Catastrophe seems to have a more forgiving master in the Senate banking committee than in the pages of history. The captain of the Titanic was not given another chance at the wheel. And unlike Mr. Bernanke, he had the decency to hit an iceberg only once.
The Senate banking committee voted 16 to 7 today to confirm Ben S. Bernanke for a second term as chairman of the U.S. Federal Reserve System. It is unfortunate for E.J. Smith that he went down with the Titanic in 1912, because, if you follow the committee’s logic, it would have reappointed him to captain another ship if it had had the opportunity.
Mr. Bernanke was part of the crew who allowed the housing and liquidity bubbles to build in the first part of the 21st century. As Fed chief, he missed the early warning signs of the impending financial collision completely, predicting that any problems would be contained and not spill over to the real economy. Watertight compartments did not work for Captain Smith, either. Only a few months ago, Mr. Bernanke told Congress that unemployment would not reach 10 percent in the U.S. He was an early supporter of the TARP, the nearly trillion-dollar fund which he and others sold to Congress on the basis that its quick passage was vital to the survival of the economy. Turns out it was not really about toxic assets, which the Fed never bought, but about propping up the capital of major Wall Street players -an idea that already skeptical lawmakers likely never would have bought. Captain Smith was known to be of the view that his ship was too big to sink. His modern financial counterpart has given new meaning to the concept that certain institutions are too big to fail. It is worth pondering whether the philosophy, practices and vision demonstrated by Mr. Bernanke will end in a similar calamitous outcome.
At a time when opaqueness and lack of openness are widely regarded as being forceful contributors to the near economic collapse of Wall Street, Mr. Bernanke has adopted that model himself in the Fed’s anonymous transactions at the discount window and its handling of bank collateral, which is the original cash-for-clunkers program. He was quite happy to have taxpayers kept in the dark about the AIG bailout, which fast-tracked added billions into the coffers of Goldman Sachs and other banks. After the details became public, he offered the implausible excuse that it was not possible to negotiate a better deal and make Goldman take a “haircut.” The world’s most powerful central banker can’t take on Goldman, but Mr. Bernanke tells the banking committee he is up to taking on a bigger role as the nation’s financial super regulator.
There is a widely held view in some circles, especially in those given to the folly of excessive public spending (which view is oddly shared by those on Wall Street and in corporate America who are driven by the vice of excessive compensation) that the Fed under its current chairman has navigated recent choppy financial waters with skill and courage. In their view, Mr. Bernanke saved the banks, brought the economy back from the brink of a depression and performed a number of other miracles that place him somewhere between Albert Einstein and Mother Teresa–Wall Street version. Perhaps these are less the outcome of brilliance and wonder than they are of a Fed printing press capable of producing unlimited dollars and support for a spending and debt binge that soars into cosmic frontiers where no Fed has dared to go before. In that imaginary world, anything is possible–for a while.
Wall Street demanded, and Mr. Bernanke dutifully provided, a zero Fed rate that is the banking community’s equivalent of billion dollar bills pouring out of helicopters. And they are making billions more from it. New York State officials announced today that Wall Street is poised to report record profits for the first three quarters of 2009. The $50 billion in profits is almost two-and-a-half times the previous 2000 record (another year associated with a bubble). Bonuses will be 40 percent higher than last year. Such numbers are a direct result of the Fed’s easy money policy. It is not surprising that it can also buy untold support for the chairman who made it possible.
Question for the Senate: How exactly do you go from being on the edge of the worst Wall Street crisis since the Great Depression to record bank profits in little more than a year? Could it have happened if Mr. Bernanke had not supplied a very expensive taxpayer-bought getaway car?
The Fed and Wall Street have become an endlessly accommodating club of insiders that Mr. Bernanke has shown he is ill-disposed to disturb, especially after his collision of miscalculation last year with that other iceberg known as Lehman Brothers. He has been willing to enter into the policy arena and indicate to Congress his disapproval of the House provision authored by Congressman Ron Paul for regular, though delayed, audits of the Fed’s monetary policy, but he has offered not a word of criticism over the New York’s Fed’s governance, for instance, which functions as a self-perpetuating clique of Wall Street bankers electing their own in furtherance of their own interests. Another well-regarded champion of current financial reform in the Obama administration, under a President whom we admired and supported even before his nomination, seems to share the same view. Treasury Secretary Timothy F. Geithner was president of the New York Federal Reserve Bank for several years prior to assuming his current duties. There is no indication that he was ever troubled by the singular Wall Street view that the New York Fed personified, which accounts at least in part for the economic devastation that has ensued under its supervision over the past few years.
