Ben Bernanke – Bubble Buster?

I’m not too encouraged by statements from Federal Reserve Chairman Ben Bernanke when it comes to fixing our economy and ensuring speculative bubbles don’t wreak havoc like they recently did.

In Fed Missed This Bubble. Will it See a New One? NY Times, 1-5-10, Bernanke is quoted from 2005, when he was a Bush administration official, as saying a housing bubble was “a pretty unlikely possibility.” Two years later, after becoming the Fed chairman, the Times article notes he said that Fed officials “do not expect significant spillovers from the subprime market to the rest of the economy.”

And this guy is running the Federal Reserve?

The Times piece points out how houses had become overvalued. Of course they did. With the sensible Glass-Steagall law no longer on the books investment banks were allowed to treat mortgages like any other security. Wall Street bet on these new mortgage-backed securities big-time, with disastrous results.

In some areas, according to the Times article, “buyers were spending twice as much on their monthly mortgage payment as they would have spent renting a similar house, without even considering the down payment.”

Plenty of people, including journalists, government officials and economists, knew about this problem. Yet the government did nothing, until it was too late. And to get a better understanding of how speculative bubbles are created, and who benefits from them, see Inside The Great American Bubble Machine by Matt Taibbi, Rolling Stone, 7-2-09.

In Bernanke warns about creating new bubbles, msnbc.com, 1-4-10, “Bernanke said the lesson learned from the crisis isn’t that regulation is ineffective but that regulation “must be better and smarter.”

Note to Washington, DC: put Glass-Steagall back on the books! Passed in the wake of the Great Depression this Act forced banks to separate their commercial and consumer activities.

For an excellent account of why this law was needed see The Value of ‘Other People’s Money’ NY Times 2-6-09. This Op-Ed piece, written by Melvin I. Urofsky, a professor at Virginia Commonwealth University and the author of Louis D. Brandeis: A Life, notes how Progressive-era reformer and Supreme Court Judge Brandeis “described a dangerous combination of avarice, lack of accountability and poor oversight in (his book) ‘Other People’s Money, and How the Bankers Use It,’ one of the best-known exposés of the Progressive era.”

The book was published in 1914. Professor Urofsky writes that Brandeis “believed that it was one thing for an individual to put up capital in risky ventures, playing to win but prepared for failure. But he saw the bankers of his time dodging failure by manipulating the marketplace at the expense of smaller entrepreneurs and consumers.”

Sound familiar? According to some great radio reporting from NPR (go to This American Life and listen to The Giant Pool of Money) stockbrokers were calling up mortgage brokers and saying, “do you have any more fixed rate?” meaning do you have any more fixed rate mortgages we can buy from you. The mortgage brokers, who were getting a second commission on this sale to Wall Street, were happy to oblige.

The lending banks certainly didn’t care about this transaction because they no longer held on to the loan for the duration of its term. They held on to it for a few months before it was sold to Wall Street.

None of this was allowed during the 66 years Glass-Steagall was on the books. And America certainly didn’t become a socialist country because of this law. On the contrary, we thrived.

Regarding regulation and going back to the lessons of 1914 Professor Urofsky points out “For Brandeis, regulation was not supposed to be a restraint on innovation or the entrepreneurial spirit, but rather a check on unbridled greed. He believed in a free market, but one in which the government enforced rules of fair competition so that the most talented could succeed. Clear rules would help ensure that business was conducted fairly and openly.”

We certainly need clear, strong rules if we’re going to fix our economy. As for Glass-Steagall’s fate, Wall Street didn’t like it so the financial industry spent $350 million on a bribery (oops, I mean “lobbying”) campaign to get it repealed (for more on this see How $350 Million Destroyed Our Economy, cosmicpoaching.com, 2-23-09.)

Congress tossed out Glass-Steagall in 1999. If our legislators had any guts and want to do something for the good of the country, as opposed to for only their campaign contributors, a new Glass-Steagall should be enacted immediately.

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