Considering Nicole Gelinas: Bank Regulation XOR Quantitative Bubble Propping

Nicole Gelinas makes a simple point which she has managed to sell unaltered to the Establishment Right. She applies the central discoveries of Richard Koo’s work on Balance Sheet Recessions to our national banks. She concludes forcefully that the U.S. banking system is dysfunctional similar to what happened in 1930-1932 and on through the Great Depression.

After the Fall: Saving Capitalism from Wall Street—and Washington

Gelinas identifies the primary systemic overflows and says what has to be done to clean up the banks.

The Great Corruption of 2003-2008 is being propped up. That’s Bernanke. Self-serving twit, just like Greenspan. The Fed is manufacturing profits for the banks, rather than doing its job as regulator. That has to end before employment and growth can rebound.

Here she is on Bloomberg. Embedded on a webpage: HERE — pops to a new window

Same thing at YouTube — pops up in a new window

And I’ll try doing the YouTube code — if it shows ???.

Not exact quotes and the embed doesn’t seem to work. (I have security controls that stop redirection. Yours might work.) Gelinas hits these nails soundly on the head. The banking system is not working. It has to be cleaned out ASAP. Today trillions of dollars are stuck in the banks instead of flowing into productive use.

The banks have to learn to be banks again. This is all standard economics, as informed by Koo’s historical econometrics.

Meanwhile, the Bernanke approach is doing nothing to force banks to make these changes. Instead we see Bernanke trying to prop up Big Bubble price levels with another $600-billion of the so-called Quantitative Easing. The main effect is to debase currency, though one might see inflation on down the road when demand returns.

Propping up Big Bubble pricing is in no one’s interest. Almost no one…. All it does is that it allows Bernanke to kick the hard decisions down the road.  The alternative to this useless QE2 exercise is the hard work of forcing the big banks to clean up their books — trashing bonuses for years in the process.

Here is the Open Letter to Bernanke. Note who all signed it — essentially kicking Bernanke’s behind to do his job regulating the banks instead of mindlessly throwing money out the door:

To: Chairman Ben Bernanke
Federal Reserve
Washington, DC

Dear Mr. Chairman:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in The Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

Respectfully,

Cliff Asness
AQR Capital

Michael J. Boskin
Hoover Institution, Stanford University
Former Chairman, President’s Council of Economic Advisors

Richard X. Bove
Rochdale Securities

Charles W. Calomiris
Columbia University Graduate School of Business

Jim Chanos
Kynikos Associates

John F. Cogan
Hoover Institution, Stanford University
Former Associate Director, U.S. Office of Management and Budget

Niall Ferguson
Harvard University
Author,
The Ascent of Money: A Financial History of the World

Nicole Gelinas
Manhattan Institute & e21
Author,
After the Fall: Saving Capitalism from Wall Street—and Washington

James Grant
Grant’s Interest Rate Observer

Kevin A. Hassett
American Enterprise Institute
Former Senior Economist, Board of Governors of the Federal Reserve

Roger Hertog
Hertog Foundation

Gregory Hess
Claremont McKenna College

Douglas Holtz-Eakin
Former Director, Congressional Budget Office

Seth Klarman
Baupost Group

William Kristol
Editor, The Weekly Standard

David Malpass
GrowPac, Encima Global
Former Deputy Assistant Treasury Secretary

Ronald I. McKinnon
Stanford University

Joshua Rosner
Graham Fisher & Co., Inc.

Dan Senor
Council on Foreign Relations
Co-Author,
Start-Up Nation: The Story of Israel’s Economic Miracle

Amity Shlaes
Council on Foreign Relations
Author,
The Forgotten Man: A New History of the Great Depression

Paul E. Singer
Elliott Management Corporation

John B. Taylor
Hoover Institution, Stanford University
Former Undersecretary of Treasury for International Affairs

Peter J. Wallison
American Enterprise Institute
Former Treasury and White House Counsel

Geoffrey Wood
Cass Business School at City University London

Helluva list of righties to sign on for kicking Bernanke. The sole issue, here, is artificially extended corruption in the banks and The Fed. We owe our gratitude to Nicole Gelinas for clarifying what is at stake and where we have effective choices.

“Facts are stubborn things” — John Adams. Adams would love this gal.

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