07 Aug 2012

“What Model Is Ben Bernanke Using?!”

Bryan Caplan, Conspiracy, Economics, Federal Reserve 24 Comments

The bitter von Pepe sends this John Taylor blog post from early July:

In a recent speech at Stanford (video here) former Wells Fargo Chairman and CEO Dick Kovacevich told the full story of how he was forced to take TARP funds even though Wells Fargo did not need or want the funds. The forcing event took place in October 2008 at a now well-known meeting at the U.S. Treasury with Hank Paulson, Ben Bernanke, as well as several other heads of major financial institutions.

In his speech, Kovacevich first described how he and the other bankers were told at that meeting that they had to accept the funds. He then paused and said to the Stanford audience: “You might ask why didn’t I just say no, and not accept TARP funds.” He then explained: “As my comments were heading in that direction, Hank Paulson turned to Chairman Bernanke, who was sitting next to him and said ‘Your primary regulator is sitting right here. If you refuse to accept these TARP funds, he will declare you capital deficient Monday morning.’ This was being said when we were a triple A rated bank. ‘Is this America?’ I said to myself.”

Kovacevich, in the Q&A period of his talk, apparently explained that he and others in the financial industry had been quiet about all this, because they didn’t want the government to crack down on their companies for talking back.

Now I’ve heard this tale before, but until this morning I never reflected on one crucial aspect of it: Ben Bernanke is sitting there, knowing that Paulson is relying on him–the Bernank–to punish people for not taking TARP funds. In other words, Bernanke didn’t spit his water out and say, “Hank, I do declare! The very idea that I would adjust my opinions on capital deficiency in this way! I am a former academic, this conversation disgusts me.”

So for all of the naive bloggers out there, who just can’t understand why Bernanke doesn’t implement the policies he advocated when he was writing journal articles… Is it because he is just a kind of shy guy?

No, I don’t think that’s it. Here is the “model” I think Bernanke is using.

24 Responses to ““What Model Is Ben Bernanke Using?!””

  1. skylien says:

    Why wanted the government to force those funds on banks who didn’t want them in the first place? Did this buy them influence in the banks? If yes did they use it? Why didn’t they wait until those banks really were in trouble and give them the funds at this point?

    Can someone explain this?

    • Blackadder says:

      Why wanted the government to force those funds on banks who didn’t want them in the first place?

      There were a few banks that would go bankrupt unless the government gave them money. But if they just gave money to those banks, everyone would realize that those banks were in trouble, would pull their money out, and the banks would still fail. So you give money to all the banks to hide which ones are really in trouble.

      That’s the theory, anyway.

      • Ken B says:

        Yup. It’s the Joe Biden approach. Biden famously said the only way out of the debt crisis was more borowing. The Fed decided the only way to restore trust in banks was more deception.

        • Silas Barta says:

          But how does that make it the Joe Biden approach? From what you’ve given, it sounds like the Joe Biden approach is, “Banks that need to raise funds should borrow them to get through this time”, not “Let’s destroy all information which would allow people to know which lenders are f’ed.”

          • Ken B says:

            It’s the homeopathic approach in each case: take more of what brought on the disease.

          • Blackadder says:

            I’m pretty sure the Joe Biden approach is to randomly send people $200 million checks, no strings attached.

          • david nh says:

            The problem is that the lenders most in need of capital are the same ones that are “f’ed”. If one a) has determined that the banks cannot be allowed to fail, and b) wants to con the market into participating, the deception is necessary.

      • skylien says:

        That makes sense. Thanks.

        • Bob Murphy says:

          Another school of thought, skylien, says that people in positions of power sometimes like to expand their power. Worth considering.

          • skylien says:

            Yes, I aimed at that in my first comment above. Just then I do not understand how they gain more power directly by giving banks money that didn’t need it. Of course they gain or at least retain it indirectly as long as they can keep this phony game up, what seems to be the case here.

      • Silas Barta says:

        Thanks for the lucid explanation, that’s the same reason I remembered from back then.

        Can well all — even the die-hard CB-lovers — at least agree that if your favored monetary policy requires deliberately hiding information by lying to the public and forcing banks to take liabilities they don’t want, that there’s something fundamentally wrong with it?

        I would think this is uncontroversial, but there seem to be a lot of folks who have “danced with the devil” here and are perfectly fine with this, and don’t seem to think that the level of deception says anything about the system, or at least that it’s some “refined, sophisticated” view to support these bizarre, no-holds-barred attempt to prop up illusions.

        Remember, this isn’t a case of “we won’t go out of our way to make it easy for you to assess bank health”. It’s not “you have to invest carefully, and we won’t comment on any suspicions you have.” It’s “we’re going to deceptively manipulate the appearance of financial health of all major banks because we think it serves some more important goal”.

