Friday, August 31, 2012

Why is Ben Bernanke (and his bank regulating colleagues) so inconsistent?

Ben Bernanke, the Chairman of the Fed, in a recent speech at Jackson Hole, refers to the possible costs the “the possibility that the Federal Reserve could incur financial losses should interest rates rise to an unexpected extent”, as a result of its balance sheet policies. 

Bernanke diminishes that very real possibility by arguing: to the extent that monetary policy helps strengthen the economy and raise incomes, the benefits for the U.S. fiscal position would be substantial. In any case, this purely fiscal perspective is too narrow: Because Americans are workers and consumers as well as taxpayers, monetary policy can achieve the most for the country by focusing generally on improving economic performance rather than narrowly on possible gains or losses on the Federal Reserve's balance sheet. 

And I must then ask why on earth Bernanke is unable to apply that same reasoning to our banks? Is not the purpose of the banks also that of helping to improve the performance of the economy? 

The sad fact is that our banks are currently constrained, by means of capital requirements based on perceived risk, from lending to the small business and entrepreneurs, those that mean so much to the real economy, only because regulators like Bernanke, worried sick, have foolishly decided these borrowers are too risky for the banks, when compared to lending to the absolute safe, like the AAA rated and the infallible sovereigns. 

The consequence of that is that if a bank lends to a Solyndra, it is required to hold more capital that if it lends to the government, so that a government bureaucrat can lend to a Solyndra. Frankly, a mind, if prone to believing in conspiracy theories, could not be blamed too much for suspecting that communism was being brought in, through the backdoor, by bank regulations. 

But setting aside any thoughts about foul play, what this regulations will create, and indeed have already created, are obese bank exposures to what is officially perceived as absolutely safe and anorexic exposures to the so needed and important “risky”. 

Bernanke ends by stating “The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.” 

Mr. Bernanke, let me then inform you that, in my humble opinion, because of your bank regulations, you and your colleagues are very much responsible for very much of that unemployment. Have you never thought of capital requirements for banks based on potential of job creation ratings?

Conclusion: The Milton Friedman helicopter approach, of dropping money from the sky, would be a much wiser approach for Ben Bernanke and the Fed to use than their QE’s, since that way some funds at least could reach the “risky”, like the small businesses and entrepreneurs, and not all get stuck with the officially perceived “absolutely safe”