Tomorrow, Federal Reserve Chairman Ben Bernanke will give an unprecedented press conference after the Federal Open Market Committee releases a statement from their April meeting. Whether Bernanke is trying this to increase transparency or reassure investors with his command of the issues or build public trust in the institution, or whether he’s just making a bad decision, this represents the never-before-seen opportunity for the media to actually question Bernanke about his views on the economy, monetary policy, inflation and jobs. This comes at a time when the Fed is failing to reach both inflation or employment targets for three years running, so Bernanke has a lot to answer for.
Andy Kroll and Nick Baumann have some ideas about what Bernanke should be asked, and I thought I’d comment as well.
Kroll and Baumann start, for example, by asking what more the Fed can do to put Americans back to work. Conservative economists have tried to claim that America is going through a period of structural unemployment, to absolve themselves of blame for their failed policymaking. The Fed has at least tried to remedy the scourge of unemployment through QEII, but so far it has failed to meet expectations according to many analysts. By setting a specific number for the purchase of Treasury bonds instead of setting a target long-term interest rate, the Fed cut its own policy off at the knees before it even got started.
They also pose such worthy questions as what Bernanke would do about fiscal policy (I actually think that should not be asked, as it is outside his mandate), whether he would consider a higher inflation target, why the Fed has resisted efforts at more transparency, what he thinks about the holdup of the appointment of Peter Diamond as a member of the Board of Governors, and whether the Fed is too close to Wall Street. But these dance around the real question that must be asked of the Fed. Bernie Sanders nails it today. It surrounds the extraordinary payouts to the nation’s largest banks during the financial crisis.
Here’s an excerpt from Sanders’ latest release:
A study requested by Sen. Bernie Sanders (I-Vt.) found numerous instances during the financial crisis of 2008 and 2009 when banks took near zero-interest funds from the Federal Reserve and then loaned money back to the federal government on sweetheart terms for the banks.
The banks pocketed interest on government securities that paid rates up to 12 times greater than the Fed’s rock bottom interest charges, according to a Congressional Research Service analysis conducted for Sanders.
“This report confirms that ultra-low interest loans provided by the Federal Reserve during the financial crisis turned out to be direct corporate welfare to big banks,” Sanders said. “Instead of using the Fed loans to reinvest in the economy, some of the largest financial institutions in this country appear to have lent this money back to the federal government at a higher rate of interest by purchasing U.S. government securities.”
Chairman Bernanke, in light of this report, do you consider it good policy for the US to hand over money to the nation’s largest banks directly through this kind of scheme? Would it make just as much sense, if you find it good for the economy, to make the same investment strategy available to small businesses, states or the US government itself to deal with their budget problems? After all, it would take a true idiot not to make fantastic amounts of money if they can borrow at zero and loan money back at high rates. Why should individuals be deprived of this money-conjuring strategy? [cont’d.]
Furthermore, shouldn’t those profits, rather than boosting the balance sheets of the large banks, have been put back into the economy? Shouldn’t that have been a condition of the direct subsidy?
To add in another Sanders question, why did the Fed bail out the Arab Banking Corp, mostly owned by the Bank of Libya, as part of their emergency lending programs, to the tune of $26 billion in credit? Why aren’t they held to the same standard of sanctions as every other Libyan business? Why are they operating two bank branches in New York?
The real questions that need to be put to Bernanke concern what he did to nurse the banking sector back to health. The contrast with how the Fed allows the rest of the economy to flop around like a fish looking for water cannot be over-emphasized.