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June 26th, 2009 (Modified on July 16th, 2009)

Update1 Bernanke Claims Little Fault — Who Will Be the Fall Guy?

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UPDATE1: Since Congress is looking for someone to blame, who’s going to be the fall guy — will it be Bernanke, Paulson, or Lewis? Former Treasury Secretary Henry Paulson is already out of office, so he makes a good candidate. BofA chief Ken Lewis is the head of an already shaky institution, and his head has been rumored to be on the chopping block for some time now. Then there’s Fed chief Ben Bernanke — his term as Federal Reserve Chairman ends at the ends of January.

While a case could certainly be made for any of the three, Megan McArdle of the Atlantic says that, “firing Bernanke lets Obama portray all of the failures of this year as Bush errors in policy or appointment.” But would that be the smartest move?

I think if he’s pushed out it will be a real pity, for several reasons.  First, Bernanke really is the most superbly qualified economist out there to deal with this particular sort of crisis.  But perhaps more importantly, regulatory uncertainty is not what we need now.  Bernanke may be tempted to keep monetary policy loose in order to make the economy look better and save his job.

Many political analysts have said that a president’s first term is built around reelection. Since the end of Bernanke’s term is more than six months away, the president’s decision of whether or not to replace him is likely to hinge on whether the economy moves up or down through the end of the year. Since we believe economic indicators aren’t likely to fluctuate too heavily in either direction, the president will likely realize that what’s good for the markets is good for his approval rating. Not to mention history may be on Bernanke’s side:

Reappointment may be less disruptive to investors, and no first-term president has replaced a sitting chairman in 30 years. Many on Wall Street and in Washington view it as likely Bernanke will be reappointed.

“There’s a very strong case for reappointment,” said Douglas Lee, who runs Economics from Washington in Potomac, Maryland, and worked on Capitol Hill in the 1970s. “Removing a Fed chairman who is generally perceived to have done an outstanding job would be an enormous problem.”

So who is going to be the fall guy? Has Bernanke earned his right to stay on?

(Original post published 6/25/09): Federal Reserve Chairman Ben Bernanke testified in front of a Congressional committee today, defending the Fed’s actions in the controversial merger of Bank of America and Merrill Lynch. In front of the House Committee on Oversight and Government Reform, Mr. Bernanke reputed previous testimonies and claims the Fed acted inappropriately by not only pressuring the banks to merge, but that they did not properly disclose the details of the merger to shareholders and lawmakers.

Mr. Bernanke claims the Fed acted properly by fulfilling all disclosure requirements and that they conducted the deal with the “highest integrity.” The Fed chief also claimed he had no part in strong arming BofA and didn’t threaten the jobs of the bank’s board members:

“Did you personally tell Mr. Lewis that you would fire him or remove the Bank of America board?,” Chairman Edolphus Towns (D., N.Y.), asked, striking a common refrain.

“I did not,” Mr. Bernanke said.

But that simple response did not sit well with lawmakers in light of a Dec. 21 email unearthed by the panel between Federal Reserve Bank of Richmond President Jeffrey Lacker and other Fed employees. In that email, Mr. Lacker recounts a conversation with Mr. Bernanke and says that the Fed chief planned to tell Bank of America that “management is gone” if they quashed the deal and later needed more government aid.

Pressed on the issue, Mr. Bernanke said, “I don’t recollect everything that was said in that conversation.”

However, earlier this month CNNMoney.com published an article which stated that former Treasury Secretary Henry “Paulson told New York investigators that he threatened Lewis’ job at the behest of Fed chief Ben Bernanke.”

We honestly can’t believe how two of the nation’s top financial officials have delivered such diverging recollections of the on goings and that more major news publications haven’t ran with.

The next piece of the puzzle will be revealed when Mr. Paulson testifies before a Congressional committee. According to Bloomberg News, Mr. Paulson is set to testify next month on “what Treasury and Federal Reserve officials did to persuade Bank of America to finish the Merrill deal after Chief Executive Officer Kenneth Lewis said he wanted to scuttle the purchase.”

For more on the subject read: “TARP’s Not-So-Dirty-Little Secrets Confirmed

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4 Responses to “Update1 Bernanke Claims Little Fault — Who Will Be the Fall Guy?”

  1. William Says: June 25th, 2009 at 8:43 pm

    “Something is rotten in the state of Denmark” – Hamlet

  2. Tim Manni Says: June 26th, 2009 at 9:24 am

    William,

    Hahaha…well put!

  3. Pauk Says: June 26th, 2009 at 10:09 am

    Now — I firmly believe in letting the details come to light so that everyone gets their fair due.

    At this point, though here is how I see it:

    1. We know that the government intentionally misrepresented the ‘health’ of the institutions — That is not conducting operations with the “highest integrity”

    2. We know that the fed strong armed participation. Not acceptable from a government body, in my opinion.

    3. Bernanke is the Chief — I personally won’t be able to accept an argument from him based on the notion that he doesn’t recall exactly what was said in a meeting or that possibly Paulon acting at the behest of Bernanke was a miscommunication or unintended action from their communications. Which, I think will be the gist of the explanation.

    3b. Quite frankly, it doesn’t matter if that is how it shakes out, ultimately the Chief is in charge of operations and certainly has to know if the body in which he presides over is not functioning properly.

    It will be interesting to see how it shakes out.

    The real point in all of this is that government should NOT be so closely tied to business. I’ll allow that government should have the tools accessible to govern, regulate (and punish where appropriate) business when illegal or harmful to the american people, but government should not be so closely integrated with our businesses.

    We are walking a very slippery slope in creating larger government involvement. The current administration continues to move in that direction and seemingly as quickly as they can.

    I’m very tentative to believe that is the best direction and in our country’s best interest.

    Will this administration commit us so deeply to that direction that reversal becomes extremely difficult?

    Ultimately, what is it about that direction that makes it better for the people of the United States? To me, it doesn’t foster the environment in which this nation was built upon, thrived upon and ultimately led the world upon.

    I don’t know that our governmental decisions are continuing to put us in a position to be a global leader.

  4. Tim Manni Says: June 26th, 2009 at 12:02 pm

    Pauk,

    You’ve touched on some great points and made some great quotes. I especially like, “I personally won’t be able to accept an argument from him based on the notion that he doesn’t recall…” & “it doesn’t foster the environment in which this nation was built upon, thrived upon and ultimately led the world upon. I don’t know that our governmental decisions are continuing to put us in a position to be a global leader.”

    I think an over-arching theme that I forgot to touch on is that the Fed is set (under the newly proposed financial overhaul) to gain greater oversight powers. With these “incidences” coming to light, do Americans really think that’s such a great idea?

    Bernanke has denied his involvement in your numbers 1 & 2.

    I am really interested in hearing what Paulson has to say. Yet, I have a feeling his testimony could be filled with vague answers that don’t offer any concrete conclusions.

    As always, thanks for commenting,
    Tim

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