Last week, Ben Bernanke, the head of the Federal Reserve, came before the Senate Banking Committee for a confirmation hearing. Bernanke was nominated by President Bush for a four year term beginning in 2006. President Obama chose to continue with Bernanke and re-nominated him this year for another four year term.
While a contrite Bernanke admitted to the committee that the Fed “should have done more” to prevent the 2009 financial meltdown and protect consumers, for some Senators, this was too little too late.
Independent Senator Bernie Sanders (D-Vt.) announced that he had put an indefinite hold on Bernanke’ nomination.
“The American people want a new direction on Wall Street and at the Fed. They do not want as chairman someone who has been part of the problem and who has been responsible for many of the enormous difficulties that we are now experiencing,” Sanders said. “It’s time for a change at the Fed.”
A hold is a procedural move that slows down the nomination process and may force Senate leaders to round up 60 votes to confirm Bernanke and overcome the hold. Two Senate conservatives — Jim Bunning (R-Ky.) and Jim DeMint (R-S.C.) — said they would join Sanders’ effort to block Bernanke’s nomination.
The Fed has four main responsibilities: to conduct monetary policy in a way that leads to maximum employment; to maintain the safety and soundness of financial system; to contain systemic risk; and to protect consumers against deceptive and unfair financial products. Bernanke has failed in all four areas. Let’s take a look back at how Bernanke handled the housing bubble while serving in key rolls as a member of the Board of Governors of the Federal Reserve System, as Chairman of the President's Council of Economic Advisers, and as Fed Chairman.
In 2004, numerous economists were sounding the warning about the housing bubble’s threat to economic stability. The FBI issued its first warnings on the looming crisis warning of an "epidemic" of mortgage fraud. Bernanke chose only to look at the good news.
July 1, 2005 CNBC Interview:
INTERVIEWER: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying ‘Oh, this is a bubble, and it’s going to burst, and this is going to be a real issue for the economy.’ Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?
BERNANKE: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.
On February 15, 2006, Fed Chairman Bernanke said: “we expect the housing market to cool, but not to change very sharply."
On February 15, 2007, Fed Chairman Bernanke said: "The weakness in housing market activity and the slower appreciation of house prices do not seem to have spilled over to any significant extent to other sectors of the economy."
On March 28, 2007, Fed Chairman Bernanke said: “The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained.”
On May 17, 2007, Fed Chairman Bernanke said: “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”
On February 27, 2008, Fed Chairman Bernanke said: "By later this year, housing will stop being such a big drag directly on GDP . . . . I am satisfied with the general approach that we’re currently taking."
As late as May 2009, Bernanke pointed to encouraging signs in the housing market as a sign the market was stabilizing. Subsequently, however, new data emerged that one quarter of all mortgages were underwater (meaning home owners owe more than what their property is worth) with some estimating that this number could rise to one half of all mortgages by 2011. Bernanke seems to miss the point that things are bad and getting worse. These mortgages and the millions of resultant foreclosures are a tremendous drag on the economy prompting many to point to the abject failure of the Obama adminstration's tepid housing programs and call upon the adminstration to undertake an entirely new approach to the continuing crisis in the housing market.
America can no longer afford a cockeyed optimist in the role of Fed Chairman.