The Senate’s vote for the Fed’s Chairman will be viewed as a crucial test for who stands with Wall Street and who stands with Main Street.
After some slightly encouraging rumblings in the contrary direction, it appears that the Senate is poised to confirm Ben Bernanke to a second term as Chairman of the Federal Reserve. Certain senators may be putting their jobs on the line when they do, however.
More and more, Main Street wants to know who stands with it. Mr. Bernanke is not seen as one of those figures. Having been part of the Greenspan-era bubble and then, even as Fed chairman himself, still blind to the dark clouds of financial crisis that were forming, his response was to shove an incomprehensible amount of money and support at Wall Street and the major banks. But he failed to come clean on the Fed’s dealings with the financial institutions that have been taking advantage of these generous programs and, in fact, has aggressively moved to prevent transparency and public scrutiny of them in a landmark case involving Bloomberg News.
Mr. Bernanke’s role in the AIG bailout, and in permitting the secret (at the time) payment of billions to other banks, including Goldman Sachs, is still not fully explained. In the nearly two years since this crisis was apparent and more than 12 months since Lehman Brothers was allowed to collapse, the Fed under Mr. Bernanke has failed to conduct any meaningful internal review as to what went wrong, what signals were missed and what steps the Fed needs to take to address them. At the very least, a vote on confirmation would seem premature until all the work by TARP’s inspector general, Neil Barofsky, is completed, including questions about AIG’s Fed-approved counterparty payments.
But Mr. Bernanke’s statement to legislators that he did as much as possible to prevent paying 100 cents on the dollar to Goldman is revealing on its face. Can you imagine the legendary Arthur F. Burns, who ran the Fed under President John F. Kennedy, or William McChesney Martin Jr., who served under a record five presidents, ever being blown off by some bankers who did not want to cooperate at a time of national crisis? Or is it a matter that Mr. Bernanke has grown so close to the big banks and their Wall Street cousins over the seven years he has been at the Fed that he just can’t say no to them? There is a reason why Wall Street itself is voting overwhelmingly in support of Mr. Bernanke’s second term, and it’s not because it thinks he’ll be great for Main Street.
Mr. Bernanke is a little like the $700 billion TARP legislation which he co-authored (with then Treasury Secretary Henry Paulson) in the fall of 2008. In a voice trembling with urgency, he told Congress that if it were not passed and implemented immediately, the entire economy would likely collapse. But the TARP was never used for its intended purpose. It did not address the main problems, as we predicted at the time. No toxic assets were ever bought up with it. It rattled many in Congress who thought they had been sold a bill of goods. And more than a year later, a couple of hundred billion of it has not been spent and still many additional costly initiatives were required to get the economy moving.
Has the reconfirmation of Ben Bernanke itself become something of a TARP, where what is being sold is not quite what is needed and will not be used for the intended purpose? Will the world really end if Mr. Bernanke is not reappointed? Or is there more risk of the opposite happening because he will miss other disasters that are brewing, just as he missed the early signs of the current one. Worse, will his cozy relationship with Wall Street end with a hideous price tag that drops like a rock at the doors of Main Street? Already, trillions in liquidity have been unleashed and the Fed’s balance sheet – a key measure of its lending to the financial system – has ballooned into the record trillions.
A clean break from the past of tolerated bubbles, missed signals and overly generous policies directed at the players who caused the problems in the first place is what is needed. Mr. Bernanke’s priorities, loyalties and convenient evasions have made him a poster boy for the discontent of Main Street and a part of what drives the forces of turbo populism.
Four years from now, Mr. Bernanke may very well be in office. But will President Obama and the senators who vote for confirmation and against the perceived interests of Main Street? It’s a role of the dice that should cause wise lawmakers to think twice.