January 3, 2010

Ben Bernanke: Ignoramus - or Politician?

Hatched by Dafydd

So the allegedly smartest financial guy in the world hath spoken on the housing-finance crisis. He spake at length; if you want to readeth the entire brain-numbing speech, here it be.

He spoke of the various factors (notably monetary policy) that could have led (but didn't) to the housing bubble, the collapse of which is largely responsible for the worldwide recession that technically began in the fourth quarter of 2008. And he issued his pronouncements about what actually did cause the bubble -- which in Bernanke's mind was an insufficiency of federal regulation, or at least "smart" regulation, from the Federal Reserve. (Shockingly, being its chairman, his solution is to grant the Fed even greater regulatory power).

In fact, his conclusion can be summed up in a single sentence: Some critics say the housing crisis was caused by the government not regulating money tightly enough; but in reality, it was caused by the government allowing too much Capitalism to occur.

Bernanke does touch -- very briefly! -- on the faint possibility that "exotic mortgages" with "exotic features" might have contributed to the problem (I suspect "exotic" is a buzz word in financial circles). But nowhere does he even so much as mention what nearly every conservative, libertarian, Capitalist, or at least independent economist and financial analyst long since concluded was the real culprit in the housing bubble: For more than three decades, Congress forced banks to lend trillions in sweetheart loans to poor people who couldn't afford them.

As Peter Schweizer amply demonstrates in his seminal book Architects of Ruin -- required reading for everybody who cares about the American economy (I doubt Bernanke is even aware of the book's existence) -- radical housing activists used race-baiting and the court system, aided by ultra-liberals in Congress and in particular by Presidents Jimmy Carter, Bill Clinton, and Barack H. Obama, to force an ever increasing percentage of mortagages to flow to people without any means to pay them... on the radical socialist theory that home-ownership is a human right. (For "the right to home ownership" read "the right to buy a five-room mansion on a studio apartment income.")

Banks and S&Ls were threatened into making unrecoverable loans by the very regulatory agencies that should have forced them to be more fiscally responsible (or at least marginally sane). They saw their mergers held up, their expansions frozen, their federal contracts suspended... until they agreed to create "exotic" home loans (such as interest-only, adjustable-rate mortgages) to, in essence, give everybody a house, whether he could afford it or not.

To keep the financial institutions afloat, radicals "reformed" the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac (for "reformed" read "turned on their heads"); henceforth, instead of setting a high standard for the loans they would back, requiring good credit, a clean personal history, a steady job, and an adequate income -- thus encouraging private financial institutions to do the same, lest their loans be ineligible for purchase by Fannie and Freddie -- the GSEs instead lowered and lowered the standards, like a game of financial "limbo," encouraging their clients, the banks, to do the same. And "Limbo" is right where they ended, holding trillions and trillions of dollars of toxic "assets," whose value, when it could be calculated at all, was about equal to the paper and ink used to print them.

Although Fannie and Freddie were supposedly private companies that theoretically could go bankrupt from such psychotic policies, everyone assumed (accurately, as it turned out) that no matter how many subprime mortgages were purchased by these GSEs, the federal government would ultimately underwrite them all; that is, Fannie and Freddie would bail out the banks, and taxpayers would bail out Fannie and Freddie.

From the introduction to Architects of Ruin:

But the heart of the story is the role that radical activists and liberal politicians in Washington played in trying to harness the U.S. financial system to advance their socialist agenda....

[T]he liberal baby boomers -- born to affluence, burdened by guilt -- saw the capitalist system as inherently flawed and unfair. More important, they saw it as a system that could, and should, be manipulated for "progressive" social purposes. Calll it "do-good capitalism": the merging of sixties social values with the rewards of the profit system. The chief buzzwords of this enlightened form of capitalism are the fashionable notions of socially responsible investing and corporate citizenship.

As the liberal boomers rose to power in the 1970s, '80s, and '90s, they increasingly sought to harness the engine of capitalism to their vision of a good society. Thus, to further their activist goals, liberals in and out of Washington pushed the federal government deeper and deeper into engagement with the housing market, artificially driving the costs of lending down and pumping the system full of toxic debt.

At the same time, liberals in the Clinton administration entered into an unprecedented partnership with the financial industry that amounted to a form of state capitalism. Under Clinton, a series of Wall Street bailouts taught the big financial houses that if they failed, the federal government would come to their rescue.... This only had the effect of further corrupting their judgment, inuring them to risks by insulating them from the ruthless discipline of the market.

However, Ben Bernanke appears not to remember any of this history.

This is especially strange, since in 2007, when Sen. Chuck Schumer (D-NY, 100%) proposed reinflating the housing bubble by forcing Fannie and Freddie to buy another $145 billion of failed loans, it was Chairman of the Federal Reserve Ben Bernanke who strenuously objected. Of course, that was when his boss was George W. Bush, who repeatedly attempted to rein in the "state capitalism" initiated by his predecessor, Bill Clinton, then resurrected by Bush's successor, Barack Obama. What a difference a couple of years, and a change of presidencies, makes in Bernanke's worldview!