It is likely that the full Senate, except for a handful of members on both sides of the political spectrum, will also vote to confirm Mr. Bernanke. Whether members of the Senate will be around when the U.S. economy collides with the mountain of inflation and another Fed-induced debt bubble that are advancing toward them, and whether the Fed under Mr. Bernanke will even see the products of its myopic policies as they approach, is uncertain.
What is clear is that catastrophe seems to have a more forgiving master in the U.S. Senate than in the pages of history. The captain of the Titanic was not given another chance at the wheel. And unlike Mr. Bernanke, he had the decency to hit an iceberg only once.
Freedom, in either its political or economic appearance, has never been a lasting guest in the American home when it was merely taken for granted.
The celebration of Thanksgiving in America is rooted, more than anything, in the blessing of freedom and opportunity. Those were the hallmarks that beckoned the first settlers to the far off shores of the new England. They are what is celebrated in the uniquely American way each year at this time.
Through evolution and revolution, titanic wars and epic financial upheavals, America has come to define ideas like a free market, individual choice and accountability among those who exercise power – whether in the economic arena or in the political. In many ways, these principles have become a model for much of the world. But their ascent has not been without cost. And the need to defend these values has, time and again, come with a painful price tag.
As America contemplates its blessings this Thanksgiving, it is timely for it to consider whether it serves the cause of political freedom by propping up corrupt regimes, such as the one that rules Afghanistan today, where, right now, thousands of U.S., Canadian, British and other NATO military personnel are placing their lives on the line, and where so many have paid the ultimate price. It is also wise to consider whether the idea of free market capitalism is well served by the constant enrichment of the regime in China, which promotes not a capitalism which extols individual rights and freedom of choice, but an authoritarian capitalism based on secrecy, tyranny and force. This system was well illustrated earlier this month when President Barack Obama visited Beijing and where his “media conference” was not permitted to see a single question asked. That is the way in China; it is not a model America looks good in adopting.
It is also time to ponder whether America is well-served by its financial system, which, after blundering into the worst crisis since the Great Depression and needing a head-spinning succession of taxpayer bailouts (with perhaps more to come), is rewarding itself with billions in bonuses while millions of Americans are losing their jobs, their homes and their dreams. Then there is the Federal Reserve system, which appears more and more to view its role as pushing out trillions to keep Wall Street happy, while Main Street is left to cope under an almost unfathomable mountain of debt and a coming gale of inflation from which there will be no shelter. Far from preserving the freedom of Americans in recent months, these institutions seem increasingly to have made them hostages to profligacy and misjudgment.
From the battered Pilgrims at Plymouth Rock and the courageous Rangers, Marines and service personnel in Iraq and Afghanistan to a struggling middle class and the steadily vanishing members of the Greatest Generation too often left in poverty and fear, Thanksgiving is a lunch that has never come free. And freedom has never been a lasting guest in the American home when it was merely taken for granted.
One of the dangers of excessive pay is that it tempts CEOs to think that maybe they really are god-like superheroes. But few have actually boasted about the role like Goldman Sachs’ s Lloyd Blankfein.
It has been a consistent view of these pages, and one much longer voiced by its author over some two decades, that executive compensation poses a number of systemic risks to companies, to the institution of capitalism and to society generally. One of those risks, the effects of which is being experienced in the economic slowdown today, is that stratospheric compensation tends to distort how CEOs view the world and tempts them to venture into unwise and perilous territory (see, for instance, 40-to-1 debt leverage; unbooked credit default swaps and subprime mortgages). Some are inclined to believe that they truly are the god-like superheroes they would have to be in order to justify pay levels that swell into the high tens of millions on a regular basis. Now, we have additional proof for our theory.
Earlier this week, the Times of London reported Goldman Sachs CEO Lloyd Blankfein, whose compensation in 2007 amounted to more than $70 million, as saying that he was doing “God’s work.” Goldman has always been filled with heavy-hitters who go on to exercise considerable sway in government (see Henry M. Paulson Jr.). It seems the influence has taken on a decidedly out-of-the-beltway, even out-of-this earth, tone.
