Last night, Ben Bernanke, the Federal Reserve Chairman, did an extended interview with 60 Minutes. This is news unto itself as the Fed Chair never does interviews. He spent his time defending the bank bailout, which should be expected. The section regarding AIG, is below:
(PELLEY ) There have now been four rescues of AIG, for about $160 billion. Why is that necessary?
(BERNANKE) Let me just first say that- of all the events and all of the things we’ve done in the last 18 months, the- the single one that makes me the angriest, that gives me the most angst, is the intervention with AIG. Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, they had a- we had a situation where the failure of that company would have brought down the financial system.
(PELLEY) You say it makes you angry? What do you mean by that?
(BERNANKE) It makes me angry. I slammed the phone more than a few times on discussing AIG. It’s- it’s just absolutely- I understand why the American people are angry. It’s absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets- that was operating out of the sight of regulators, but which we have no choice but the stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy.
Notice he uses the word “bet”. The Stock Market is legalized gambling at its best. Why then, would we continue to shore up these gamblers? According to Bernanke, if we don’t, Armageddon could be on the horizon. Below is his analogy:
(PELLEY) You know, Mr. Chairman, there are so many people outside this
building, across this country, who say, “To hell with them. They made bad bets. the wages of failure on Wall Street should be failure.”
(BERNANKE) Let me give you an analogy, if I might. If you have a neighbor, who smokes in bed. And he’s a risk to everybody. If suppose he sets fire to his- to his house, and you might say to yourself, you know, “I’m not going to call the fire department. Let his house burn down. It’s fine with me.” But then, of course, but what if your house is made of wood? And it’s right next door to his house? What if the whole town is made of wood? Well, I think we’d all agree that the right thing to do is put out that fire first, and then say, “What punishment is appropriate? How should we change the fire code? What needs to be done to make sure this doesn’t happen in the future? How
can we fire proof our houses?” That’s where we are now. We’re having-
we have a fire going on.
(PELLEY) It’s still burning.
(BERNANKE) It’s still burning
The biggest surprise for me was that the Federal Reserve doesn’t use tax payers money…it simply prints more. From the transcript:
(PELLEY) Is that tax money that the Fed is spending?
(BERNANKE) It’s not tax money. the banks have- accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. so it’s much more akin to printing money than it is to borrowing.
(PELLEY ) You’ve been printing money?
(BERNANKE) Well, effectively. And we need to do that, because our economy is very weak and inflation is very low. when the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.
It all sounds like a dangerous game, where no one is sure of the consequences.Printing money creates inflation doesn’t it? Didn’t I learn that in college?
Didn’t we learn anything from the Great Depression? How does Bernanke think we can fix the financial industry so this kind of crap doesn’t happen again?
(PELLEY ) There was a panic in 1907. So, the Fed was created to prevent that from ever happening again. And then we got the Great Depression. And now we have this. How do we prevent this from occurring another time?
(BERNANKE) well, tougher regulation of large firms. It includes having a set of laws that allows us to wind down. A large, internationally active firm, without the adverse impacts on the markets that a disorderly bankruptcy would have. It includes possibly having a systemic regulator. A- regulator that has some responsibility to look at the system as a whole.
Wait a friggin minute, we had laws and regulations in place to watchdog the financial industry On Bill Clinton’s watch, the Republican-led Congress passed deregulation bills a plenty. Congress neutered that watchdog folks. The Glass-Steagall Act was trashed.
So, my original question remains. Is Bernanke a friend to the little guy or just a supporter of the financial industry that caused this catastrophe? Is he blowing smoke up our collective asses in this interview?
I don’t know..but he doesn’t make me feel warm and fuzzy. How about you?