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Shelby says thumbs down
on Bernanke appointment

WASHINGTON, DC – U.S. Sen. Richard Shelby (R-Ala.), ranking Republican on the Committee on Banking, Housing, and Urban Affairs, today opposed the nomination of Ben Bernanke to be Chairman of the Board of Governors of the Federal Reserve System.

“While there may be some agreement on Chairman Bernanke’s handling of the crisis, we must also take into account his role leading up to the crisis,” said Shelby. “We talk a good game when it comes to accountability, but we rarely match our own rhetoric with action. In this instance, I believe, that we must not only express our disapproval of this particular nominee, but we must also signal future nominees that we have expectations, and that those expectations must be met. For this reason and the others I have articulated, I will be opposing a second term for Dr. Bernanke as Chairman of the Board of Governors of the Federal Reserve System.”

The full text of Shelby's statement follows:

On the nomination of Ben Bernanke to be Chairman of the Board of Governors of the Federal Reserve System

December 17, 2009

“Thank you, Mr. Chairman.                                       

"Today the Committee will vote on the nomination of Ben Bernanke to serve a second term as Chairman of the Board of Governors of the Federal Reserve System.

“Our vote today will not only be an expression of our confidence in his ability to lead the Fed out of this crisis, but also a judgment on his performance in the years preceding it.

“After the recession that ended in 2001, which was precipitated by a bursting of the dot-com bubble, the Fed was concerned about a sluggish economy and the specter of deflation.  Given those concerns, the Fed chose to hold interest rates remarkably low for years.  The effective federal funds rate was below 2 percent between December 2001 and November 2004.

“During most of that period, now Chairman Bernanke served as a member of the Board of Governors of the Federal Reserve and supported the low interest rate policies.  In 2002, then-governor Bernanke expressed concerns about the possibility of deflation and the potential for future financial crises. 

“His warning was clear:  deflation is a potential danger which could ignite a financial wildfire.  The policy prescription seemed equally clear:  keep interest rates low, keep liquidity flows high, and lean hard against deflation pressures.

“However, while keeping interest rates low for a protracted period of time to avoid a deflation-induced crisis, the Fed seemed remarkably unconcerned about the possibility of igniting a different financial crisis by inflating a housing price bubble.

“According to noted economist Dr. Anna Schwartz, the easy monetary policy environment advocated by Dr. Bernanke represents a sin of commission.

“As housing prices soared and risk-taking escalated, Wall Street investors pressed on as if a “Fed put” was assured.  The notion was that — in adverse market conditions — the Fed would absorb faltering assets and flood markets with liquidity. 

“Governor Bernanke assured markets that the Fed stood ready to use the discount window and other tools to protect the financial system — an indication that the “Fed put” was indeed in place.

“Promoting the existence of a Fed “put” was, I believe, an invitation for unreasonable risk taking and moral hazard.

“In 2004 and 2005, Chairman Bernanke and other members of the Board of Governors spoke of the emergence of a “Great Moderation” — a potential permanent reduction in macroeconomic volatility and risks which, they argued, were a result of vigilant and adept monetary policy. 

“In retrospect, this misperception left market participants believing that large risks had been mitigated, opening the door for even greater risk taking. 

“Dr. Schwartz argues that Chairman Bernanke committed a sin of omission by neglecting the growing risks.

“According to the inflation-adjusted home price index constructed by economist Robert Shiller, home prices rose by an astounding 85 percent between 1996 and 2006.

“Chairman Bernanke was a member of the Board of Governors during the last four years of that period when home prices rose 43 percent. This is in remarkable contrast to a 10 percent rise in real home prices during the entire period from 1890 to 1996.

“I’d like to repeat those figures.  In the 106-year period beginning in 1890, home prices only rose 10 percent in real terms.

“With that in mind, I do not believe that there can be any disagreements that housing prices were becoming irrationally high over the following decade.

“As early as 2005, Yale economist Robert Shiller warned about the outsized gains in home prices. 

“Commenting on what he saw as a bubble in real estate markets, Shiller said that, “Significant further rises in these markets could lead, eventually, to even more significant declines. 

“The bad outcome could be that eventual declines would result in a substantial increase in the rate of personal bankruptcies, which could lead to a secondary string of bankruptcies of financial institutions as well.  Another long-run consequence could be a decline in consumer and business confidence, and another, possibly worldwide, recession.” 

“Chairman Bernanke was indeed aware of the growing dangers.

“However, the Fed ignored the risks identified by Professor Shiller and, instead, forecasted that the housing market would eventually bounce back from what was viewed as a slowdown and that problems in the subprime market would be contained.

“In a June 2007 speech, Chairman Bernanke said that “…fundamental factors — including solid growth in incomes and relatively low mortgage rates — should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system.” 

“He followed, in a speech in October of 2007, by saying that, “The banking system is healthy.”           

“In October of 2007, the banking system was decidedly not healthy.  By many accounts, the system was months into the kind of post bubble fallout that typically follows deleveraging of investments tied to a massive price appreciation like that which had just occurred in the housing markets.

“In making this fundamental misdiagnosis, the Chairman missed the clear signals: a housing bubble, a weakening economy, instability in the credit markets, and most important, he missed a clear chance to take action when it would not have required a massive commitment of taxpayer resources.

“In considering Chairman Bernanke’s reappointment, we need to be mindful of the fact that the crisis of 2008 was not days or weeks in the making. 

“It took years, and in many of those years Chairman Bernanke supported actions that contributed to the ultimate scale of the problems we encountered – a scale we have not seen since the Great Depression. 