It is difficult enough for Goldman to justify the compensation it regularly doles out. To add to that PR nightmare by taking on the role of an emissary from God may prove to be more than even this fabled company can pull off. Such talk only serves to divide Wall Street from Main Street further at the very time when public confidence in America’s financial institutions, and respect for its captains, still remains fragile.
Paying millions to a CEO like Mr. Blankfein, or any number of his contemporaries, can get you, well, a very highly paid CEO. But can it get you a leader who personifies both common sense and good judgment and is able to avoid making stupid statements that cause him and his company to be the laughing stock of late-night comedians and op-ed page commentators? That is the question, rather less for heaven than for earth, where the generous American taxpayer, and not Divine providence, is most responsible for placing Goldman Sachs, and the Wall Street economy it depends upon for its success, back on track.
The world has become accustomed to the idea of an October Surprise. It has happened in politics, in theaters of war and in the economy (see October 1929). But rarely has this phenomenon had the courtesy to actually appear on October 1st, on the dot. That happened on Wall Street today (and on Bay Street in Toronto), where, in the one case, the Dow slipped by more than 200 points, and in the other the TSX plunged by over 300.
It has become common among some strident analysts to declare the recession over and the prospect of a Dow at 12,000, and then at 14,000, easily within reach. Others, and we include ourselves in this camp, have been more skeptical. If we really had the worst recession since the Great Depression, the idea of equity markets so quickly sprinting back to the heights they reached during the subprime bubble seems perplexing. It is a little like someone suffering a massive heart attack and then expecting to win the Boston Marathon 18 months later. On the other hand, if the recession was overly hyped and not really as bad as most of us had feared, the unprecedented torrent of Fed cash and zero interest rates promises to unleash a terrible inflationary toll down the road. Neither scenario seems to be giving much confidence to investors or to the consuming public. And confidence is still the most needed ingredient in any credible plan for economic recovery.
The lesson from today’s surprise is that there is still no end of experts who are happy to be generous with other people’s money – and are determined that neither common sense nor the laws of physics will prevent them from resuming their party and the over-sized compensation that feeds it. They are the risk-oblivious, reality-blind Pied Pipers of their own self-consuming Gilded Age who led us to the brink of the abyss that was so frightening last October. Why would we think they suddenly know the way back to stability this October?
Even before the current crisis, the Fed was a powerful institution with few rivals for its Kremlin-like curtain of secrecy. Now, it seems fated to acquire even more sweeping powers, with only a few followers of Jeffersonian ideals in Congress seemingly interested or capable of questioning that move.
It is widely held that some public functions are so important that they must operate at arm’s-length from the influences of government and party politics. But, generally, the arm needs to be connected to a body that has its feet planted firmly on the ground. When it comes to the Federal Reserve Board, this anatomical connection is not entirely clear.
Exhibit A (as famed screenwriter Rod Serling used to say about scary things to come) is the apparent rejection by the Fed of a Treasury recommended review of the central bank’s structure and governance. These pages have been advocating that for well over a year, and long before it was proposed that the Fed take on even more sweeping powers.
Exhibit B is the news that the Fed will be given a lead role in overseeing pay packages at banks and in prohibiting compensation schemes that encourage inappropriate levels of risk. But the Fed wants the oversight to come in the form of the ultra opaque bank examination relationship it has with America’s financial institutions, which would effectively shield decisions from public scrutiny.
From its handling of the discount window and details about which banks and institutions are knocking on it to specifics about the Bear Stearns “collateral” it bought up, not to mention its role in the AIG bailout and the billions in payouts it approved to make good on credit default swaps with institutions like Goldman Sachs, the Fed is, and prefers to be, a creature of the shadows of cozy-club decision-making and not of the sunlight that affords transparent scrutiny. It operates in a world that hangs on its every word, yet that word is often issued by fiat, with little consideration shown to notions of public accountability. What banks and Wall Street want, however, is often a different matter. We know little about where the lives of Wall Street titans and Fed governors intersect. But if it is anything like what happens at the New York Fed, as we have noted before, where Wall Street titans are that institution’s governors, there is reason for Main Street to be worried.
