FacebookTwitterRedditEmail

Bernanke’s Bad Money

To combat the financial crisis set off by the collapse of the housing bubble, the Federal Reserve Board has lent out more than $2 trillion through various special lending facilities. While the Fed discloses aggregate information on the loans made through each of the facilities, it will not disclose how much money it lent to specific banks or under what terms. By contrast, the Treasury puts this information about its $700 billion TARP bailout up on its website.

Partly in response to this huge increase in the Fed’s power (its secret lending is equal to two-thirds of the federal budget), more than 270 representatives in Congress have co-sponsored a bill that would have the Government Accountability Office audit the Fed. In principle, this audit would examine the Fed’s loans and report back to the relevant congressional committees, which could decide to make this information public.

Most people might consider it perfectly reasonable to have Congress’s auditing arm review what the Fed has done with $2 trillion of the taxpayer’s money to ensure that everything is proper. After all, we wouldn’t let other government agencies spend one millionth of this amount ($2 million) without some sort of record that could be verified.

However, the Fed and its chairman Ben Bernanke do not see it this way. Mr. Bernanke warned Congress last month that such an audit could jeopardize the Fed’s independence, which in turn: “could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability.”

Okay, Ben Bernanke warned Congress that if the Fed had less independence, it could lead to “reduced economic and financial stability.” We have just been through a year in which the “Great Depression” was a more frequent topic of conversations that the Superbowl, World Series, and Oscars combined. In fact, Mr. Bernanke is given credit for preventing another Great Depression. The Congressional Budget Office is now projecting that unemployment will average in the double digits through 2010 and it will not be until 2014 that the unemployment rate falls back to its normal level.

Did Mr. Bernanke forget about the current state of the economy and the financial collapse that he was frantically trying to head off when he warned Congress that if the Fed were less independent, it could lead to “reduced economic and financial stability”? After all, how do you get less economic and financial stability than the Great Depression?

This is not the first time when Ben Bernanke’s memory appears to have failed him when we was addressing Congress about an important policy issue. Last September, when he was telling Congress that the economy would collapse if it did not approve the $700 billion TARP bailout, he warned that the commercial paper market was shutting down.

This was hugely important because most major companies rely on selling commercial paper to meet their payrolls and pay other routine bills. If they could not sell commercial paper, then millions of people would soon be laid off and the economy would literally collapse.

What Mr. Bernanke apparently forgot to tell Congress back then is that the Fed has the authority to directly buy commercial paper from financial and non-financial companies. In other words, the Fed has the power to prevent the sort of economic collapse that Bernanke warned would happen if Congress did not quickly approve the TARP. In fact, Bernanke announced that the Fed would create a special lending facility to buy commercial paper the weekend after Congress voted to approve the TARP.

Mr. Bernanke has taken extraordinary measures in the last year that have been successful in preventing a much worse downturn. Nonetheless, Congress should not forget that it was incredible mismanagement by Bernanke and his predecessor Alan Greenspan that brought about this disaster in the first place. If Mr. Bernanke is approved for another term, as seems likely, Congress should not be hesitant to use more oversight than it did in past years. And it certainly should not let the Fed send $2 trillion out the door without a verifiable paper trail.

Given the track record for Mr. Bernanke’s version of bank independence, it is hard to imagine that greater congressional oversight would lead to worse outcomes.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

 

 

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

July 02, 2020
Stan Cox
It’s Not Just Meat: All Farm and Food Workers Are in Peril
Marshall Auerback
We Won’t Have a Truly Global Economy Until People Start Taxing It That Way
John O'Kane
Progressive Pulses Among the Ruins of Riot
John Feffer
Time to Rethink the US-ROK Alliance
Binoy Kampmark
The Kafkaesque Imperium: Julian Assange and the Second Superseding Indictment
Kim C. Domenico
Disbelief, Belief and the Perils of Pandemic Re-opening
George Ochenski
Trump’s Contagion Road Show Heads West
Julian Vigo
A Call for Radical Humanism: The Left Needs to Return to Class Analyses of Power
Haydar Khan
The Great Wall of Wokeness
Jeremy Kuzmarov
Biden Compared Indicted War Criminal to “George Washington”
Howard Lisnoff
Try to Get Published; Try to Be Heard
Rebecca Gordon
Fear of Falling: Can Making Black Lives Matter Rescue a Failing State?
Gary Leupp
Traditional Russophobia in an Unusual Election Year
John Kendall Hawkins
Biopic? Shirley, You Jest
Gary Macfarlane – Mike Garrity
Conservation Groups Sue Trump Administration to Halt Massive Logging in Steelhead Critical Habitat
Quincy Saul
Who Made the Plague?
July 01, 2020
Melvin Goodman
De-Militarizing the United States
Kenneth Surin
UK’s Labour Leader Sacks the Most Left-Wing Member of His Shadow Cabinet
Ruth Fowler
Then as Farce: the Commodification of Black Lives Matter
Kent Paterson
Crisis After Crisis on the Border
Rick Baum
The Pandemic and Wealth Inequality
Michael Welton
“Into the World of Bad Spirits”: Slavery and Plantation Culture
James W. Carden
The Return of the Anti-Antiwar Left
Dan Wakefield
Charles Webb Enters Heaven
Julian Vigo
A Call for Radical Humanism: the Left Needs to Return to Class Analyses of Power
Binoy Kampmark
A Trendy Rage: Boycotting Facebook and the Stop Hate for Profit Campaign
Michael D. Knox – Linda Pentz Gunter
As Monuments to War Generals Come Down, Let’s Replace Them with Monuments to Peace
Cesar Chelala
Attorney General William Barr’s Insomnia
Raphael Tsavkko Garcia
Is Bolsonaro Plotting a Self-Coup?
Mandy Smithberger
COVID-19 Means Good Times for the Pentagon
Joe Emersberger
On Pablo Celi, Ecuador’s super shady “Auditor General”
June 30, 2020
James Bovard
Bill Clinton’s Serbian War Atrocities Exposed in New Indictment
Bianca Sierra Wolff – Lisa Knox
ICE is Leaving Immigrants to Die in Detention, and Retaliating When They Speak Out
Don Fitz
Should NYC’s Wall Street Be Renamed “Eric Garner St.?”
Chris Hedges
My Student Comes Home
Richard C. Gross
Obamacare Vulnerable
John Feffer
The Hatchet Man’s Tale: Why Bolton Matters
Thomas Knapp
Afghanistan Bounties: Pot, Meet Kettle (and Turn Off the Stove!)
Charles Reitz
Anti-Racist Engagement in the Kansas Free State Struggle, 1854-64: Horace Greeley, German 48-ers, and the Civil War Journalism of Karl Marx, 1861-62
Howard Lisnoff
A Student Murdered in Cold Blood and a Kids’ Bike Ride Through Queens, New York
David Swanson
Hey Congress, Move the Money
Aparna Karthikeyan
Memories of Pox, Plague, and Pandemics in Tamil Nadu
John Kendall Hawkins
Democracy Chasers in a Badly Injured Nation
Binoy Kampmark
Wasteful, Secret and Vicious: the Absurd Prosecution of Witness K and Bernard Collaery
Norman Solomon
Ro Khanna and Barbara Lee Could Defy “the Madness of Militarism” as Co-Chairs of the Democratic Convention’s Biggest Delegation
FacebookTwitterRedditEmail