The Great Debate

Ben Bernanke in peril and the Volcker crackdown on proprietary trading by banks show two truths of the current dispensation: there is no effective hedge against politics and the reflation trade rests on fragile foundations.

Neither of these realities is particularly good for financial markets and neither is going away any time soon.

Both, too, are utterly related not just to each other, but to the Senate election in Massachusetts which installed a Republican into what had been a Kennedy seat, in the process terrifying Democrats who fear they will be sunk by association with a set of policies perceived to be favoring Wall Street.

In the aftermath, President Obama unveiled a policy authored by former Fed chief Paul Volcker, which is intended to make financial firms get out of the business of using government insurance to underwrite speculative bets; well, er, not all speculative bets, but the bad kind.

At the same time the confirmation of Bernanke is under threat, and he and the institution he works for had to endure the humiliation of seeing Senator Harry Reid issue a statement endorsing him but implying that he’d extracted some sort of undertaking from the central banker to “redouble” his efforts to help those struggling in the recovery.

– James Saft is a Reuters columnist. The opinions expressed are his own —

Ben Bernanke may minimize the role of monetary policy in the housing debacle, but he minimizes two key factors: the effect of low rates and the Fed’s policy of cleaning up after but not popping bubbles had on risk-taking.

In what amounts to a defense of his own and Alan Greenspan’s legacy, Bernanke maintains that low interest rates didn’t cause the bubble, which he says required a regulatory rather than monetary solution.

John M. Berry is a guest columnist who has covered the economy for four decades for the Washington Post and other publications.

By John M. Berry

Financial crises and the policies to deal with them top the agenda at the Kansas City Fed's Jackson Hole conference. But what is actually going to be on everyone's mind at the august gathering is the uncertain future of the Federal Reserve itself.

Many members of Congress want to clip the Fed's wings for failing to prevent the crisis and for its actions since the meltdown began two years ago. In particular, most are angry about government bailouts, starting with the $29 billion in Fed backing for the purchase of Bear Stearns by JPMorgan Chase.

If Ben Bernanke were running TV ads, taking polls and holding town hall-style meetings, it wouldn't be any clearer that he's conducting an explicit reelection campaign for another four-year term as Federal Reserve chairman come next January. Oh, wait a second, he just did hold an unprecedented town hall meeting. And it was one worthy of a presidential candidate charming primary voters in Iowa.

At the Kansas City Fed last night, Bernanke answered a couple dozen questions from 190 area residents for a three-part public television broadcast. Like a veteran politico, he tossed out the occasional platitude ("The best way to have a strong dollar is to have a strong economy"), railed against Washington ("I don't think the American people want Congress running monetary policy"), gave a riveting and heroic personal narrative ("I was not going to be the Federal Reserve Chairman who presided over the second Great Depression"), and got downright folksy when talking about too-big-too-fail ("When the elephant falls down, all the grass gets crushed as well").

Message to America: Ben Bernanke, a pharmacist's son from Dillon, South Carolina, feels your pain. Now it's not as if previous Fed chairmen haven't campaigned for another four-year hitch. But the usual modus operandi is to curry favor with the Electorate of One -- the president -- who will be doing the renominating. And the precise mechanism has been a growth-friendly monetary policy.

– James Pethokoukis is a Reuters columnist. The views expressed are his own –

Ben Bernanke’s testimony to Congress about his involvement in the Bank of America-Merrill Lynch merger was a lot like an FOMC statement: short and unadorned, yet open to much interpretation.

When the Federal Reserve chairman wasn’t repeatedly saying “I don’t remember” or “I don’t recollect,” he was matter-of-factly stating that he didn’t intend to threaten Bank of America CEO Ken Lewis with termination if he didn’t go through with the Merrill deal.

– Agnes T. Crane is a Reuters columnist. The views expressed are her own –

Call it a battle for beginnings and endings, and the Federal Reserve is smack in the middle.

As Fed policymakers convene for a two-day meeting starting on Tuesday, the lines are growing more defined between those who want the Fed to do more to stimulate a still fragile economy, and those who are calling for a defined exit strategy to prevent the global economy from going into an inflation-inducing overdrive.

– James Saft is a Reuters columnist. The opinions expressed are his own –

The U.S. policy of keeping zombie financial institutions alive is so clearly failing that it is now attracting attack from inside policymakers’ circle of covered wagons.

The most interesting intervention in the banking debate in the past few weeks was an extraordinary attack by Kansas City Federal Reserve President Thomas Hoenig on what he termed a policy of “piecemeal” nationalization which leaves discredited management in place, repels new capital from the banking system and allows bad assets to fester rather than be cleared.

– James Saft is a Reuters columnist. The opinions expressed are his own –

Another week, another set of protestations that U.S. banks will remain in private hands, apparently almost regardless of the consequences.

It is clear that nationalization violates a sacred value for U.S. policymakers, or perhaps they believe it to be a sacred value held by voters. As we know from behavioral economics, when people are confronted by a conflict between material advantage and their ideas of the sacred, they tend to opt surprisingly often for the sacred.

– John Kemp is a Reuters columnist. The opinions expressed are his own –

For the world monetary system, the financial crisis which erupted in the summer of 2007 is a cataclysmic shift that will prove every bit as significant as the outbreak of the First World War (which heralded sterling’s demise as a reserve currency) and the suspension of gold convertibility in 1971 (which marked the end of bullion’s monetary role).

The crisis marks the passing of an era in which the U.S. dollar has been the world’s undisputed reserve currency for making international payments and storing wealth.

– John Kemp is a Reuters columnist. The views expressed are his own –

Like the sorcerer’s apprentice, Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan have unleashed a series of ever-larger asset bubbles they cannot control.

Now the Fed’s decision to cut interest rates to between zero and 0.25 percent, coupled with a promise to keep them there for an extended period, and the threat to conduct even more unconventional operations in the longer-dated Treasury market risks the biggest bubble of all, this time in U.S. government debt.