Chairman of the Fed Must Protect ConsumersJanuary 28, 2010
Mr. President, I rise today to oppose the nomination of Ben Bernanke as Chairman of the Fed. I do so as a member of the Banking Committee who voted against his nomination in that committee, because I researched his record, and on that record I believe that Ben Bernanke is not the right person to lead the Fed. In short, Bernanke’s decisions over the last eight years as a member of the Federal Reserve Board, as Chairman of the Council of Economic Advisors, as Chairman of the Fed, helped set the fire that destroyed our economy.
Now, Mr. Bernanke is a calm and unassuming man, responsive and thorough in his explanations and very likeable. In addition, to keep the analogy, he has done a good job with the fire hose over the last year. He understood that tightening credit during a collapsing, bubble economy would be like turning off the fire hydrant in the middle of a fire. He did keep the fire hydrant turned on. And I give him credit for that.
But now we need to rebuild our economic house, and that takes an architect, not a fireman. That takes a builder, not someone turning on a fire hydrant. Based on his performance over the last eight years, I do not believe that Ben Bernanke is the right architect to rebuild our economy, an economy that will work for working families.
Consider the following: Ben Bernanke failed to react to the enormous danger from an interlocking web of derivatives that created high-speed channels for massive financial contagion. Let me put it simpler: Derivatives turned our financial institutions into a set of dominoes, which if one falls, others fall. And Ben Bernanke did not respond to the growing threat of derivatives. Bernanke failed to respond to the increase in proprietary trading that amplified risk in both depository lending institutions and our financial system as a whole.
Again, let me put this more simply. Gambling on stocks and bonds and derivatives is fundamentally incompatible with bank stability. But Bernanke did not respond. Ben Bernanke supported and advocated for policies that reduced capital and increased leverage in both commercial banks and investment banks greatly magnifying risk across the system. He supported Greenspan’s philosophy of deregulation and self-regulation. He advocated for Basel II. Now what was Basel II? Basel II was to say to the largest banks in America, “you can set your own leverage ratios.”
Now what did that result in?
That resulted in banks going to 30-1 leverage. Now, if you invest money 30-1 in an up market, it’s a killing. You make all kinds of money. But when you’re at 30-1 leverage and the market turns down, you blow up. Immediately. Now, there is not an analyst in America who can tell you at any one moment when the market will go up, and when the market will go down. But they can tell you that it will go up and down over a period of time. What goes up must come down. There is never going to be a steady, upward climb forever. So, if you allow 30-1 leverage, you’re going to make a lot of financial institutions very, very happy. They’re going to make a lot of money until the market turns down.
Well, Ben Bernanke set loose the leverage requirements that paved the path that set this fire, that burned down our economy. Ben Bernanke ignored the housing bubble. He failed to protect homeowners from deceptive practices. Now why is this important? Let me explain to you what happened over those eight years.
Families went to their real estate agent and the real estate agent followed a strict code of conduct, a strict code of ethics and they arranged to buy a house. And then they went to a broker and they assumed that there would be a similar strict code of ethics and they were going to get a loan for their house and the broker said, “you know what? Homeownership has gotten very complicated, mortgages have gotten very complicated. I’m going to be your advisor. I’m going to be your advisor, trust me and sign this loan right here. This will be the best one for you.”
And what was wrong with that is that the homeowner did not know that the broker was being paid a large sum of money, called a “yield spread premium” also known as a “steering payment” because they were designed to steer people into certain loans, also known as “a kickback.” The broker was receiving those, and families that qualified for prime loans ended up in subprime loans.
What institution was responsible for consumer protection on mortgages? The Fed was responsible. Ben Bernanke did not do a thing to protect consumers from this gross conflict of interest that torpedoed the financial prospects of millions of American families, but he had direct responsibility.
In the Fed, monetary policy has been in the penthouse, as it must be. That is their primary responsibility. Safety and soundness in the upper floors, and consumer protection in the basement. We cannot leave consumer protection in the basement.
So I’ll close with this: Ben Bernanke was not alone in helping to set this fire. He had a lot of company. But over eight years he made critical mistake after critical mistake that in the short term, large financial institutions loved, but it set the conditions for our economy to burn down. And the consequences for families were extraordinary; loss of jobs, loss of retirement, loss of savings, and with the job loss, loss of health care. That’s an extraordinary amount of damage. And now we need somebody to rebuild our economy. Ben Bernanke is not that man.