While reading over Federal Reserve Board Chairman Ben Bernanke’s comments from the symposium in Jackson Hole, Wyoming last Friday a few things stick out. First, he follows a disturbing trend we have noted here for some time that dates the credit crisis to September 2008 instead of much earlier; next, he supports the popular notion that a slower rate of decline equals growth and throughout he is quite loose with details surrounding certain events. Most disturbing is he takes credit for avoiding a disaster but fails to take responsibility for anything. Bernanke pats himself and others on the back for averting a disaster that 1) he was at least partially responsible for creating and 2) he assured us was not going to happen. Both Bernanke and former Treasury Secretary Hank Paulson were on record as saying the worst of the credit crisis was behind us while it was staring us in the face.
I have seen multiple comments that referred to this speech as Bernanke’s “Mission accomplished” moment. That seems fair to me as we are not out of the recession and whether or not you agree that a disaster of biblical proportions was avoided, it is clear that the remedy will have negative consequences on the economy for years to come.
One tough thing about regulatory responses is that while government officials can say we needed to do this to avert certain disaster, they never note prior action that could have been taken that may have averted this crisis or prior action that may have caused the crisis. For instance, what if the Fed would had allowed Bear Stearns to fail without the sweetheart deal for J.P. Morgan ? Could that have led to a smaller scale crisis and scared some financial institutions straight, rather than indicating to them that he Fed had their back? No one can answer that but it is clear that Bernanke is not being honest when he stated that a year ago, “there was little to suggest that market participants saw the financial situation as about to take a sharp turn for the worse.”
After Bear went down many analysts and market price predicted Lehman could be next and Lehman chief Richard Fuld refused to make a deal probably because he thought the Fed would backstop their bad debt ala Bear. Merrill made the deal with Bank of America after it was clear a Lehman deal would not be backstopped by the Fed and later B of A was pressured to close the Merrill deal despite new revelations regarding Merrill’s financial status.
That quote from Bernanke also belies the massive easing and credit facilities created by Bernanke and the Fed to try and hold off such a crisis. The fed had already taken unprecedented action to support banks from a deeper solvency crisis by opening up it lending window to investment banks and brokerage houses. That hadn't been done since the depression era.
He went on to say, “although indicators of default risk such as interest rate spreads and quotes on credit default swaps remained well above historical norms, most such measures had declined from earlier peaks.”
Indexunivese.com takes issue with this statement, noting, “the average credit default swap spread on these dealer banks was 13 times higher in August 2008 than it had been in January 2007.”
And that is after the Fed lent billions against the risky assets to try and contain the problem. The Web page also takes issue with Bernanke’s statement that the Fed was “lending freely against sound collateral”.
If the collateral was sound there wouldn’t have been a crisis.
The market rallied on Mr. Bernanke’s speech. Perhaps it is due to the following statement, “The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge.”
That bit of optimism goes a tad beyond the recent Fed statement following its August meeting.
The problem with Bernanke’s comments is that the disaster averted is mysterious as the entire financial system did not collapse thanks to Ben and the boys, however, the consequences of his actions will lead to further problems that likely will be real.