Federal Reserve

Fed Chief Bernanke: In Trouble in the Senate?

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Some Senators are wondering if Federal Reserve chief Ben Bernanke even deserves to keep his job. The ZeroHedge blog quotes a Hill account of Bernanke's potential political trouble in his reconfirmation hearings, and provides a useful list of of questions that Ben should be asked in his confirmation hearings. I don't think every one is a fair gotcha, but certainly many are. For examples:

1. The TARP Inspector General recently disclosed that the New York Federal Reserve did not believe that AIG's credit-default swap (CDS) counterparties posed a systemic financial risk. In Congressional testimony and elsewhere, you have stated repeatedly that AIG posed a systemic risk based partly on its CDS obligations [source: Bernanke's testimony to the House Financial Services Committee, 3/24/09]. Explain this apparent contradiction. What was your specific role in the decision to pay AIG's counterparties 100 cents on the dollar?

2. On May 5, 2009, in front of the Joint Economic Committee, you said the following about the unemployment rate: "Currently, we don't think it will get to 10 percent. Our current number is somewhere in the 9s" [source]. In November it hit 10.2%, and many economists predict it will go even higher. This is happening despite enormous fiscal and monetary stimulus that you previously said would help create jobs. What happened after your JEC testimony in May that caused your prediction to miss the mark?

3. It's now widely accepted that loose monetary policy is at least partly to blame for the credit bubble and subsequent crash. You played an important role in that policy. For eight straight meetings of the FOMC, from June 2003 to May 2004, you voted to keep the Fed funds rate at 1%. But transcripts of recently-released FOMC meetings show you wanted the FOMC to consider cutting rates even further. In the August 12, 2003 meeting, with the Fed already at 1%, you said:

    Despite the good news, I think it's premature to conclude that we should not consider further rate cuts, if not at this meeting then at some time in the near future depending on how the data play out. [source: transcript of FOMC meeting on 8/12/03, page 63]

How much worse would the bubble and subsequent crash have been if you had gotten your way? What do your comments in that meeting imply about your ability to correctly time the reversal of the Fed's current accommodative policy?

4. Forecasts are an important part of the Fed's work. Monetary policy by nature depends on forecasts, making predictive ability an essential part of the job description for any Fed chairman. Yet your record of predictions, including the one about unemployment in (2) above, is questionable at best. Some examples [source]:

March 28, 2007: "The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."

May 17, 2007: "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

Feb. 28, 2008, on the potential for bank failures: "Among the largest banks, the capital ratios remain good and I don't expect any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system."

June 9, 2008: "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."

July 16, 2008: Fannie Mae and Freddie Mac are "adequately capitalized" and "in no danger of failing."

Explain this pattern of terrible predictions and forecasts. What do they imply about your ability to conduct policy going forward? Is there some fatal flaw in your economic models or forecasting tools? Are you just winging it?….

9. In a scenario in which unemployment remains uncomfortably high, but the dollar continues to fall and commodities including oil and gold continue to rise, what would the Fed do? At what point do market signals take priority over hard-to-measure statistics like the output gap?…..

12. What does the surge in gold mean to you? At what price level would it begin to worry you, if it doesn't already? Does gold have any impact on the Fed's policy deliberations?

UPDATE: The set of questions quoted above did not originate at ZeroHedge where I came across them, but at the "Cunning Realist" blog.

Gold breaks $1,200 and has been above $1,000 for over a month now. My November Reason magazine feature on the rise and mainstreaming of anti-Federal Reserve thought and sentiment.

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  1. With an outstanding record like this, his confirmation by the Senate is assured. The fix is in!

    1. What is his problem of taxing the RICH? He is rich you know! Just take the money from SS and Medicare that is his solution. Send him back to Princeton! Tell the dummy to solve the unemployment problem BY RAISING INTEREST RATES

  2. I wouldn’t hold my breath on this. When it comes to the Trouble industry, Bernanke is pretty clearly a Producer, and not a Consumer.

  3. Obama will talk about how much he likes the job that Bernake has done and then the Senators will lob him a few soft balls and he’ll be reconfirmed comfortably.

    1. Benny, you’re doing a heck of a job.

  4. Only way to fix this problem is to END the FED.

    When will Reason take this position? Read the literature. Ending the fed is compatible with free minds and free markets.

    1. You’re right. The people questioning Bernanke are missing the point. It’s not whether he personally is doing a good job, it’s whether the job itself should exist in the first place. You might be able to find a better person than Bernanke, but no human being will ever be able to do a good job at running the Fed. We need to dismantle the whole system, and the sooner the better.

  5. “How long ago was it, Chairman, when you had your brain removed and replaced with rat droppings?”

    “Do you now, or have you ever, stuffed a zucchini in your underwear?”

    “Are you gay?”

    “Following up on the previous question: seriously, are you gay?”

  6. Gay has nothing to do with it

    Bottom line – abolish the Fed.

    1. Neither do zucchini and cranial rat droppings. PC ain’t my style.

  7. Of course, Bernanke getting canned would just mean another clown — perhaps a more dangerous one — takes over. The devil you know, etc.

  8. The Federal Reserve is the rectum from which the bile of big government tyranny spews.

    EWW. Sorry about that. That was nasty.

    But seriously. The Fed is about as consistent with free markets as federally subsidized monkey farming.

    1. Bile moves the other way brother.

      Let’s just stick with feces.

  9. He’s just doing what his Illuminati masters are telling him to do.

  10. Why in the world would the Democrats have any problems with Bernanke?

    His 0% Interest Rate.. print all the fucking money in the world that you want.. bail out the entire fucking world with worthless dollars is right up their nothing-is-real ally.

    It’s pretty hard to destroy Capitalism when the Fed Chairman actually, like, defends the Currency.

    Re-confirmation Guaranteed!

  11. “Heeeey, Ben! Who wonna second world war, you so smart?”

    Seriously: Dr. Bernanke, why since the creation of the Federal Reserve has the dollar lost so much of its value?

  12. Better question:

    The TARP Inspector General recently disclosed that the New York Federal Reserve under Timothy Geithner did not believe that AIG’s credit-default swap (CDS) counterparties posed a systemic financial risk. So who’s the idiot? You or Geithner

    1. No reason it can’t be both, RC. It fact, it appears more and more that “both of them” is the correct answer.

  13. Gold. Clearly the bubble du jour.

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