The movie “The Big Lebowski” has built an enormous cult following. Fans of the film commit all the classic one-liners to memory and often dress up in the garb of even the most obscure characters from the film. One my favorite lines in the movie is uttered by John Goodman’s character, Walter, to Steve Buscemi’s character, Donny. They, along with the Big Lewbowski, are facing down the three nihilists outside of the bowling alley. Donny is worried about a physical confrontation, but Walter confidently reassures him and says, “Don’t worry, Donny. These men are cowards.”
I was reminded of this scene – and its relevancy to the financial crisis – by a remarkable meeting held this past week at the Brookings Institution. There, Ben Bernanke, Tim Geithner and Henry Paulson sat down with a select group of reporters and reflected on the financial crisis; apparently – and amazingly - as some sort of experts. As reflected by their prominent position on the “Confederacy of Dunces” list, nothing could be further from the truth than recognizing these three as experts on the financial crisis – unless the expertise is in causation.
With all this as a preface, it is useful to revisit the Big Lebowski scene described above. However, instead of Walter, Donny and the Big Lewbowski confronting the three nihilists outside the bowling alley, it is useful to envision the American people confronting three of the leading causal agents of the financial crisis – Ben Bernanke, Tim Geithner and Henry Paulson - inside the Brookings Institution. Instead of dismissing these three as cowards, it will be much more appropriate to dismiss them as frauds. The financial crisis provides reams of evidence to show that Bernanke, Geithner and Paulson are consummate frauds. The brief discussion below is only a brief introduction to this evidence.
The fact that Ben Bernanke emerged from the financial crisis with an enhanced reputation is the best evidence of just how poorly the crisis is understood by the media – even with the benefit of ten years of hindsight. Ben Bernanke – with his summa cum laude degree from Harvard and his MIT PhD – unleashed his enormous economic ignorance on the world, and huge numbers of people suffered as a result. Of course, it was his purportedly “elite” education that gave him the unbridled confidence to unleash this ignorance on the world. As just one example of this ignorance is Ben Bernanke remaining clueless about the enormous bubble in housing that his Federal Reserve helped inflate. Bernanke remained clueless about this bubble even after it had been collapsing for years.
Many people are aware of Ben Bernanke confidently dismissing the prospect of a housing bubble in a July 2005 interview with CNBC. (A link to the video is in my Twitter feed.) There he dismissed a housing bubble as a “pretty unlikely possibility.” In a December 3, 2015 interview with the Freakanomics podcast, Bernanke claims he really can’t be taken to task for this comment because he was as an economic advisor for the Bush administration in 2005. He now claims he didn’t want to cause a panic by telling the truth. For the sake of brevity, let’s ignore the enormous, society eroding forces associated with governments and government officials not being expected to tell even a semblance of the truth. Instead, let’s simply accept it and study the purely economic aspects of Bernanke’s answer.
Bernanke’s answer in 2015 makes it appear that he was aware of the emerging problems in housing in 2005, but couldn’t express these concerns publicly. (Note, in terms of ownership, the housing market peaked in April 2004, fifteen months prior to his CNBC interview.) However, a review of meeting minutes from the Federal Reserve’s open market committee in 2006 show that the cluelessness Bernanke expressed to CNBC in July 2005 is completely representative of his thinking at the time. The quotes below are all from Bernanke and recorded as part of Fed meeting minutes.
- March 27-28, 2006: "The economy appears to be quite strong... Perhaps the leading source of uncertainty on the output side is the housing market, but I was reassured to hear that most participants think that a decline in housing will be cushioned by strong fundamentals...I agree with most of the commentary that the strong fundamentals support a relatively soft landing in housing.
- May 10, 2006: "So far we are seeing, at worst, an orderly decline in the housing market."
- September 20, 2006: "...But I agree that the economy except for housing and autos is still pretty strong, and we do not yet see any significant spillover from housing."
Like most Harvard and MIT graduates, what Ben Bernanke learned at these schools is completely undermined by his inability to know when he has been wrong.
Of the three people discussed here, Geithner is clearly the biggest fraud – and that is saying something. During the crisis, Geithner served as head of the Federal Reserve Bank of New York. Bernanke, at least, has the academic background – replete with enormous flaws, gaps and psychological blind spots though it is – of a senior Federal Reserve official. Similarly, Treasury Secretary Paulson had spent nearly his entire working life on Wall Street, and ran the most successful Wall Street investment bank, Goldman Sachs. On the other hand, Geithner majored in government at Dartmouth. He then spent large parts of his professional life with Kissinger Associates, as an “expert” with the Council on Foreign Relations and little more than a Treasury department errand boy. In fact, one of the few things Ben Bernanke gets correct in his 600-page crisis memoir, The Courage to Act, is being “underwhelmed” when he first met Geithner, (p. 78). The fact that a privileged ne’er-do-well like Tim Geithner became president of the most important federal reserve bank gives truth to the adage, “it is not what you know; it is who you know.”
