Saturday, February 20, 2010

Ben Bernanke’s NOT So Finest Moments

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

As long time readers of my Street$marts newsletter know, I have been a fan of Ben Bernanke since early 2008 when then "Rip Van Bernanke" finally awoke from his long sleep to take desperately needed and historic action in the financial markets. While he certainly has to accept some of the blame for being asleep at the switch early on, I commend him for his outside the box thinking and action in attacking the crisis from all sides.

And while I wasn't surprised to see him vilified by several members of Congress during his reappointment hearing to send a very stern and strong warning, it's unreal that you have people like free marketer and fiscal conservative Jim Bunning on the same side of an issue as socialist Bernie Sanders. When was the last time the far right and far left agreed on anything, even the weather, let alone a serious issue? As Charles Dudley Warner so aptly said, "Politics makes strange bedfellows".

When I was reviewing my notes for this article, I came across some old comments from the Fed chief that don't exactly put him in the most positive light. Frankly, it makes Bernanke look like he and the Fed had their heads buried in the sand. But in his "defense", I don't believe that he would publicly offer warnings even if he did think something was coming. Not from the most powerful banker in the world. I debated listing them, but what the heck.

July 2005 - "I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit."

November 2005 - "With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly."

"The Federal Reserve's responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions."

February 2006 - "Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise."

March 2007 - "The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."

May 2007 - "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

February 2008 - "Among the largest banks, the capital ratios remain good and I don't expect any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system."

June 2008 - "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."

July 2008 - Fannie Mae and Freddie Mac are "adequately capitalized" and "in no danger of failing."

In short, Ben Bernanke and his disciples clearly were asleep at the wheel during some critical moments leading up to and during the crisis. That's not debatable. But their actions during the darkest financial hours of the past 75 years, so far, staved off the second depression since 1900. Only time will tell if they really succeeded or just band-aided and duct taped the problem.

Please feel to email me with any questions or comments at

Until next time…

Paul Schatz

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