Commenting on the health of big U.S. banks last week, former Fed Chairman Ben Bernanke wrote on his Brookings blog that “a lot of progress has been made (and more is in train) toward reducing the risks that large, complex financial institutions pose for the financial system and the economy.” Bernanke’s observation came after Minneapolis Fed president Neel Kashkari’s recent commentary about the need to reduce the alleged problem of “Too Big To Fail” within banking. Some readers could be excused for wondering why Bernanke would have any opinion on the matter at all.
Ben Bernanke’s new book, The Courage to Act, demonstrates throughout its 579 pages the fundamental uncertainty faced by central bankers, Treasury officers, and everybody else when dealing with financial cycles, panics and recoveries. “But if the last few years had taught us anything, it was that we had to be humble about our ability to detect emerging threats to financial stability,” he writes.
A lively and informed discussion was held at the American Enterprise Institute on March 20, 2014 on the question: Is the Federal Reserve a philosopher king or servant of the treasury? Alex Pollock, a frequent contributor to Law and Liberty and participant in the AEI discussion, offers here in condensed form the arguments and the instructive history presented.
Our Books section this week features an incredibly insightful review from Alex Pollock on Fed Chairman Ben Bernanke's collection of speeches entitled The Federal Reserve and the Financial Crisis. Pollock notes the size and potential legacies of Bernanke's big bet: How future histories characterize the author will reflect something they will know, which we cannot: what the outcome of the Bernanke Fed’s massive manipulation of the government debt and mortgage markets will have been. This is something that we, and the Federal Reserve itself, now can only guess about. We do know that this has taken the Bernanke Fed’s assets to…
Over at his Economics One Blog, (link no longer available) economist John Taylor discusses a recent speech by the former Wells Fargo Chairman and CEO Dick Kovacevich, who explains how he was forced to take TARP funds by U.S. Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke:
In his speech, Kovacevich first described how he and the other bankers were told at that meeting that they had to accept the funds. He then paused and said to the Stanford audience: “You might ask why didn’t I just say no, and not accept TARP funds.” He then explained: “As my comments were heading in that direction, Hank Paulson turned to Chairman Bernanke, who was sitting next to him and said ‘Your primary regulator is sitting right here. If you refuse to accept these TARP funds, he will declare you capital deficient Monday morning.’ This was being said when we were a triple A rated bank. ‘Is this America?’ I said to myself.”
At that time Wells Fargo was in process of acquiring Wachovia and such a declaration would have killed the deal. According to Kovacevich: “It was truly a godfather moment. They made us an offer we couldn’t refuse.” It was also truly a deviation from the principles of economic freedom, such as those I have highlighted in my book First Principles—predicable policy, rule of law, reliance on markets, limited scope for government. One can debate whether those deviations were appropriate, but they were clearly deviations.
During the question and answer period after his talk, I asked Dick Kovacevich why more business people were not speaking out on this important issue. He explained how he had in fact waited a long time after he left Wells Fargo before speaking out because he did not want to risk some kind of retribution. He said he thought many others had a “fear” of speaking out.”
Obviously, this is reprehensible. It clearly indicates how big government can stifle freedom. But the more interesting question for me is whether these are impeachable offenses.