Person of the Year 2009: Ben Bernanke

TIME Managing Editor Rick Stengel appeared on the “Today” show Wednesday morning to reveal his magazine’s selection for 2009’s Person of the Year: Ben Bernanke.

“The winner is Ben Bernanke, Chairman of the Federal Reserve, the most powerful, least understood government force shaping our lives,” Stengel said. Stengel described the cover as a “throwback cover, like a Person of the Year cover from the ’40s or ’50s.”

“He was the great scholar of the Depression, and basically he saw what looked like another Depression coming and he decided he would do whatever it takes to forestall that,” Stengel said. “And basically he did.

Stengel admitted that Bernanke has made mistakes, but said that “in terms of influencing the economy this year, he’s the guy.”

Source: Huffington Post

The right reform for the Fed

Washington Post – By Ben Bernanke – November 29, 2009

For many Americans, the financial crisis, and the recession it spawned, have been devastating — jobs, homes, savings lost. Understandably, many people are calling for change. Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

These matters are complex, and Congress is still in the midst of considering how best to reform financial regulation. I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions. Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers. And a House committee recently voted to repeal a 1978 provision that was intended to protect monetary policy from short-term political influence. These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States. The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.

The proposed measures are at least in part the product of public anger over the financial crisis and the government’s response, particularly the rescues of some individual financial firms. The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly were — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society. (I know something about this, having spent my career prior to public service studying these issues.) My colleagues at the Federal Reserve and I were determined not to allow that to happen.

Moreover, looking to the future, we strongly support measures — including the development of a special bankruptcy regime for financial firms whose disorderly failure would threaten the integrity of the financial system — to ensure that ad hoc interventions of the type we were forced to use last fall never happen again. Adopting such a resolution regime, together with tougher oversight of large, complex financial firms, would make clear that no institution is “too big to fail” — while ensuring that the costs of failure are borne by owners, managers, creditors and the financial services industry, not by taxpayers.

The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis. We have extensively reviewed our performance and moved aggressively to fix the problems.

Working with other agencies, we have toughened our rules and oversight. We will be requiring banks to hold more capital and liquidity and to structure compensation packages in ways that limit excessive risk-taking. We are taking more explicit account of risks to the financial system as a whole.

We are also supplementing bank examination staffs with teams of economists, financial market specialists and other experts. This combination of expertise, a unique strength of the Fed, helped bring credibility and clarity to the “stress tests” of the banking system conducted in the spring. These tests were led by the Fed and marked a turning point in public confidence in the banking system.

There is a strong case for a continued role for the Federal Reserve in bank supervision. Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests.

This expertise is essential for supervising highly complex financial firms and for analyzing the interactions among key firms and markets. Our supervision is also informed by the grass-roots perspective derived from the Fed’s unique regional structure and our experience in supervising community banks. At the same time, our ability to make effective monetary policy and to promote financial stability depends vitally on the information, expertise and authorities we gain as bank supervisors, as demonstrated in episodes such as the 1987 stock market crash and the financial disruptions of Sept. 11, 2001, as well as by the crisis of the past two years.

Of course, the ultimate goal of all our efforts is to restore and sustain economic prosperity. To support economic growth, the Fed has cut interest rates aggressively and provided further stimulus through lending and asset-purchase programs. Our ability to take such actions without engendering sharp increases in inflation depends heavily on our credibility and independence from short-term political pressures. Many studies have shown that countries whose central banks make monetary policy independently of such political influence have better economic performance, including lower inflation and interest rates.

Independent does not mean unaccountable. In its making of monetary policy, the Fed is highly transparent, providing detailed minutes of policy meetings and regular testimony before Congress, among other information. Our financial statements are public and audited by an outside accounting firm; we publish our balance sheet weekly; and we provide monthly reports with extensive information on all the temporary lending facilities developed during the crisis. Congress, through the Government Accountability Office, can and does audit all parts of our operations except for the monetary policy deliberations and actions covered by the 1978 exemption. The general repeal of that exemption would serve only to increase the perceived influence of Congress on monetary policy decisions, which would undermine the confidence the public and the markets have in the Fed to act in the long-term economic interest of the nation.

We have come a long way in our battle against the financial and economic crisis, but there is a long way to go. Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation.

