The Weiner Component Vol.2 #8 – The Federal Reserve During the Bernanke Years: 2006 – 2014

English: President Barack Obama confers with F...

English: President Barack Obama confers with Federal Reserve Chairman Ben Bernanke following their meeting at the White House. (Photo credit: Wikipedia)

In 1935, Cret designed the Seal of the Board o...

In 1935, Cret designed the Seal of the Board of Governors of the Federal Reserve System. (Photo credit: Wikipedia)

On January 31, 2006, Alan Greenspan retired or resigned as Chairman of the Federal Reserve and on February 1, 2006, Ben Bernanke became the new Chairman. He served two four year terms, initially being nominated by George W. Bush and being re-nominated the second time by President Barack Obama. Chairman Bernanke would find, among other things, the means to avoid a depression far greater than that of 1929. He would do this through the use of Creative Monetary Policy; that is, essentially by flooding the economy of the United States with money.

 

To understand in detail what he did one has to read his 2015 book, The Courage to Act. In this work he explained how the world’s economies came close to collapse in 2007 and 2008. Bernanke explained how it was the efforts of the Federal Reserve utilizing Monetary Policy and cooperating with other national agencies of the U.S. and agencies of foreign governments that prevented an economic catastrophe far greater than the Great Depression of 1929 which lasted for over ten years.

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Generally speaking: in 2008 the Housing Crash came. It had gradually been developing since the 1980s. While President George W. Bush and his Secretary of the Treasury, Hank Paulson, made large loans to banking houses to keep them from failing Bernanke bailed out AIG, the largest insurance company throughout the United States.

 

If AIG went bankrupt millions of people would have lost their insurance coverage and the premiums they had paid over the years. AIG had also insured some of the Hedge Funds that went under. They had wanted some of the profits that the banks were making from the Housing Market and their actuaries had no experience in dealing with Hedge Funds. I assume that Bernanke wanted to avoid the misery this would cause nationwide.

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It is important to keep in mind that the Federal Government under Presidents Bush and Obama were making loans to the banks, AIG and to the auto industry. These loans were repaid by all three groups with interest.

 

President Obama set a condition on the loans that Bush did not. That was to limit compensation packages for the executives of these struggling institutions. To the President it seem ridiculous that CEOs and other bank executives should continue to receive salaries of over a million dollars after bring the banking houses to the point of bankruptcy.

 

The CEO of the Bank of America complained bitterly about this. He wanted to pay off the Government loan quickly so the leading executives could go back to salaries in the multi-millions. Today in 2017, and for a number of prior years, their remunerations go from about four million up.

 

It should also be noted that the banks, taken together, have paid multimillions in fines for illegal practices. And no one has ever gone to jail but the banks have paid at times massive fines.

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The Housing Debacle and the increase in unemployment (up to 10%) that accompanied it should have been handled by both the Federal Reserve applying Monetary Policy and the Congress and the President applying Fiscal Policy, Congress passing spending bills and the President signing them. From 2011 on, when the Republicans gained control of the House of Representatives there were no Fiscal Policy Bills passed through Congress.

 

The year 2011 on was an ideal time to begin rebuilding the infrastructure of the United States. Most of the infrastructure had been built in the late 19th and the first half of the 20th Century. The population had practically doubled since then and a good part of the infrastructure of the country was well out of date.

 

The National Highway System had been built by President Eisenhower in the 1950s. By 2009 most of the airports, railroads, government buildings, the electric grid, many public schools, even the education system was/is grossly out of date. In fact, for what it’s worth, President Donald Trump has defined the infrastructure of the country as a “disaster.”

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After the bank bailouts the Obama Administration expected the banks to return to a reasonable level of what they had been doing before the crash. This did not happen. The banks became ultra conservative in their lending policy. People buying new homes had to have a fairly large percentage of the cost of the new home. Chairman Bernanke lowered the interest rate the Fed charges banks to 0% giving them free money.

 

From this point on in approximately 2010 the banking houses looked for new way to make profits with their funds. What they came up with, among other things, was the Futures Market.

 

Future Markets are exchanges that buy and sell future contracts. A future contract gives the buyer an obligation to purchase an asset and the seller an obligation to sell an asset at a set price which is to be delivered at a future point in time. The purchasers are interested in selling the asset the future time at a profit. They are often blamed for big price swings in the Futures Market.

 

The assets underlying future contracts include food commodities, stocks and bonds, grain, precious metals, electricity, oil, beef, orange juice and natural gas to name a few. They are bets that the price of the product at the eventual delivery price will far exceed the earlier purchase price.

