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Silence Amid the Ruins
Is Bernacke Headed for the Exit?
By PETER MORICI
Business Professor Peter Morici of the University of Maryland and winner of second straight Forecaster of the Month award from MarketWatch.
Is Bernacke Headed for the Exit?
By PETER MORICI
Business Professor Peter Morici of the University of Maryland and winner of second straight Forecaster of the Month award from MarketWatch.
Today Ben Bernanke appeared before the Senate Banking Committee. In his testimony, he noted the shortages of credit, especially the reluctance of banks to extend credit to one another, and the inability of the banks to securitize Alt-A, Subprime and Jumbo mortgages. The latter makes all but Fannie Mae conforming mortgages and home equity loans too scarce.
In plainer terms, if you are not a prime borrower seeking a first mortgage of less than $417,000 you are having a tough time finding financing. The stimulus package will raise that limit but only for prime borrowers.
Since September, the Fed has lowered the target federal funds rate 2.25 percentage points but to little avail, because the bond market no longer trusts the major New York banks to package mortgages into securities.
Bernanke has simply not addressed this more fundamental structural problem that frustrates his monetary policy.
The large New York commercial and investment banks are operating with a flawed business model.
.
.
.
Bond buyers have figured out the value added in these complex securities is negative and risky. Banks like Goldman Sachs that sold these securities to clients while shorting the market are now viewed with great suspicion.
So far the banks, flush with infusions of capital from Sovereign Wealth Funds, have not had to make necessary adjustments in their business practices. Those sources of capital see no problem with the business practices of banks that managed to lose their stockholders one percent of GDP, because these funds have non-profit motivations for investing.
Bernanke needs to speak to these issues, and encourage the adoption of sounder business models. If he does not, the recession will be long and hard.
Bernanke has responsibility for encouraging the sound functioning of credit markets.
He is ignoring this task through silence, and he may have to be shown the door.
In plainer terms, if you are not a prime borrower seeking a first mortgage of less than $417,000 you are having a tough time finding financing. The stimulus package will raise that limit but only for prime borrowers.
Since September, the Fed has lowered the target federal funds rate 2.25 percentage points but to little avail, because the bond market no longer trusts the major New York banks to package mortgages into securities.
Bernanke has simply not addressed this more fundamental structural problem that frustrates his monetary policy.
The large New York commercial and investment banks are operating with a flawed business model.
.
.
.
Bond buyers have figured out the value added in these complex securities is negative and risky. Banks like Goldman Sachs that sold these securities to clients while shorting the market are now viewed with great suspicion.
So far the banks, flush with infusions of capital from Sovereign Wealth Funds, have not had to make necessary adjustments in their business practices. Those sources of capital see no problem with the business practices of banks that managed to lose their stockholders one percent of GDP, because these funds have non-profit motivations for investing.
Bernanke needs to speak to these issues, and encourage the adoption of sounder business models. If he does not, the recession will be long and hard.
Bernanke has responsibility for encouraging the sound functioning of credit markets.
He is ignoring this task through silence, and he may have to be shown the door.
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