Audit the Fed Attached as an Amendment

Ron Paul, November 23, 2009

I was pleased last week when we won a vote in the Financial Services Committee to include language from the Audit the Fed bill HR1207 in the upcoming financial regulatory reform bill.  As it stands now, if HR 3996 passes, because of this action, the Federal Reserve’s entire balance sheet will be opened up to a GAO audit.  We will at last have a chance to find out what happened to the trillions of dollars the Fed has been giving out.

Finally, the blanket restrictions on GAO audits of the Fed that have existed since 1978 will be removed.  All items on the Fed’s balance sheet will be auditable, including all credit facilities, all securities purchase programs, and all agreements with foreign central banks.  To calm fears that we might be trying to substitute congressional action for Fed mischief in tinkering with monetary policy, we agreed to a 180 day lag time before details of the Fed’s market actions are released and included language to state explicitly that nothing in the amendment should be construed as interference in or dictation of monetary policy by Congress or the GAO.  This left no reasonable objections standing and the amendment passed with a vote of 43 to 26.

This was a major triumph for transparency and accountability in government.  With unprecedented turmoil in the financial markets, the people are demanding to know and understand the extent of the Federal Reserve’s involvement in the creation of out-of-control business cycles, who they are helping, and how.  We need information.  The excuses for not giving out this information are flimsy at best, and the passage of this amendment is a major step to finally getting at the truth.

Of course I could not have done this without the help and support of many other members who have been strong allies in this fight.  Having over 300 cosponsors was obviously helpful.

However, as great as this victory is, we have to remember that this amendment is attached to a bill that would give sweeping new powers to the Federal Reserve. The Fed has taken its mandate to maintain stable prices and full employment and used its immense power to help elite friends at the great expense of everyone else.  The answer is not to increase their powers and ability to interfere in the economy, but that is what the legislation will do.  It is a disaster waiting to happen, and unfortunately it looks as if it will pass.

At least with the Audit the Fed amendment attached to the bill, the Fed will not be able to do its destructive work in secret. The people will know exactly who the beneficiaries are of this immoral system of money management.

Goldman Proves Best With Hatzius Divining Economy You Can Trade

Bloomberg – By Bob Willis

When forecasters look back at the chain of disasters that brought down the U.S. economy during the past two years, one indicator stands out: employment. Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc., says a January 2008 government employment report told him that the housing downturn then plaguing the country had broadened out to a full-blown recession, pushing joblessness up to 5 percent in December 2007 from 4.7 percent the prior month. Based on that, he wrote a note to clients predicting “an outright contraction” of the economy.

The Cambridge, Massachusetts-based National Bureau of Economic Research, the official arbiter of when recessions begin, didn’t come to the same conclusion until almost a year later.

The Goldman veteran’s foresight helped propel him and his team to No. 1 among economic forecasters, according to data compiled by Bloomberg. Hatzius is also No. 1 among forecasters of U.S. gross domestic product and No. 2 among prognosticators of unemployment and of moves in the Federal Reserve’s target for its fed funds rate.

The German-born Hatzius says high unemployment will continue beyond 2010, putting a damper on the recovery. He and his team, Edward McKelvey and Andrew Tilton, forecast in early October that unemployment would reach 10 percent by the end of 2009 and would average 10.3 percent for all of 2010. The following month, the government reported that joblessness had reached 10.2 percent.

Shrinking Economy

The Bloomberg ranking of 65 forecasters covers the four quarters through June 2009, a period when the world’s largest economy shrank 3.8 percent. It includes estimates of GDP, unemployment, the fed funds target rate and movements in the U.S. consumer price index.

Thomas Lam, a former economist for Singapore-based United Overseas Bank Ltd., is No. 2 overall and ties for No. 2 among GDP forecasters. In November, he resigned from UOB and planned to start a new job as chief economist at OSK-DMG, a joint venture between Malaysian securities firm OSK Holdings Bhd. and Frankfurt-based Deutsche Bank AG, in December.

Kurt Karl of Zurich-based Swiss Reinsurance Co. is No. 1 in forecasting U.S. CPI and the fed funds rate and is No. 3 overall.

Hatzius, 40, who has a Ph.D. in economics from Oxford University in England and has worked at Goldman since 1997, says that every time since World War II that unemployment spiked the way it did in 2007, a recession resulted.

‘The Clincher’

“That was probably the clincher that a recession either had just started or was about to start,” Hatzius says, speaking from his 45th-floor office at Goldman’s One New York Plaza headquarters, which overlooks New York Harbor and the Statue of Liberty.

