finds more matches when the current Fed Chairman's name is combined with the word "failure" than when using the former Fed Chairman's name:

* Greenspan + failure = 1.06 million results http://tinyurl.com/yem7aoo

* Bernanke + failure = 1.44 million results http://tinyurl.com/y9xq9j6

Whether the relationship between these two has changed in recent days as a result of this speech is not known, but, on its face, it is surely not a good omen and bears close watching as the Fed chairman's confirmation vote in the full Senate approaches.

Early on Monday, Barry Ritholtz at The Big Picture argued that bond managers reaching for yield due to record low short-term interest rates2 was a direct consequence of monetary policy, one of many factors that contributed to the financial market meltdown.

What Bernanke seems to be overlooking in his exoneration of ultra-low rates was the impact they had on the world’s Bond managers — especially pension funds, large trusts and foundations. Subsequently, there was an enormous cascading effect of 1% Fed Funds rate on the demand for higher yielding instruments, like securitized mortgages (Yes, I laid all this out in the book).

Barry then supplied a ten step causation timeline that began with low yields and ended with a collapsed credit system, touching upon mortgage backed securities, ratings agencies, and derivatives along the way, reinforcing the point that step one was "lower interest rates", not "beef-up regulation", what we know now is a recipe for disaster. The failure of effective regulation was the key to the systemic failure in Bernanke's view, however, John Carney at ClusterStock took issue with this line of thinking.
http://tinyurl.com/ybxrjgg

Bernanke makes the extraordinary claim that regulatory and supervisory policies would have been effective means of addressing the run up in housing prices. What makes this claim so extraordinary is that it completely ignores the fact that regulatory and supervisory policies weren’t just ineffective at popping the housing bubble—they were actively fueling it. ... This is why Bernanke’s view is so disturbing. He urges “stronger regulationâ€