Volcker: "Bernanke a One Termer"

Monday, April 14, 2008 | 07:10 AM

The following information comes from a well-placed sourced, whose partner was present at the event -- but since its 2nd or 3rd hand to me, consider it a rumor until proven otherwise.

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Over the prior weekend of April 6, former Fed Chair Paul Volcker was present at a small gathering. Several luminaries from the worlds of finance, economics and trading were in also attendance.

The conversation turned to the present Federal Reserve. The blunt, straight talking Volcker stated that Ben Bernanke is not likely to serve more than one term as FOMC chief. Quote: "He's a one-termer."

Why?

For reasons both political and economic.

The economic reasons are the weaker of the two issues. Most of the forces leading to the current situation were in effect long before Bernanke became Fed chief. But if the current crisis gets worse -- a possibility only a few economists and analysts see as likely -- heads will have to roll. While the current administration does not believe in falling on your own sword in the event of failure, it has been considered honorable amongst other, less disingenuous administrations.

Regardless of who wins the White House in November, there is a strong impetus for change across the board. Bernanke was George W. Bush' Council of Economic Advisers Chairman. If a Democrat wins, the political pressure for change will be even greater.

It is only fair to point out that Ben Bernanke essentially inherited the current crisis. As far as assessing where the blame goes, between him and Greenspan, I find its 85/15 in favor of Greenspan.

Why only 15% responsibility? As we have long lamented, the policies that led directly to the current crisis trace directly back to Greenspan. His malfeasance in refusing to allow the Fed to perform its duties as regulator of banks -- despite Ed Gramlich's warning about predatory lending -- is the enabling governmental act for the reckless and irresponsible lending frenzy. Easy Al then compounded the problem by dropping rates to generational lows at 1%, and then keeping them at 1% for an unprecedented length of time. His actions are what is primarily at fault here.

Bernanke only gets 15% for his prior words, not actions. 5% responsibility as CEA chair -- but he was so late in this admin that most of the economically problematic policies were already well in effect. He gets another 5% for his now infamous deflation speech. That rationalized Greenspan's ultra-low rates, and deflected criticism. Lastly, the "Savings Glut" meme he help to propagate is also worth 5%. Each of these two speeches were influential, and raised Benrnake's profile. They also served to provide intellectual cover for the now discredited and otherwise indefensible policies of Alan Greenspan. Hence, but 15% is Bernanke's fault.

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The bottom line remains this is an ongoing issue, one that is likely to be increasingly costly for US taxpayers, and damaging to the global economy.


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Previously:

Must See TV: Volcker's Speech on Financial Crises   http://bigpicture.typepad.com/comments/2008/04/paul-volckers-s.html 

Sources:
Deflation: Making Sure "It" Doesn't Happen Here
Governor Ben S. Bernanke
November 21, 2002
http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

The Global Saving Glut and the U.S. Current Account Deficit 
Governor Ben S. Bernanke 
Federal Reserve, April 14, 2005.  http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/default.htm

Ex-Fed Chairman Chides Current One
MICHAEL M. GRYNBAUM
NYT, April 9, 2008
http://www.nytimes.com/2008/04/09/business/09fomc.html

Volcker Says Fed's Bear Loan Stretches Legal Power
John Brinsley and Anthony Massucci   
Bloomberg, April 8 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aPDZWKWhz21c

Volcker's Demarche
WSJ, April 9, 2008; Page A14
http://online.wsj.com/article/SB120769723589099695.html

Monday, April 14, 2008 | 07:10 AM | Permalink | Comments (41) | TrackBack (1)
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Tracked on Apr 14, 2008 9:59:38 AM

Comments

So here’s my first, fanciful thought. We had the fairly direct assault on BB from PV—the borderline illegal Fed action in the Bear takeover interview.

Recall that Volcker’s an economic advisor to Obama. It’s spread by PV himself, as the start of a viral movement to undermine BB. Obama’s elected? As one of his first moves, he announces the appointment of a new head of the Federal Reserve, former chairman Paul Adolph Volcker.

Posted by: Scot Frew | Apr 14, 2008 7:13:28 AM

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