Tags: Fed | Bernanke | Hensarling | House

House Committee Thanks the Bernank

By    |   Monday, 22 July 2013 03:24 PM

On July 17, the House Financial Services Committee, chaired by Jeb Hensarling, R-Texas, took its turn to hold the first of the two presentations by Federal Reserve Chairman Ben Bernanke of the last semi-annual report on monetary policy before his term expires in January.

As would be the case the following day in the Senate, committee members from both parties thanked Bernanke for his service, but on the House side, perhaps the Democrats thanked the former Republican Chairman of the Council of Economic Advisors with more enthusiasm.

The late Robert Weintraub, a Chicago-school economist who conceived the Humphrey-Hawkins hearings while serving on the staff of former Sen. James Buckley, R-N.Y., told me that a Fed chairman, regardless of party would serve the interest of the president, again regardless of party, in the interest of the president getting re-elected and then reappointing the Fed chairman. He would have been right about the first Obama term, and would have seen Bernanke practically join the Obama campaign in 2012. However, there could be little question that Obama would appoint his own person this time around, and now there is now doubt.

Observant Americans might be embarrassed by the scene that unfolded as the hearing convened and photographers seated on the floor in front of Bernanke with their cameras nearly in his face. Presumably Bernanke would want the photographers to get their shots, in the interest of boosting the economy, but I recall hearings where the photographers were allowed a few minutes to snap and then asked to retreat to a more discreet distance.

Then the toy microphone in front of Bernanke failed. These microphones have become prevalent in Congress, as well as at agencies and think tanks. Perhaps the selling point was that they are less conspicuous and less likely to pick up stray noise than the mikes in the old newsreels that were more conspicuous but actually worked.

After a five-minute rain delay, came the travesty of opening statements, which after the first couple descended to a parade of one-minute ditties. The toy mikes cut out again near the end of the statements of both Hensarling and the ranking Democrat, Maxine Waters, D-Calif., and another five minutes was lost while she was allowed to repeat her statement.

It doesn't have to be this way. A dignified option followed in bygone days was to allow statements from the chairman, ranking member and the same from the appropriate subcommittee; nothing from the Peanut Gallery. At the Senate Banking Committe, Chairman Tim Johnson, D-S.D., allows only two speeches when the Fed chairman or Treasury Secretary testifies. That's enough.

In this spirit, it is fair to report that Hensarling began his opening statement with a gracious expression of praise for Bernanke's performance in 2008 for acting "boldly, decisively, very creatively, [as] the Fed took a number of actions that certainly staved off an even worse economic event, and for that, I believe our nation will always be grateful."

Hensarling then shifted gears and proceeded to excoriate Bernanke for expanding the Fed's balance sheet to an unprecedented extent, but showing little return for the economy and making it difficult for savers to earn the returns they need, then giving "offhand" guidance regarding the Fed's intentions for its exit from what he called untested and poorly understood of quantitative easing (QE).

He complained that the extraordinary actions of 2008 have become the ordinary policies of 2013 and blamed the Fed's guidance for recent market volatility. Quoting the late former Fed Chairman William McChesney Martin, he called for a "ruthless examination" of the Fed's record as it approaches its 100th anniversary to consider "how to improve the Fed for the next century."

Waters opened her statement by complimenting Hensarling on his praise of Bernanke, but she continued with an aggressive defense of the Fed's policies under Bernanke and she credited these policies for improving employment and home values without inflation. She pointedly called on the Fed to "continue to give the employment aspect of your dual mandate the critical attention it deserves."

In response to the views of the two senior members, I would offer several observations. First, the extraordinary measures of 2008 would not have been necessary if the Fed had done its job, both as a regulator and as steward of monetary policy. Thus, the Fed and Treasury, under a succession of presidents, fostered the excesses that led to the ongoing crisis that they now claim to be fixing.

The total ineptitude of the Dubya White House gave first former Goldman Sachs CEO Hank Paulson a free hand to bail out his former firm and the rest of Wall Street, then the incoming Obama administration the freedom to continue these policies indefinitely, on the ground that it inherited this mess.

Second, the circumstances of Chairman Martin's nearly two-decade tenure as Fed chair could hardly be more different from those of Bernanke. Martin negotiated the so-called Accord with the reluctant Truman administration that established the independence of the Fed from White House policy, whereas, regardless of how much one values this myth slash principle, Bernanke forfeited whatever was left of it, faithfully walking two steps behind Tim Geithner, the former president of the Federal Reserve Bank of New York, a competing power center to the Board of Governors in Washington, who ran the Treasury for almost all of Bernanke's term after 2008.

Geithner testified that bailing out Wall Street was the last thing he wanted to do. I contend that it had to be the next to the last thing he wanted to do, because if it were really the last thing, he would not have done it.

Finally, it remains to be seen whether the Fed will be able to withdraw from QE in the measured, three-stage manner that Bernanke outlined in his testimony. It is fairly likely that once he is gone and, let's say, Janet Yellen or someone even more dovish or "pragmatic" is installed in his place, the new chairman might decide, citing data at the time, that unwinding must be shelved until unemployment reaches 6.5 percent. Then, while this delay is in effect, financial markets might decide they've waited too long and take interest rates up in a rapid, if not disorderly, fashion.

The recent volatility is just a taste of what could happen if the Fed has to learn the hard way that it does not have control over the timetable.

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On July 17, the House Financial Services Committee, chaired by Jeb Hensarling, R-Texas, took its turn to hold the first of the two presentations by Federal Reserve Chairman Ben Bernanke of the last semi-annual report on monetary policy before his term expires in January.
Monday, 22 July 2013 03:24 PM
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