And how quaint and precious that Schumer bill seems now, with its paltry $145 billion to buy more toxic debt. On Christmas Eve, the Obamunist announced an Executive Order giving a blank check to Fannie and Freddie: They can now buy more unrecoverable debt through 2012 with no ceiling whatsoever. Fannie and Freddie will likely purchase tends of trillions of dollars more of such toxic assets before the November elections give us a chance to terminate that deal, thus locking in "Obamunism" for the rest of the president's term. As the Wall Street Journal reports:

The Treasury announced Thursday it was removing the caps that limited the amount of available capital to the companies to $200 billion each.

Unlimited access to bailout funds through 2012 was "necessary for preserving the continued strength and stability of the mortgage market," the Treasury said. Fannie and Freddie purchase or guarantee most U.S. home mortgages and have run up huge losses stemming from the worst wave of defaults since the 1930s....

The Treasury removed the cap on the size of available bailout funds by amending agreements it reached with the companies in September 2008, when the government seized control of the agencies under a legal process called conservatorship. The agreement allowed the Treasury to make amendments through the end of the year, without the consent of Congress. Changes made after Dec. 31 would likely involve a struggle with lawmakers over the terms.

Oh, and of course the obligatory hand-buttering:

The companies on Thursday disclosed new packages that will pay Fannie Chief Executive Officer Michael Williams and Freddie CEO Charles Haldeman Jr. as much as $6 million a year, including bonuses. The packages were approved by the Treasury and the Federal Housing Finance Agency, or FHFA, which regulates the companies....

Under the new packages, Fannie will pay as much as about $3.6 million annually to David M. Johnson, chief financial officer; $2.4 million to Kenneth Bacon, who heads a unit that finances apartment buildings; $2.8 million to David Benson, capital markets chief; $2.2 million to David Hisey, deputy chief financial officer; $3 million to Timothy Mayopoulos, general counsel; and $2.8 million to Kenneth Phelan, chief risk officer.

At Freddie, annual compensation will total as much as $4.5 million for Bruce Witherell, chief operating officer; $3.5 million for Ross Kari, chief financial officer; $2.8 million for Robert Bostrom, general counsel; and $2.7 million for Paul George, head of human resources.

The pay deals also drew fire. With unemployment near 10%, "to be handing out $6 million bonuses to essentially federal employees is unconscionable," said Rep. Jeb Hensarling, a Texas Republican who is a frequent critic of Fannie and Freddie.

Not bad for a pair of enterprises at the rim of a financial black hole; but of course, let's not forget these are government-sponsored enterprises, and that makes all the difference. (I assume Fannie and Freddie will also be immune to any executive pay caps imposed by the One the Radicals Have Been Waiting For, in his relentless quest to promote "Robin Hood Capitalism," as Schweizer puts it in Architects of Ruin. After all, Fannie and Freddie are doing "a heck of a job" saving the world from the free market; their execs should be "adequately" compensated.)

What guesses can we hazard about the conclusions that will be drawn over the next few months by Chuck Schumer, Chris Dodd (D-CT, 100%), Barney Frank (D-MA, 100%), Barack Obama, Ben Bernanke, and others running (or ruining) our economy?

  • The fix for Fannie and Freddie having lent too much money to people with too little to pay it back -- is to lend even more to the same people, so they can buy even bigger houses that they can even less afford.
  • The proper response to radical socialists ramming fantastical, ideologically based regulation though Congress is to encourage them to redouble their efforts.
  • The solution to diminished wealth creation due to warping the free-market system into "state capitalism" is to finish the job and dive whole hog into the liberal fascism cesspool.
  • And the remedial corrective for those who should have been overseeing our financial system, from regulators like Bernanke to journalists at the New York Times and the Washington Post, but who turned the other eye for the most part... is for our overseers to become full-fledged cheerleaders for the very radical policies that have brought the world's mightiest economy to its knees, so that we must beg "friends" like the People's Republic of China to bail us out.

Assuming America survives such economic ruin -- as I do assume, agreeing with Adam Smith "that there is a great deal of ruin in a nation" -- I believe the rise of the Baby Boomers to power as radical "reformers" of Capitalism will come to be seen in hindsight as one of the greatest threats the world has ever known. The "Boomer Bust" is the late twentieth, early twenty-first century echo of the rise of nakedly totalitarian socialism in the late nineteenth and early twentieth. (Much as Sauron was the echo of his master Morgoth in the Lord of the Rings trilogy.)

See? The 60s radicals will "make their mark" upon history after all!

Cross-posted on Hot Air's rogues gallery...

Hatched by Dafydd on this day, January 3, 2010, at the time of 3:27 PM

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So the allegedly smartest financial guy in the world hath spoken on the housing-finance crisis. He spake at length; if you want to readeth the entire brain-numbing speech, here it be. He spoke of the various factors (notably monetary policy) that coul... [Read More]

Tracked on January 3, 2010 3:01 PM


The following hissed in response by: Captain Ned

I've been railing against what I call the "68ers" (after Chicago and Paris in 1968) for years and people only look at me like I'm some doddering idiot. Living in Vermont probably isn't helping, as sympathetic audiences are a bit tough to find up here.

Ben is saying what he;s saying because he's up for renewal as Fed Chair. The only way to keep the job is to stroke the egos of O/Frank/Dodd, so he'll keep doing it. I just hope that if/when he is reappointed & confirmed, he remembers that the Fed is supposed to be an independent body.

The above hissed in response by: Captain Ned [TypeKey Profile Page] at January 3, 2010 3:42 PM

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