B en Bernanke’s memoir is out and the chatter about it inevitably turns to
the sickening moments in September 2008 when “the world economy came very
close to collapse.” Easy to say, but how many people know what that means?
It’s every bit as opaque as the operations of the Federal Reserve itself.
There were many ugly facets to the problem but they all boiled down to
global insolvency — too many promises to pay that could not be met. The
promises, of course, were quite hollow. They accumulated over the
decades-long process, largely self-organized and emergent, of the so-called
global economy arranging itself. All the financial arrangements depended on
trust and good faith, especially of the authorities who managed the world’s
“reserve currency,” the US dollar.
By the fall of 2008, it was clear that these authorities, in particular
the US Federal Reserve, had failed spectacularly in regulating the operations
of capital markets. With events such as the collapse of Lehman and the rescue
of Fannie Mae and Freddie Mac, it also became clear that much of the
collateral ostensibly backing up the US banking system was worthless,
especially instruments based on mortgages. Hence, the trust and good faith
vested in the issuer of the world’s reserve currency was revealed as
worthless.
The great triumph of Ben Bernanke was to engineer a fix that rendered
trust and good faith irrelevant. That was largely accomplished, in concert
with the executive branch of the government, by failing to prosecute banking
crime, in particular the issuance of fraudulent securities built out of
worthless mortgages. In effect, Mr. Bernanke (and Barack Obama’s Department
of Justice), decided that the rule of law was no longer needed for the system
to operate. In fact, the rule of law only hampered it.
Mr. Bernanke now says he “regrets” that nobody went to jail. That’s
interesting. More to the point perhaps he might explain why the Federal
Reserve and the Securities and Exchange Commission did not make any criminal
referrals to the US Attorney General in such cases as, for instance, Goldman
Sachs (and others) peddling bonds deliberately constructed to fail, on which
they had placed bets favoring that very failure.
There were a great many such cases, explicated in full by people and
organizations outside the regulating community. For instance, the Pro Publica
news organization did enough investigative reporting on the racket of
collateralized debt obligations to send many banking executives to jail. But
the authorities turned a blind eye to it, and to the reporting of others,
mostly on the web, since the legacy news media just didn’t want to press too
hard.
In effect, the rule of law was replaced with a patch of official
accounting fraud, starting with the April 2009 move by the Financial
Accounting Standards Board involving their Rule 157, which had required banks
to report the verifiable mark-to-market value of the collateral they held. It
was essentially nullified, allowing the banks to value their collateral at
whatever they felt like saying.
Accounting fraud remains at the heart of the fix instituted by Ben
Bernanke and the ploy has been copied by authorities throughout the global
financial system, including the central banks of China, Japan, and the
European Community. That it seemed to work for the past seven years in
propping up global finance has given too many people the dangerous conviction
that reality is optional in economic relations. The recovery of equity markets
from the disturbances of August has apparently convinced the market players
that stocks are invincible. Complacency reigns at epic levels. Few are ready
for what is coming.