As it has handled the crisis of the past year or so –the crisis it never saw coming– the Fed has taken interest rates to zero (for banks; not consumers, where credit card rates are proportionally higher than at any time in human history), smashed open the dams of liquidity, and created a Fed cash-for-clunkers program for broken-down financial assets that has no precedent in the annals of economic thought. In doing so, it has created an artificial market from which Wall Street is the most significant beneficiary, even though it was the principal source of the problems. Its moves to provide everything Wall Street wanted have permitted bonuses and huge pay days to be resumed, with barely an interruption. Outside Wall Street, job losses continue to mount and Main Street still awaits the arrival of the famous Fed-promised trickle-down economy.
Yet for all its power and soon-to-be-added authority, it is by no means clear that the Fed possesses any better vision to see another coming storm down the road, especially one of its own concoction from a combination of zero-interest, swirling liquidity, monetized debt and a floundering U.S. dollar. It is debatable whether it possesses the moral clarity, either. The fact that it was in the room and permitted the outrageous compensation decisions at AIG, and allowed billions to be passed on to other institutions in what could not be a more classic redistribution of wealth had it originated from Moscow in the 1950s, gives reason to doubt the Fed’s capacity to act in any role whatever when it comes to deciding compensation issues.
Even before the current crisis, the Fed was a powerful institution with few rivals for its Kremlin-like curtain of secrecy that cannot be questioned. With the Administration’s package of sweeping financial reforms, the Fed is taking on the trappings, along with the arrogance and the influence, of a fourth branch of government, with only a few followers of Jeffersonian ideals in Congress seemingly interested or capable of questioning that move. This is an institution, like the very bodies it regulates, where the culture needs to change dramatically; governance reforms are an important step in achieving that goal.
We think it would be a most unwise turn in public policy to seek to solve one problem, namely the risk-oblivious and compensation-obsessed Wall Street that produced the worst economic crisis since the 1930s, by creating a transparency- oblivious, secrecy-obsessed Fed with more power to shape the world as it sees it. Its sights, as we have observed before and from these recent examples, rarely extend beyond a few blocks in lower Manhattan.
There is much discussion about whether anything has changed in the culture of Wall Street in this period. Maybe it has, or maybe it hasn’t. But at least in Judge Jed Rakoff’s Manhattan courtroom today, something undeniably did.
Common sense received a well-deserved nod today in a landmark ruling from U.S. District Judge Jed S. Rakoff. The judge rejected the overly cozy settlement struck between the Securities and Exchange Commission and Bank of America. In making his ruling, he expressed skepticism that a public agency should allow shareholder money to be used to shield B of A’s management from more rigorous investigation over the Bank’s takeover of Merrill Lynch. The move was stunning in its departure from the way the courts normally handle SEC settlements.
As the judge astutely noted:
The S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger, and the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators…. It is quite something else for the very management that is accused of having lied to its shareholders to determine how much of those victims’ money should be used to make the case against the management go away.
As we said about this case here:
The settlement process between the SEC and securities issuers is part of the old way of doing business involving weak oversight and overly permissive regulation that helped to create the recent market debacle. Far from spurring accountability and transparency, which is generally regarded as a necessary part of financial reform, it allows companies to pay money out of shareholders’ pockets and evade any larger sense of responsibility for what they have done. In this charade, management knows it can try to get away with as much as possible and, if caught, has only to come up with a few million, which becomes another business expense. It is an easy way of creating the impression that the SEC is making progress toward reform and enforcement when it is nothing more than a mere slap on the wrist that perpetuates the culture of always skating close to the edge of the law. That is a culture that needs to change dramatically if the lessons from the market’s meltdown and credit collapse mean anything.
The decision is a poetic present as Wall Street and a still-reeling, bailout-fatigued economy celebrate the first-year anniversary of the collapse of Lehman Brothers and the dramatic weekend that saw the forced Bank of America – Merrill Lynch deal.
There is much discussion about whether anything has changed in the culture of Wall Street in this period. Maybe it has, or maybe it hasn’t. But at least in a federal building in Manhattan today, something undeniably did. Common sense was a rare witness in the courtroom. Judge Rakoff preferred her testimony.
An investing public who should more than ever be interested in the truth and in the morality of how business is run should feel grateful and a little more relieved today.