 

It can be assumed that the rise in food and gasoline prices after 2010 exceeded what they would have been if the banks had not been involved. In essence the banks exploited the general homeowner up until 2008 and from 2010 on they exploited the general public whose tax dollars had bailed them out of the economic disaster which they had caused in their perennial search for more and more profits.

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In the year 2010 the American public elected a Republican majority to the House of Representatives. With their ascension to the House in 2011 all possibilities of Fiscal Policy Bills ceased. The Republicans wanted to reduce government spending and make President Obama a one term president by not allowing him to succeed in anything. In fact what the House of Representatives did was to worsen the Housing Debacle by reducing, forcibly at the time, government spending. They even shut the government down by not funding it.

 

President Obama offered an Infrastructure Bill that never even came up in the House of Representatives. The fact that President Obama and Chairman Bernanke were able to turn the Housing Crash and limit initial unemployment to only 10% with actual opposition from the Republican House of Representatives was itself miraculous. What the Fed and the President did was to turn a possible depression into the Great Recession. Even though economic conditions were far from ideal this was truly an act of wonderment.

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What happened with the Housing Crash was a situation that looked like it might take decades to straighten out. Virtually overnight the value of homes deflated at the speed of an exploding balloon. Many people who had financed and refinanced their property more than once suddenly discovered that they were underwater, that is, that they owed more on their homes than they were worth. A percentage of these people just walked away from their property, leaving it deserted.

 

This raised an interesting problem both for these properties and for those in which the people continued living. Who owned these mortgages? Remember the mortgages had been divided up into innumerable fractional pieces. In order to control any one of these property mortgages one needed to own over 50% of it. No Hedge Fund owned that much of any one property. The records of mortgage ownership were highly inaccurate. Consequently in point of fact no one really owned these properties.

 

Most of the banks that had been charging endless fees to administer these mortgage loans felt that they could foreclose on these properties, either because they were deserted empty houses or because the inhabitants could, for one reason or another, no longer afford to make their monthly payments. A goodly number of these people had lost their jobs.

 

The banks used their computers to generate the needed documents since no real records of ownership existed. The banks had earlier been in too great a hurry to generate loans than to keep accurate records.

 

Some of these cases went to court and initially the judges felt that a solid institution like a bank would do nothing illegal. Some of the attorneys who made this point were declared to be in “contempt,” and were disbarred. Eventually after a large number of cases were determined in favor of the banks the evidence of their wrongdoing was acknowledged by the Courts. Whether the disbarred lawyers got their licenses back I don’t know, but the banks were severely fined for wrongdoing and the illegal foreclosing ended leaving a lot of people living in homes for which they were not paying.

 

The problem was left up in the air. As long as the people living in these homes paid their property taxes no one could legally disposes them even if they never made another house payment on the mortgage. Most of the Hedge Funds had gone bankrupt; they didn’t own enough of any property to foreclose on it. Of course no one knew which properties these were and which actually had owners of the mortgages. Some of the banks had owned some of the Hedge Funds.

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What generally happened across the nation from that point in time on was interesting. Numerous individuals, generally not being employed, no longer paid their mortgages. If they were reemployed or eventually got a job they still did not make payments. Why bother? No one had foreclosed on them. In essence these people now had extra cash which they tended to spend. Suddenly, among other things, eating out with their families became very popular. A good part of their housing funds were being spent. The National Cash Flow or the amount of money available in the general society increased with all this spending and it helped keep the level of national unemployment to no higher than ten percent. This was an interesting irony that was initially funded by the banks but ultimately payed by the taxpayers in the bail outs.

 

Had the House and Senate passed the Infrastructure Bill that President Barack Obama suggested then the overall effects of the Great Recession would have disappeared by the end of his first term in office and the country would have dropped to a 2 ½ percent unemployment level which is considered full employment because it is the rate generated by people normally retiring, changing jobs, and first entering employment.

 

The result would have been more taxes being paid which would have largely offset the increased government spending. But the Republicans dominated House of Representatives was penny smart and dollar stupid. By forcing down government expenditure they also cut down the Gross National Product (GDP) and shrank taxable income throughout the United States, keeping unemployment higher.

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On August 25, 2009, President Barack Obama announced he would nominate Bernanke to a second term as the Chairman of the Federal Reserve. He stated, with Ben Bernanke standing at his side that Bernanke’s background, temperament, courage and creativity helped to prevent another Great Depression in 2008.

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