In Ben Bernanke’s own words, the Federal Reserve Bank of New York has an important role in “banking supervision.” On its website, the NY Fed elaborates on this role and states as objectives of this supervision, “…the overall safety and soundness of the supervised institutions,” and the “stability of the financial system.” The best evidence of Geithner’s awful job of promoting the “stability of the financial system” is provided by his blindness to the enormous problems that occurred at AIG.
Defenders of Geithner might claim that he was not directly responsible for supervising AIG. However, this misses the point, and does nothing to defend Geithner from well-deserved and long-overdue criticism. AIG's enormous blunders, which were fueled by the theories of a Wharton finance professor, Gary Gorton, exposed AIG's counterparties - i.e. Wall Street banks that the NY Fed was responsible for - to enormous problems if AIG failed. AIG provided insurance on mortgage bonds defaulting. If AIG went bankrupt and couldn't cover mortgage bond losses, then other Wall Street banks could be exposed to these losses or credit runs. Here is Henry Paulson, during the depths of the crisis, admitting to the "systemic" nature of AIG in the crisis. "If we don't shore up AIG, we will likely lose several more financial insitutions. Morgan Stanley, for one."
The problems with AIG long pre-date the Federal Reserve’s $85-billion bailout of AIG on September 16, 2008. (The bailout’s cost would eventually soar to well over $115-billion.) As evidenced by the brief timeline below, AIG’s problems were so slow in developing and so large in scope that there seems to be no rational explanation for the enormous ignorance that coursed through the veins of the New York Fed - other than the fecklessness of its president, Tim Geithner.
- End of 2005: a trader with Deutsche Bank travels to London to try to convince AIG not to issue more mortgage bond insurance.
- Early 2006: a senior executive with AIG, Gene Park, convinces upper management at AIG to stop issuing new mortgage bond insurance policies.
- September 08, 2006: Grant's Interest Rate Observer predicts massive losses on "trillions" of mortgage bonds.
- September 28, 2006: Merrill Lynch predicts massive losses on mortgage bonds.
- October 06, 2006: Grant's Interest Rate Observer notes that even a slight drop in home prices will completely wipe out AAA rated mortgage bonds.
- Fall 2006: Deutsche Bank makes presentations to hundreds of investors detailing the ticking time-bomb nature of many mortgage securities.
- November 13, 2006: investor and author Peter Schiff tells a mortgage brokers convention, "that particular piece of paper, (a mortgage bond), should be rated 'F,' and it will go to zero."
Tim Geithner and the Federal Reserve Bank of New York were ignorant of all this and he is judged some sort of blameless expert on the crisis?
Given Henry Paulson’s long-career on Wall Street, it was only natural that his tenure as Treasury secretary would get the relationship between finance and wealth producing-economic activity completely backwards. Rather than wealth producing activity giving rise to a healthy financial system, Paulson thinks strong banks produce wealth producing economic activity. This is not a harmless mistake or mere semantics. This mistake lies at the core of the notion – assiduously advanced by Ivy League economics departments and their Federal Reserve messenger boys – that the “financialization” of the US economy is some sort of development to be celebrated.
Paulson’s fraud is much easier to discern than that of Bernanke’s or Geithner’s. All that it takes is to understand the role Paulson played in changing the “net capital rule.” Basically, the net capital rule limited the amount of leverage – or borrowing – banks could use when making investments of their own. On February 29, 2000 Paulson argued on behalf of scrapping the existing net capital rule and allowing banks to use far greater leverage. Here is Paulson to the SEC, “In addition, we and other firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important fact driving significant parts of our business offshore.”
Unsurprisingly, the SEC under William Donaldson – who has degrees from Yale and Harvard, (so he must be really smart) – acted as little more than a rubber stamp for what Wall Street wanted. In April 2004 the net capital rule was changed allowing far more leverage on Wall Street. Within just a few years, three of the banks that were authorized to use more leverage – Bear Stearns, Lehman Brothers and Merrill Lynch – would vanish from the face of the financial earth. Amazingly, in his post-crisis memoir Paulson cites – and bemoans – the increased use of leverage up and down Wall Street, (“excessive leverage was evident in nearly all quarters”). However, he never discusses his enormous role in the increased use of leverage on Wall Street! Talk about being a fraud!
The discussion here is a brief introduction into just some of the information available in the timeline and the various dunce biographies. Limited though it is, this discussion should be more than enough to prove Bernanke, Geithner and Paulson as consummate frauds.