Federal Reserve Chairman Ben Bernanke has had an unusually rough go of it in both Senate Banking Committee and House Financial Services Committee hearings this week, taking heat from both sides of the aisle. This week’s hearings have so far been an instructive and concise depiction of the difficult position in which he finds himself given the current state of both the U.S. economy and political climate.
The first round of hard questions was perhaps very much anticipated, coming as it did from the left side of the aisle in the form of freshman Massachusetts Senator Elizabeth Warren. Warren essentially took Bernanke to task in front of the Senate Banking Committee hearing on Tuesday, for policies that she considers supportive of banks that are comfortably too big to fail.
Citing a Bloomberg study released last week in which it was calculated that the nation’s biggest financial institutions such as J.P. Morgan (JPM), Bank of America (BAC), and Wells Fargo (WFC) were essentially receiving $83 billion in annual subsidies from the government (ultimately at the expense of the American taxpayer) in the form of low borrowing costs, Warren asked the Chairman if the government would again come to the rescue of these institutions in the event of another crisis.
The exchange became somewhat contentious when Bernanke tried to explain the low cost of borrowing in terms of market expectations about assured government bailouts, and then tried to resolve this explanation by saying “Those expectations are incorrect. We have an orderly liquidation authority. Even in the crisis, we -- in the cases of AIG (AIG), for example, we wiped out the shareholders..."
Warren was quick to retort with the observation that the shareholders of the biggest banks did not suffer a similar fate during the crisis, to which Bernanke responded that the “tools” to do so were not available at the time, but that they were now in place as a result of the 2010 Dodd-Frank act.
He seemed to backtrack on this assurance, however, when he was pressed on the issue, saying “Some of these rules take time to develop. The orderly liquidation authority, I think we've made progress on that … I think we're moving in the right direction ... We do have a plan, and I think it's moving in the right direction.”
When Warren asked, “when we're gonna arrive in the right direction?", the Fed Chief could only answer with, "Over time we will see increasing market expectations that these institutions can fail", following it up with an assurance that banks would eventually lose some of the benefits of size and would shrink themselves voluntarily.
On Wednesday, before the House Financial Services Committee hearing, a number of Congressional Republicans, perhaps not wanting to be out-done, submitted Bernanke to another round of demands for explanation, this time over the fed’s Quantitative Easing policy.
Bernanke did seem to fare a bit better with these questions. For example, when Republicans Michele Bachman of Minnestoa and Patrick McHenry of North Carolina accused the Chairman of using extremely low borrowing rates to mask the deficit, Bernanke retorted by citing the fact that the fed actually holds less outstanding debt (15 percent) than it did prior to the financial crisis.
Contrary to the unease he showed the previous day with Warren, there was no stuttering when Bernanke asked the legislators if they knew of any alternatives to the QE policy. He also noted that lower rates were helping the economy in the short term, reminding his inquisitors that such would not be the case in five years’ time, suggesting finally that they should live up to their responsibilities by doing something to cut the deficit in the meantime.
Republican Congressman Jeb Hensarling of Texas, who serves as chairman of the committee, asked what would have been one of the most poignant questions of the hearing when he demanded an explanation for the marked lack of capital with banks sitting on record amounts of cash. As was the case with many of his colleagues, however, Hensarling’s question was lost in an overarching monologue/diatribe on the subject that left Bernanke almost no opportunity to provide a substantial answer.
What the chairman did manage to do on Wednesday, however, was to provide measured responses to critical inquiries about the Fed’s monetary policies. He addressed the apparent contradictions of such policies successfully on a number of occasions. When speaking of low interest rates, for example, he said: “One of the paradoxes is that the best way to get interest rates up is to have low interest rates, because that promotes a stronger growing economy and that causes interest rates to rise. In some ways the fact that interest rates have gone up a bit, and it happens on the real not the inflation side, is actually indicative of a stronger economy, which again suggests that maybe this is having some benefit."
He was also attempted to turn the populist tenor of the questioning back around on legislators, for example when explaining the Fed’s current policy. When responding to the suggestion of California Republican John Campbell that the Fed was basing its decisions on the need to supplement federal government borrowing, big banks, and foreign governments, he said: "This is very much focused on the average American citizen. Our estimates are that we've helped create many private sector jobs, government jobs to support the economy quite significantly."
This point was expanded on later when he suggested to lawmakers that they “align the timing of your fiscal consolidation better with the problem, that is to do somewhat less in the very near term when it will have the greatest impact on growth and jobs and where the Federal Reserve doesn't have any scope to offset it and instead to focus on the longer term where the real problems I think still remain.”
Additionally, he cited how low mortgage rates were helping consumers buy houses and ultimately reinvigorate the housing market, as well as the low car loan rates, both of which were making consumers feel more secure.
All in all, the Fed Chairman’s defense of quantitative easing was taken as a great reassurance by Wall Street, bolstered as it was by yesterday’s data on the state of the housing market. No amount of questioning or criticism, irrespective of political motivations both latent and overt, seemed to be able to interfere with that fact, putting into stark relief how much at odds political and economic currents can sometimes be. The S & P 500 index closed at a gain of 1.27 percent at just under 1,1516, while the Dow ended the day at 14,075.37, and increase of 1.26 percent and its highest since 2007. The Nasdaq composite Index, meanwhile, was up 1.04 percent to close at 3,162.26.
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