Here’s a glimpse at what must have been a fascinating discussion:
"The Federal Reserve’s moves to prop up Bear Stearns Cos. will come to be seen as "the worst policy mistake in a generation," the Fed’s past head of monetary affairs said. The action is comparable to "the great contraction" of the 1930s and "the great inflation" of the 1970s, said Vincent Reinhart, a scholar at the American Enterprise Institute, who retired from the Fed last fall.
Mr. Reinhart’s assessment, delivered at a panel discussion at the institute Monday, is one of the harshest appraisals yet by a high-profile observer of the Fed’s decision in mid-March to lend money to Bear both as temporary funding to make a merger possible, and then to finance $29 billion of Bear’s assets to make its takeover by J.P. Morgan Chase & Co. possible."
I’d love to get a recording or transcript of the speech. Any one have access?
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Source:
Ex-Fed Official Declares Bear Deal Worst Mistake in a Generation
GREG IP
April 28, 2008 4:10 p.m.
http://online.wsj.com/article/SB120941300416350473.html
BR—
Will we be seeing an IBank welfare line soon?
I think Ben is completely driven by the market! Even though the market is slightly insane!!! I bet he can only serve one-term!
No transcript yet, but VR’s comments aren’t surprising in the context of his recent related articles. Of note:
Barry,
1)Just call AEI and ask for transcript. Who knows, maybe the will send it to you.
2) If that doesn’t work, I bet some readers/clients are “doners” to AEI, and perhaps they can get copy.
3) Do you dare ask Larry Kudlow if he could get that for you??? He may be a doner.
R
Roscoeii,
I suspect they’d be happy to forward a transcript.
Even though I largely agree with the sentiments expressed, I don’t see much new or insightful here other than a think tank throwing out sensationalized headline fodder to get publicity.
When a new guys heads to the American Enterprise Institute, they expect him to get out there and make some noise. When his argument rests on the assumption that:
“…[The bailout of Bear Sterns] eliminated forever the possibility the Fed could serve as an honest broker…”
…Mr. Reinhart’s trying to apply a philosophy which no government regulator can abide by.
Governments are “forever” cleaning up the messes, that’s what they do. That’s what the Fed did. That’s what they’ll continue to do (if somewhat ungracefully.) In “the future” when you’re levered 30 to 1, all your cash business is leaving, and the Fed comes in and tells you you’re out of business, you will be, “honestly.”
Now, I think Reinhardt is a reasonable fellow but he’s also part of the neocon AEI. Neocons believe all government is bad government so let’s dismantle all of it. And, any regulations of capital along with it. So, it’s more than an irony that Reinhardt holds this view. Whether he espouses neocon ideals or not his employer generally does.
It’s interesting that Volcker said in a Charlie Rose interview that Congress could not act quick enough to deal with a crisis of the moment and the Fed did what it had to do. Not that he supports the Fed increasing its powers in the future.
So, who’s right? 13 trillion in derivatives with potential counterparty losses as deep as $300 billion that could start a chain reaction or step in and save this pig? It’s an interesting arm chair discussion. But being in the moment and the markets cratering around the globe I know what I would have done.
The statements are a given for an AEI “scholar”.
And I agree with the commenter stating that Bernanke is driven by the market.
I’d go a step farther and say that Bernanke is being played by those who can temporarily move the markets. They know from his academic work what he will view as a big threat and they know also what his prescribed response is. I don’t know how else you can explain the Fed agreeing to take on risk from the non-bank parties without demanding any regulatory oversight in return.
Greenspan probably did a bit of silent fist-pumping when “worst mistake in a generation” dropped in Bernanke’s lap and not his. Bernanke can at least use the excuse that he was reacting in an emergency, while Greenspan made his mistakes with plenty of time to deliberate, which means they were deliberate, which makes them worse.
The fear that a collapse of BSC would lead to unimaginable calamity keeps the fear of such an eventuality out there, rather than letting the market discover a resolution. The Fed’s course, therefore was a vote of no-confidence in the market: no confidence that we the “free” market could handle the unwinding of an insolvent investment bank. Are we, the unwashed masses, so untrustworthy as to be assumed to be one Black Monday away from grabbing the pitchforks and torches?
My bet is that if another bailout candidate appears on the horizon the FED will react in the same manner.
You’re way off on the neocon movement, bdg123.
The libertarians and paleo-conservatives are the folks that don’t like the gov’t and regulations (they also have a very different perspective on monetary policy, central banking, etc. Think Ron Paul). The neocons like the ideas of the libertarians and paleos, but have given in to the notion that big government is here to stay so we might as well use government to change society into our image (Think Bush’s compassionate conservatism), rather than simply dispose of big government. The roots of the neocons are in communists / leftists turned conservative (Think Kristol). They haven’t quite given up their old ways. Make sense?
bdg123,
You are so off on your assessment of neocons. They don’t hate government, they only hate government when it doesn’t do what they want. So if liberals are in power, they hate government, but when they are in power, they make government do what they want. They are not conservative by any stretch of the imagination, which is why the term neoconservative is so misleading. Study their intellectual history. The founders of the Neocon movement are all former leftist trotskyites.
From this look at the 24 April 2008 Fed balance sheet, he may be right.