“In my view, many of the Fed’s responses greatly amplified the problem of moral hazard stemming from too big to fail treatment of large financial institutions and activities. 

“Because the Fed also made other major forecasting errors, it was slow to identify possible spillovers from the housing market into the general economy and the financial system.

“Consequently, the Fed took actions that often appeared to be ad hoc and piecemeal.

“To quote Dr. Anna Schwartz, “The Fed delivered plenty of rhetoric about the importance of transparency, yet failed to articulate its own goals.  The market was thus bewildered when the Fed rescued certain firms and not others. 

“Mr. Bernanke ultimately failed to convince the market that the Fed had a plan, and was not performing ad hoc.

“Under Chairman Bernanke, the Federal Reserve also vastly expanded use of its discount window, including the provision of funds to institutions over which the Fed had no oversight.

“The Fed also created new lending facilities to channel liquidity and credit to markets that were deemed most stressed and systemically important. 

“The Fed’s balance sheet ballooned from a pre-crisis level of around $800 billion to more than $2.2 trillion through credit extensions and purchases of risky private assets, GSE debt, and U.S. Treasury debt. 

“Some Fed actions in the recent crisis were innovative ways to provide liquidity to a wide variety of financial institutions and market participants.  Some actions, however, amounted to bailouts.

“When handling failing individual institutions deemed systemically important by the Fed, shareholders were wiped out and management was replaced. 

“However, in many instances, bondholders were made whole, even though they were not legally entitled to such favorable treatment.

“Using powers granted under Section 13(3) of the Federal Reserve Act, the Fed made it clear that certain institutions and activities would not be allowed to fail.  The result was moral hazard on an unprecedented scale.

“For many years, I have held the Federal Reserve in very high regard.  I had a great deal of respect for not only its critical role in U.S. monetary policy, but also for its role as a prudential regulator.  I believed it to be this nation’s repository of financial expertise and excellence. 

“Over the years, we have enacted a number of laws which demonstrated our confidence in this institution and our expectation that they would use the authority we gave them to avoid financial crises.  We trusted the Fed to execute those laws when deemed prudent and necessary. 

“I fear now, however, that our trust and confidence were misplaced.

“I believe in accountability.  The Senate’s constitutional authority to advise and consent can be a highly effective means by which this body can hold individuals accountable.  It is a process through which we can express our disapproval of past deeds or our lack of confidence in future performance. 

“I strongly disapprove of some of the past deeds of the Federal Reserve while Ben Bernanke was a member and its Chairman, and I lack confidence in what little planning for the future he has articulated. 

“Once again I agree with Dr. Schwartz.  “Chairman Bernanke advocated monetary policies that contributed to excessive risk taking; ignored or downplayed serious emerging risks; failed to use regulatory authority available to the Fed to prevent housing speculation and unsound lending practices; often misjudged the nature of problems in the markets; and contributed to market turbulence by appearing to act inconsistently, without plans, and in an ad hoc manner.” 

“These shortcomings stand in stark contrast to some of Chairman Bernanke’s stated objectives given during his nomination hearing before the Committee in 2005. 

“During that hearing, Dr. Bernanke said that: “Monetary policy is most effective when it is as coherent, consistent, and predictable as possible…” 

“I do not believe that monetary policy during the recent crisis—which in some instances was, effectively, fiscal policy—was coherent, consistent, or predictable.

“In 2005, Dr. Bernanke said that, “…monetary policy has become increasingly transparent to the public and financial markets, a trend that I strongly support.” 

“As I mentioned earlier, I do not believe that there was any transparency in some of the actions taken during the crisis by the Fed.

“In 2005, Dr. Bernanke said that, “…the Fed works closely with other regulators to ensure the safety and soundness of the U.S. banking system, and over the years it has played a constructive role in managing and mitigating diverse types of financial crises.

“If I am confirmed, I will work to enhance the stability of the financial system and to ensure that the resources, procedures, and expertise are in place as needed to respond to any threats to stability that may emerge.”

“Not only were there evident threats to the stability of our financial system prior to 2006, but also a complete lack of regulatory response by the Fed.

“And finally, in 2005, Dr. Bernanke said that, “The Federal Reserve, along with other regulators, is also engaged in trying to ensure that consumers are treated fairly in their financial dealings, that their privacy is protected, that they receive clear and understandable information about the terms of financial agreements, and that they are not subject to discriminatory or abusive lending practices.”

“Is there any doubt at this point that we were experiencing a systemwide breakdown in mortgage underwriting and the Fed did virtually nothing until it was too late?

“Chairman Bernanke is a distinguished scholar and student of monetary policy and financial markets.  Under his leadership, the Fed engineered some innovative ways to inject liquidity into distressed markets during the recent financial crisis. 

“While there may be some agreement on his handling of the crisis, we must also take into account his role leading up to the crisis.

“Many have said, that changing horses in the middle of the stream will introduce an unacceptable level of uncertainty into the markets.  I would argue, however, that it can be equally damaging to our economy and our form of government if we – the United States Senate – fail to use our constitutional authority to disapprove a nomination when a particular nominee has not executed his responsibilities in a manner consistent with his own claims and our expectations. 

“We talk a good game when it comes to accountability, but we rarely match our own rhetoric with action. 

“In this instance, I believe, that we must not only express our disapproval of this particular nominee, but we must also signal future nominees that we have expectations, and that those expectations must be met. 

“For this reason and the others I have articulated, I will be opposing a second term for Dr. Bernanke as Chairman of the Board of Governors of the Federal Reserve System.”