As early as late 2008, the darkest period of the financial crisis, Hatzius, McKelvey and Tilton were forecasting that the U.S. economy would resume expanding in the third quarter of 2009. They were right; it grew 2.8 percent in that quarter. In August 2009, they said economic growth would be 3 percent in the second half of the year, slowing to an average of 2.1 percent for 2010, as the effects of President Barack Obama’s $787 billion stimulus plan diminish.

The most accurate forecasters of unemployment are Morgan Stanley economists Richard Berner and David Greenlaw. Yet neither they nor Hatzius saw the full impact of the economic meltdown on job losses. In January 2009, Berner and Greenlaw projected unemployment rates of 8 percent and 8.8 percent for the first two quarters, respectively; the actual numbers were 8.5 percent and 9.5 percent.

‘Devastating Impact’

“As much as we recognized the depth and the breadth of the recession as it unfolded, we failed to appreciate how devastating the impact would be on job loss,” says Berner, who holds a Ph.D. in economics from the University of Pennsylvania and has worked at Morgan Stanley since 1999.

Berner and Greenlaw say jobs have been cut so sharply that companies will resume hiring faster than many financial firms are forecasting.

“Employers have been so aggressive in cutting jobs that if output picks up further, they’ll probably need to hire more quickly,” Berner says. He and Greenlaw predicted in early October that unemployment would drop below 10 percent by the second quarter of 2010 and average 9.5 percent in 2011.

Hatzius is more pessimistic.

“I don’t think the economy is going to grow fast enough to produce rapid job growth,” he says. “The head winds on private demand are still fairly significant, and the boost we’re getting from inventories and the stimulus is temporary.”…]

Dismantling the Temple

The Nation – By William Greider, July 15, 2009

The financial crisis has propelled the Federal Reserve into an excruciating political dilemma. The Fed is at the zenith of its influence, using its extraordinary powers to rescue the economy. Yet the extreme irregularity of its behavior is producing a legitimacy crisis for the central bank. The remote technocrats at the Fed who decide money and credit policy for the nation are deliberately opaque and little understood by most Americans. For the first time in generations, they are now threatened with popular rebellion.

During the past year, the Fed has flooded the streets with money–distributing trillions of dollars to banks, financial markets and commercial interests–in an attempt to revive the credit system and get the economy growing again. As a result, the awesome authority of this cloistered institution is visible to many ordinary Americans for the first time. People and politicians are shocked and confused, and also angered, by what they see. They are beginning to ask some hard questions for which Federal Reserve governors do not have satisfactory answers.

Where did the central bank get all the money it is handing out? Basically, the Fed printed it, out of thin air. That is what central banks do. Who told the Fed governors they could do this? Nobody, really–not Congress or the president. The Federal Reserve Board, alone among government agencies, does not submit its budgets to Congress for authorization and appropriation. It raises its own money, sets its own priorities.

Representative Wright Patman, the Texas populist who was a scourge of central bankers, once described the Federal Reserve as “a pretty queer duck.” Congress created the Fed in 1913 with the presumption that it would be “independent” from the rest of government, aloof from regular politics and deliberately shielded from the hot breath of voters or the grasping appetites of private interests–with one powerful exception: the bankers.

The Fed was designed as a unique hybrid in which government would share its powers with the private banking industry. Bankers collaborate closely on Fed policy. Banks are the “shareholders” who ostensibly own the twelve regional Federal Reserve banks. Bankers sit on the boards of directors, proposing interest-rate changes for Fed governors in Washington to decide. Bankers also have a special advisory council that meets privately with governors to critique monetary policy and management of the economy. Sometimes, the Fed pretends to be a private organization. Other times, it admits to being part of the government.

The antiquated quality of this institution is reflected in the map of the Fed’s twelve regional banks. Five of them are located in the Midwest (better known today as the industrial Rust Belt). Missouri has two Federal Reserve banks (St. Louis and Kansas City), while the entire West Coast has only one (located in San Francisco, not Los Angeles or Seattle). Virginia has one; Florida does not. Among its functions, the Federal Reserve directly regulates the largest banks, but it also looks out for their well-being–providing regular liquidity loans for those caught short and bailing out endangered banks it deems “too big to fail.” Critics look askance at these peculiar arrangements and see “conspiracy.” But it’s not really secret. This duck was created by an act of Congress. The Fed’s favoritism toward bankers is embedded in its DNA.