Assets
Securities held outright 548,661 + 29 – 238,488
U.S. Treasury (1) 548,661 + 29 – 238,488
Bills (2) 70,317 0 – 206,702
Repurchase agreements (4) 109,500 + 5,250 + 71,500
Term auction credit 100,000 0 + 100,000
Other loans 32,043 – 2,465 + 31,986
Items in process of collection (702) 2,209 + 729 – 498
Thank God it’s all AAA or it could start looking ugly.
Not to pile on bdg123, whose blog I read religiously and whose opinions I take seriously, but the term neocon has been so abused and misunderstood as to become unrecognizable.
As others have said, neocons believe in using big government to achieve American Greatness. Iraq was the signature move – utter belief in the power and righteousness and perfection of government to intervene and solve a complex situation.
As we all know, it doesn’t work that way.
I don’t mind a pile on.
I guess I don’t understand what the proper definition of neocon is. When Blackwater is training police departments in the U.S., when we have Hessians fighting our wars, when the government attempts to dismantle Social Security-the only thing between a roof over their head and living in the gutter for many elderly, and has attempted to outsource a long list of other government services to large corporations in the name of efficiency, I tend to believe neocons are attempting to dismantle government in the name of Teutonic efficiency.
Maybe I should clarify that as domestic government services. Because I do acknowledge that they also believe in using government as a tool on the international front.
I’ve never heard Kristol called a communist. Fascist I could buy.
Reinhardt just expressed what many feel.
Inflation is driven by psychology as well as printing. Helicopter Ben is not trusted – many know he does not what’s required to combat inflation. He could be single handedly driving global inflation.
bdg123 …can’t agree strongly enough…these pronouncements from high on up are ludicrous at best..let the city burn for playing with matches..
…. the AEI should be very willing to get you a transcript if you ask. They like the sound of their own voice more than wall-street….
and if you are willing to listen.
but… they do have podcasts… now that is cool. I can definitely let that dribble down out the hamburgler on power-lunch.
I guess I believe that BS had to be rescued to save the system. But I just wish the FED had nationalized it first, made the stock worth zero, fired all the officers and Board of Directors with no parachutes, and opened the books to the SEC, the Department of Justice, and class-action lawyers trying to reclaim bonuses. Then sold it to JPM. Then no other firms would be thinking they could just run to the FED to save their bonuses when their over-leveraged house of cards started to look unstable.
Continuing the above comment, This action that I just described would have been the slap to the face that Wall Street needs that might have changed its behavior for the future.
It’ll all be covered up, again.
http://www.nytimes.com/2008/04/27/magazine/27Credit-t.html?_r=3&oref=slogin&ref=magazine&pagewanted=print&oref=slogin&oref=slogin
excerpt from the ticker, where I read this.
Ratings Extortion? Maybe. And Yet More Fraud
Oh boy.
The NY Times has published a bombshell that should, if markets are rational, cause both a huge selloff (due to allegations of extortion) and lead directly to Congressional and FBI investigations and, if the allegations true, indictments.
Indictments?
Yes.
“And the banks pay only if Moody’s delivers the desired rating. Tom McGuire, the Jesuit theologian who ran Moody’s through the mid-’90s, says this arrangement is unhealthy. If Moody’s and a client bank don’t see eye to eye, the bank can either tweak the numbers or try its luck with a competitor like S.&P., a process known as ‘ratings shopping.’ ”
Read that a couple of times.
They don’t pay if they don’t get the desired rating?
This isn’t from some observer or random commentator – its from the former head of the firm!
There is no rating going on at all; these organizations are “captive” to the banks and act as the banks wish, or they’re out of business. This is exactly the same “business model” that appraisers found themselves operating with during the housing bubble, where they’d get an order for an appraisal and then if they didn’t hit the “desired number” the Realtor who ordered it would refuse to pay them.
If this isn’t a near-textbook definition of fraud I don’t know what is.
bdg123,
See, there you go. As a gross generalization, you could say, the neocon likes the idea of the private sector, but can’t get away from the notion that something should be done and so things should be planned. And so they have arrived at the solution of maintaining the form of government, but privatizing its organs.
I would agree with you that this thinking can lead dangerously close to the pre-Nazi idea of fascism (as would many libertarians and paleos).
Also, AEI has plenty of libertarians and paleos in it. It’s not simply a neocon camp, though its hawkishness on Iraq tends to leave the impression.
Dave writes “made (BS)the stock worth zero” nationalizing the business
I like the basic idea above excluding that one point. IMO many investors (not all) are playing this game as innocents.
Inventing a clean-up would be nice to differentiate the 2 player types.
Drilling this whole money problem down … I think we made this mess when we let companys print up stock certificates. Then come all the laws and rulings which let companys print fiat money.
Go back to the days when people saved money in the bank. The bank loaned money expecting the money paid back (or else take your stuff), the common workers expected the money be paid back with interest when they wanted their money for goods and services (or else FDIC).
When back to that place, its still not where we need to be, but its a start.
Commodity markets …
you only can play the game if you accept the product into your shipping / receiving dock.
but … without markets, the lot your born into, your stuck in,
short of a great night in Vegas or a successful business
I’m sticking with mo – its more a self regulating entity than what we’re in now
For Barry,
You asked for access to Vincent Reinhart’s 4/28 AEI speech. You may have already found access to the speech, but in case you haven’t had the time to find access to the speech try this (ten minutes long), which I found through AEI’s “video” link. He is the last of several panelists, likely having saved as the “best for last” :
http://app2.capitalreach.com/esp1204/servlet/tc?cn=aei&c=10162&s=20271&e=9455&&espmt=2