Dean Baker criticizes Senate approval of a new term as Fed chief for Ben Bernanke, the man who knowingly refused to do anything to contain an out-of-control housing bubble.
US Senate backs Bernanke for second term at Fed
Thu Jan 28, 2010 4:16pm EST
By Mark Felsenthal and Thomas Ferraro
WASHINGTON, Jan 28 (Reuters) - The U.S. Senate on Thursday approved Ben Bernanke's nomination to a second four-year term running the Federal Reserve, the world's most powerful central bank, despite deep misgivings over his perceived policy missteps.
The Senate voted 70-30 to confirm Bernanke, after clearing a procedural hurdle with the support of 77 senators. . . .
President Barack Obama and allies in the Senate Democratic leadership were forced to intervene over the past week to press senators to get the 60 vote super-majority needed to overcome efforts to block the nomination.
Center for Economic and Policy Research Co-Director Dean Baker, who since 2002 (along with other economists) had warned about the housing bubble, commented:
The Senate approval of a second term for Ben Bernanke as Fed chairman sends exactly the wrong message to the Federal Reserve Board and the country. First and foremost, Mr. Bernanke failed in his job about as spectacularly as is humanly possible. He sat back and watched the housing bubble grow to a level where its collapse jeopardized the stability of the U.S. economy.
The financial crisis and the economic downturn of the last two years were entirely predictable outcomes of this collapse. Yet, Mr. Bernanke insisted that there was no problem with the housing market, first in his capacity as a governor of the Federal Reserve Board since 2002 and then in his capacity as chairman since January of 2006.
Attacking the bubble would have been politically difficult since it required going after a source of enormous profit for the financial industry. Nonetheless, a responsible Fed chair would have used all of the Fed’s tools and power to prevent the bubble from expanding to such dangerous levels, even knowing that he would face fierce opposition from the financial industry.
Baker also noted three disturbing aspects of the Bernanke approval process (emphasis added):
- "Bernanke’s supporters repeatedly referred to the drop in the stock market in response to concerns that his approval could be blocked as a reason for approving Bernanke. No serious economist would advocate setting policy around fluctuations in the stock market. . . . It is unfortunate that Mr. Bernanke’s supporters felt that they had to use such a fallacious argument to advance their agenda and even more unfortunate that this argument was apparently effective."
- "Many of Bernanke’s supporters praised his policies for turning around the economy quicker than had been predicted," and yet the "January 2009 projections from the Congressional Budget Office, the Obama Administration and most private forecasters proved to be overly optimistic. The economy has done worse, not better than expected."
- Watching President Obama as he effectively enlisted Senators "who opposed Bernanke to vote for cloture, when he has apparently been unable to accomplish a similar feat with health care and many other pieces of legislation. This suggests a prioritizing of Bernanke’s reappointment that is not in any way justified by his importance to the economy or the country."
For the heck of it, here's Bernanke red-handed:
Bernanke Blew Off Warnings About Housing Crisis Because He'd Been Hearing Them Since 1979
By Pat Garofalo, Dec 21st, 2009
In today's Washington Post, Binyam Applebaum and David Cho took a long look at the Federal Reserve's complete failure to take note of the subprime housing bubble. "The Fed's failure to foresee the crisis or to require adequate safeguards happened in part because it did not understand the risks that banks were taking," they wrote. "[R]ather than looking for warning signs, the Fed had joined - and at times defined - the mainstream consensus among policymakers that financial innovations had made banking safer."
Of course, much of the focus - and the blame - falls to current Federal Reserve Chairman Ben Bernanke, and Applebaum and Cho rightly remind readers of Bernanke's 2007 declaration that "we see no serious broad spillover to banks or thrift institutions from the problems in the subprime market."
And it's not like there was a shortage of warnings given directly to the Fed regarding the housing market's problems. In one of many such instances, National City bank's chief economist told the Fed in January 2005 that "an increasingly overvalued housing market posed a threat to the broader economy." But "the message wasn't well received" :
One board member expressed particular skepticism - Ben Bernanke. "Where do you think it will be the worst?" Bernanke asked, according to people who attended the meeting, one in a series of sessions the Fed holds with economists. "I would have to say California," said the economist, Richard Dekaser. "They have been saying that about California since I bought my first house in 1979," Bernanke replied.