This awkward reality explains the dilemma facing the Fed. It cannot stand too much visibility, nor can it easily explain or justify its peculiar status. The Federal Reserve is the black hole of our democracy–the crucial contradiction that keeps the people and their representatives from having any voice in these most important public policies. That’s why the central bankers have always operated in secrecy, avoiding public controversy and inevitable accusations of special deal-making. The current crisis has blown the central bank’s cover. Many in Congress are alarmed, demanding greater transparency. More than 250 House members are seeking an independent audit of Fed accounts. House Speaker Nancy Pelosi observed that the Fed seems to be poaching on Congressional functions–handing out public money without the bother of public decision-making.

“Many of us were…if not surprised, taken aback, when the Fed had $80 billion to invest in AIG just out of the blue,” Pelosi said. “All of a sudden, we wake up one morning and AIG was receiving $80 billion from the Fed. So of course we’re saying, Where is this money coming from? ‘Oh, we have it. And not only that, we have more.'” So who needs Congress? Pelosi sounded guileless, but she knows very well where the Fed gets its money. She was slyly tweaking the central bankers on their vulnerability.

Fed chair Ben Bernanke responded with the usual aloofness. An audit, he insisted, would amount to “a takeover of monetary policy by the Congress.” He did not appear to recognize how arrogant that sounded. Congress created the Fed, but it must not look too deeply into the Fed’s private business. The mystique intimidates many politicians. The Fed’s power depends crucially upon the people not knowing exactly what it does…]

An Answer to Bernanke

By Ron Paul

Federal Reserve Chairman Ben Bernanke (November 29th Washington Post) does not want us to know any of the details of the Fed’s secret operations. This position is not surprising and has been typical of all central bank chairmen.

Bernanke’s stated goal in his editorial is “To design a system of financial oversight…” that will “provide a robust framework for preventing future crises.”

During its 96 years of existence, the Federal Reserve has played havoc with our economy and brought great suffering to millions through unemployment and price escalation. In addition, it has achieved what only a central bank can: a steady depreciation of our currency. Today’s dollar is now worth four cents compared to the dollar entrusted to the Federal Reserve in 1913.

Ninety-six years should have been plenty of time for the Fed to come up with a plan for preventing economic crises. Since the Fed is the source of all economic downturns, it is impossible for any central banker to regulate in such a manner to prevent the problems that are predictable consequences of his own monetary mismanagement.

The Federal Reserve fixes interest rates at levels inevitably lower than those demanded by the market. This manipulation is a form of price control through credit expansion and is the ultimate cause of business cycles and so many of our economic problems, generating the malinvestment, excessive debt, stock, bond, commodity, and housing bubbles.

The Federal Reserve’s monetary inflation indeed does push the CPI upward, but concentrating on government reports on the CPI and the PPI is nothing more than a distraction from the other harm done by the Federal Reserve’s effort at central economic planning through secret monetary policy operations. Real inflation, the expansion of our money supply, is greatly undercounted by these indexes. In response to our latest financial crisis, the Federal Reserve turned on its printing press and literally doubled the monetary base. This staggering creation of dollars has yet to be reflected in many consumer prices, but it will ultimately hit the middle class and poor with a cruel devaluation of their savings and real earnings.

The Fed has clearly failed on its mandate to maintain full employment and price stability. It’s time to find out what’s going on. Instead of assuming responsibility for the Fed’s role in the crisis, Bernanke brags about “arresting” the crisis. I would suggest to Mr. Bernanke that it’s too early to brag.

Bernanke decries any effort to gain transparency of the Fed’s actions to find out just who gets bailed out and who is left to fail. Instead, he proposes giving even more power to the Fed to regulate the entire financial system. What he does not recognize, or does not want to admit, is that he is talking about symptoms and ignoring the source of the crisis — the Federal Reserve itself. More regulations will never compensate for all the distortion and excesses caused by monetary inflation and artificially low interest rates. Regulation distracts from the real cause while further interfering with market forces, thus guaranteeing that the recession will become much deeper and prolonged.

Chairman Bernanke’s argument for Fed secrecy is a red herring. It serves to distract so the special interests that benefit from Fed policy never become known to the public. Who can possibly buy the argument that this secrecy is required to protect the people from political influence?

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