        • Silas Barta says:

          argh! “Can well all …” should be “Can we all …”

          • david nh says:

            Silas, don’t you realize the philosopher kings must have all the discretion they need to govern us wisely and make the difficult decisions? Also, don’t forget how evil speculators, once aware of the truth, can frustrate the plans the philosopher kings have for the benefit of the collective? The deception is for our own good.

            • Egoist says:

              I get the sarcasm, but I have to point out that the deception is really for the benefit of deceiver, not the deceived.

              They just present it as altruist to tickle the egoism of the deceived.

        • skylien says:

          I really doubt you will get an answer to this question from CB “lovers”. I guess you have DK in mind? (Prove me wrong Daniel 😉

  2. joeftansey says:

    The hyperlink doesn’t go to the video.

  3. Matt M says:

    Does being declared “capital deficient” mean they come in and shut you down and take all your assets, or is it just a notification to the market that you aren’t to be trusted that would likely result in a bank run and a collapsing stock?

    If the latter, couldn’t a confident CEO basically call their bluff and say “make my day,” wait for the stock to collapse to undeserved lows, buy up a whole lot of it, and then reap the rewards once the market eventually discovers that Bernanke was lying about their situation?

    • Major_Freedom says:

      “… The Times of the nineteenth of December had published the official forecasts of the output of various classes of consumption goods in the fourth quarter of 1983, which was also the sixth quarter of the Ninth Three-Year Plan. Today’s issue contained a statement of the actual output, from which it appeared that the forecasts were in every instance grossly wrong. Winston’s job was to rectify the original figures by making them agree with the later ones.

      “As for the third message, it referred to a very simple error which could be set right in a couple of minutes. As short a time ago as February, the Ministry of Plenty had issued a promise (a ‘categorical pledge’ were the official words) that there would be no reduction of the chocolate ration during 1984. Actually, as Winston was aware, the chocolate ration was to be reduced from thirty grammes to twenty at the end of the present week. All that was needed was to substitute for the original promise a warning that it would probably be necessary to reduce the ration at some time in April…

      “But actually, he thought as he re-adjusted the Ministry of Plenty’s figures, it was not even forgery. It was merely the substitution of one piece of nonsense for another. Most of the material that you were dealing with had no connexion with anything in the real world, not even the kind of connexion that is contained in a direct lie. Statistics were just as much a fantasy in their original version as in their rectified version. A great deal of the time you were expected to make them up out of your head.

      “For example, the Ministry of Plenty’s forecast had estimated the output of boots for the quarter at one-hundred-and-forty-five million pairs. The actual output was given as sixty-two millions. Winston, however, in rewriting the forecast, marked the figure down to fifty-seven millions, so as to allow for the usual claim that the quota had been overfulfilled. In any case, sixty-two millions was no nearer the truth than fifty-seven millions, or than one-hundred-and-forty-five millions. Very likely no boots had been produced at all.

      “Likelier still, nobody knew how many had been produced, much less cared. All one knew was that every quarter astronomical numbers of boots were produced on paper, while perhaps half the population of Oceania went barefoot. And so it was with every class of recorded fact, great or small. Everything faded away into a shadow-world in which, finally, even the date of the year had become uncertain.”

      • Dan Lind says:

        “A child, however, who had no important job and could only see things as his eyes showed them to him, went up to the carriage.

        “The Emperor is naked,” he said.

        “Fool!” his father reprimanded, running after him. “Don’t talk nonsense!” He grabbed his child and took him away. But the boy’s remark, which had been heard by the bystanders, was repeated over and over again until everyone cried:

        “The boy is right! The Emperor is naked! It’s true!”

        • Tel says:

          In the historical version of that story the Emperor simply asked his guards to run a spear through the boy and wave him around at the front of the parade.

          All the bystanders rapidly agreed the Emperor’s new clothes were the finest they had ever seen.

          • Silas Barta says:

            And in modern retellings, a lot of people react to the story by saying, “Well of course a *kid* isn’t going to be able to see the Emporer’s clothes … why do they care what *he* has to say?”

            • Dan Lind says:

              The great thing about that kingdom is that ANY kid could grow up and be Emperor someday.

  4. david nh says:

    Bernanke presumably was being guided by one of the Fed’s other implicit mandates.

    BTW, I am not sure that “naive” is really the best term to apply to those that “can’t understand why Bernanke doesn’t implement the policies he advocated when he was writing journal articles”. If central banks followed theoretically optimal monetary policy, there wouldn’t be any point (from the state’s perspective) in having them.

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