6 Comments

  • RichL says:

    Do you believe that Bernanke wishes his legacy to be the destruction of our monetary system? Do you think that the thoroughly unprofessional conduct of our Congress, on top of their ignorance, indicates any interest in responsible behavior?

    The judgment of history is what will keep all but the most craven Fed Chairman on the straight and narrow. In this instance, secrecy is useful given that truth will be distorted in the political process.

    I trust the Fed far more than the politicians.

    As far as the Fed being a slave to the banks, I’d suggest that they are following the employment aspect of their dual mandate. If you think this economy is flaccid, how do you think it would look with zombie banks?

  • I think Bernanke is wedded to the intellectual monoculture of the Fed, and the sterile neoclassical economics it represents. I do not trust an unelected institution with a large amount of discretionary power. That is part of what makes the politicians lazy, because the Fed takes “action” when they don’t.

    I don’t think the Fed should have a dual mandate. Questions of employment should belong to Congress. It’s not as if monetary policy can do much anyway, when so many bank balance sheets and household balance sheets are impaired. Zombie banks? It is not rational to borrow more or lend more in an economy that is overleveraged. We don’t need more credit.

    I bring this back to the door of the Fed, because they could have let the market fail in 1987, 1991, 1998, or 2002, and the effects would not have been that severe. But no, they kept lowering the fed funds rate to “rescue” the economy. They would not let recessions do their work to eliminate bad lending, and the debt grew.

    It’s harder to argue with intervention in 2008, because things were so far gone, but I think we would have been better off taking many of the big banks into insolvency, while guaranteeing deposits, replacing managements, and using “bailout” funds to create “mutual banks” as I suggested. As it is, the big banks do not do much for the economy. That would have cleaned up bank balance sheets, similar to the RTC, and we would be in better shape now.

    • Syd says:

      “It is not rational to borrow more or lend more in an economy that is overleveraged. We don’t need more credit.”

      I really appreciate this comment. This is why further monetary easing makes no sense to me.

      What would be better is if the Fed could inject money into the economy more directly, without new credit being created, and without the new money tending to go predominantly into bank coffers, stocks, bonds and derivatives.

      For instance, Congress/POTUS could pass/sign a law to temporarily suspend collection of all FICA taxes (e.g., for three years), with the Fed crediting the Treasury’s account in amounts equal to all Social Security benefits paid out in the same period.

      To me it is irrational to encourage borrowers to take on more debt than their incomes can bear, and irrational to encourage/condone banks extending such credit, since that leads to borrowers and banks becoming insolvent, and the TBTF banks getting bailed out.

  • madasafish says:

    ” It would allow large financial firms to go bankrupt, allowing the FDIC to rescue depositors, but not lenders or owners”

    So in 2008/9, the entire US banking system would have collpased – not just Lehman- as the effecet of one collapse hits the next bank and so on.

    That’s what happened in 1929-32.. So the writer knows nothing about economics then and has not studied history..

    It shows.. A perfect recipe for economic collpase…

    • I disagree. The banking system would not have collapsed. Guaranteeing at the depositor level would have preserved the banks. Fresh capital would have come in to buy ownership interests from the bondholders.

      I will say this, though. There are no good solutions in the bust. The Fed drove the increase in debts via its monetary policy, combined with a pro-debt fiscal policy. It can’t get us out of what it got us into.

  • madasafish says:

    The banks would all have collapsed as AIG would have gone and thus all the bank insurances would have collapsed.

    Of course, IF you want to rescue AIG and not the banks, you are playing with words as the AIG insurances basically underwrote the world’s banking system.
    No AIG, no world banking..

    Fresh capital? You are joking I assume. in 2008 the only fresh capital before the Fed rescued the banks was limited to a few brave souls who basically were gambling on the Fed rescuing the system.

    No Fed means no gambling on rescue.

    I can remember how bad things were in 2008. Compared to the entire banking system going bank and ATMs stopping working (which was about to happen in the UK without bank rescues), you would have seen depositors queuing to WITHDRAW money as that is how investors think…

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