Bernanke is destroying the independence and the balance sheet of the Fed. Whatever independence it may have had is being compromised as it becomes more and more a creature of the national government. The reason for this seems to be Bernanke’s fears. He has little or no confidence in the ability of the capital markets to recover, in a short timeframe at least. In this respect, he is a Keynesian. Bernanke has exaggerated fears of declines in asset prices, especially stock prices. He overreacted and caved in the Bear Stearns case. He has made clear his anxieties and apprehensions about the banking system, derivatives, and investment banks. But price declines are just what is needed to place depreciated assets in the hands of those willing to shoulder the risks of owning them. Price declines will raise the expected rates of return on assets to proper levels. By creating a stock price bubble, inflation lowered rates of return below their appropriate levels. This had numerous bad consequences which include more corporate scandals, more accounting peccadilloes, and more investments that destroy value rather than create it. A stock market decline is just what is needed to lead to a resolution of these and other such financial problems caused by the earlier inflation. Now Bernanke fears the demise of the GSEs. The result seems to be that Paulson, who is strongly statist and a stronger figure, is ruling the roost.
Rozeff also ponts out the dangers this will cause for the overall economy:
The recommended measures, being hustled through Congress, have several negative consequences. (1) The GSEs are to be kept in the business of being the major end-buyers of housing loans. This maintains the same system that has led to the current mortgage market woes and does nothing at all to rectify the situation. (2) By maintaining the system and opening both the Fed and the Treasury to the GSEs, the latter can actually become even larger. (3) They will also be even more beholden and responsive to the political forces surrounding the housing business.
(4) The Fed will provide the GSEs with money loans, on either Treasury or a GSE’s own debt as collateral. That is directly inflationary and amounts to printing money and placing it at the disposal of the GSEs. (5) If money has to be created for the GSEs, there is less that can be created for all the other many banks that are in trouble. The Fed is less likely to discount their bad paper. This may be one reason (beyond the Indymac failure) why regional bank shares fell so sharply on the news (an index was down more than 8 percent.).
(6) Feeding the GSEs taxpayer dollars from the Treasury is a pure bailout. It rewards them for financing too many mortgages and too many mortgages of low quality. It means that Congress intends business as usual. (7) More government money and government stock ownership enlarge the GSEs while worsening the control and financial structures of the company. Any control by the government is going to enhance politically-motivated conflicts about the company policies and retard taking politically unpopular measures. The GSEs become even more of a political football than they already are.
(8) Another negative result is that the uncertainty surrounding the financial crisis will be prolonged. (9) Instead of the Fed and Treasury strengthening the GSEs, the GSEs will weaken the Fed and Treasury, that is, weaken the government. The government debt will rise. This jeopardizes other government programs, which is likely to end up either being inflationary or mean higher taxes. The Fed is basically losing a degree of independence while kowtowing to the dominant political forces, which weakens it and raises the odds of higher inflation. (10) Giving the GSEs taxpayer monies weakens the country’s productivity. It takes capital out of the private sector and transfers it to an industry that is already overbuilt.
It appears that Bernanke has become Paulson's lap dog. The curious news last week Friday that Bernanke was going to open the discount window to Fannie Mae and the denial issued by the Fed on Saturday, now appears to be Paulson asserting himself as top dog. Bernanke most likely leaked the story and Paulson made him kill it, even though that news was announced on Sunday by the Fed in conjunction with a Treasury statement.
Yes, "Hank is for Hank" Paulson is in charge and his plan is in execution phase.
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