Ben Bernanke's Huge Mistake About The Crisis Will Screw Us All

The grimmest news of the new year has to be the fact that Fed chairman Ben Bernanke still has no clue about the causes of our financial crisis or what measures need to be undertaken to avoid another crisis.

Bernanke gave a speech yesterday at the Annual Meeting of the American Economic Association that did two things. First, he exonerated Alan Greenapan’s low-interest rates from blame for the housing bubble, arguing that the housing bubble began before the Fed pushed interest rates low and that the size of the bubble cannot really be explained by monetary policy alone.

Perhaps more importantly, however, Bernanke makes the extraordinary claim that regulatory and supervisory policies would have been effective means of addressing the run up in housing prices. What makes this claim so extraordinary is that it completely ignores the fact that regulatory and supervisory policies weren’t just ineffective at popping the housing bubble—they were actively fueling it.

“Clearly, for lenders and borrowers focused on minimizing the initial payment, the choice of mortgage type was far more important than the level of short-term interest rates,” Bernanke said.

Perhaps some people just can’t stand prosperity, they go out of their ways to make sure there is plenty of adversity to go around. Congress is in a peculiar position when it come to passing out misery - they don’t even have to think twice about the effects of the edifice they are raising. They shall never be personally affected by the adversities.

But adversities for the common folk, that is just retribution for their trusting ways and gentle good nature. The laws are crafted as a response to the law-breakers out there, but only apply to the law-abiding, who because of the construction of the law, soon run afoul of the law in some manmer or another.

With the profusion of laws and statutes, almost everybody is at some time breaking one or another of this collection of often contradictory and vaguely-written clauses gathered into the law “code”, and consequently, state’s attorneys and judges have considerable latitude in whom and how they prosecute and adjudicate.

Bernie Madoff and Ken Lay both knew of this wide latitude in the application of the law, and even though they were on the radar for some time, they were prosecuted only when it seemed to be an opportune time - embarrass the political party in power at the time.

Now that the government is involved in a MUCH broader Ponzi scheme of their own, hoping the sheeple won’t catch onto the HUGE inflationary bubble that has been pushed into the economy, while not drawing off the toxic financial dealings that created it (overalued and non-performing real estate loans), but just keep shuffling them through the churn of renewed short-term loans. That is what the T-bills are, short-term loans place at relatively low interest rate return, in hopes the coming collapse may be staved off another day.

Kind of like watching a Japanese game show, except the consequences of failure are much greater than getting dunked in the muddy pool.

This article goes on at length about something the author calls "regulatory failure," and about Bernanke's apparent failure to understand how regulators didn't just allow the housing crisis, they were active participants in creating it.

So far as Bernanke is concerned, let's remember that he's still facing a Senate vote on his re-appointment as Fed Chairman. He's not going to say anything that would upset the Democrat majority. He's going to be gung-ho for more regulation, more regulators, more power for Chris Dodd, and so on. It'll be nothing but, "Banks bad, government good" from Bernanke.

So ignore his views. He's saying what his masters want him to say.

My problem with this article is the way the author calls what happened regulatory "failure." The hidden assumption in that formulation is that 'regulation' is by nature benign, such that if anything bad happened, the 'regulation' must have failed.

Not so.

What happened in the housing crisis is not the fault of regulatory failure, it was the result of allowing economic decisionmaking to fall under the purview of politicians. That happened precisely because of the regulatory agencies. The agencies were the mechanism by which the politicians forced their meddling into the system. The bankers knew full well that they were making loans to people who could never (unless they got really lucky) pay them off. Had the decision been one of simple dollars and cents, the mortgage application would have come back stamped "No way." The reason these mortgages were approved were that (a) Barney Frank and Chris Dodd were sitting on the banks, telling them to make loans to the nice poor people (or face Regulatory Hell), and (b) Barney Frank and Chris Dodd operated the Fannie and Freddie Show, which would instantly buy the known-bad mortgage from the bank and make it disappear into the ether... leaving the bank with its cash back so it could make another bad loan to another person who was of a group favored by Barney and Chris. Round and round it went, until entire neighborhoods were full of people who were over their heads in housing payments, and the ether was full of "mortgage-backed securities" issued by Fannie and Freddie (arms of the Federal Government, don't you know, what could be safer) that were fast becoming worthless.

That's not regulatory failure. It's giving government too big a seat at the banking table. That cannot be done — no matter which party is in power — without bending hard business realities to the will of politicians... who will always be driven by short-term, feel-good considerations that will sound "nice" in the press.

It makes a nice TV show, but as we've now learned The Hard Way, it's no way to decide who should get a home loan.

Keep the politicians out of business decisionmaking. If politicians and their bureaucrats running business were a good idea, the Soviet Union would be the sole superpower. It's not.

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