Business Law Prof Blog

Hope for Change: Yes We Can Fire Bernanke

Ben Bernanke, the Chairman of the Fed, is up for reappointment.  The economists all want him reappointed.  I want him fired.  Not because his replacement will be better, she will not, but because he will get what he deserves -- credit for a mess.  I recognize that firing Bernanke would mean the Administration would admit economic mistakes so it cannot happen, but I hope for change.  Bernanke is claiming credit for "stopping the meltdown" of the finanical markets.  To analize the claim one must speculate on what would have happened had he acted differently -- he claims he averted disaster.  Did he?  I am a doubter.  I believe he made things worse.  The history will show that the panic of Bernanke, Paulson and Geithner set in on the collapse of Lehman when the commerical paper markets were under threat.  This was the date of the potential meltdown.  Reconsider:  First, why the threatened collapse of the commerical paper market?  Paulson (and his buddies) had bailed out Bearn Stearns and led Fund to believe they would bail out Lehman.  As a result Fund did not take two serious offers to buy his company and did not take steps to seek new capital.  To this day, Fund is still stunned that the trio did not act to bail him out.  A consistant public policy at the time of the Bearn Stearns collapse could have averted the Lehman debacle.  [I would not have bailed out Bearn Stearns either, forcing Lehman to sell to the Korea Development Bank.]   Second, once the commerical paper market stumbled, what should the trio have done?  One commerical paper fund had "broken the buck" on its Lehman investments.  A targeted response, would prop up the commerical paper market.  The Fed buys commercial paper (which it did and which worked).  Instead the trio went blunderbuss.  They pushed anything and everything -- a pork laced stimulus package (which has not and will not work), bailouts of insurance, automobile and financial institutions (which are bottomless pits and compromise private markets), mortgage forgiveness (which has not worked), the purchase of mortgage backed securities (which has not helped the securitization market), attacks on executive salary, attacks on private equity, empty reform of finanical regulators and of the derivative markets, and the list continues.  It is the blunderbuss approach that is painful to watch.  Bernanke is taken credit for killing a fly on the wall with an 8 gauage loaded with buckshot.  He should be fired. 

Cash for Clunkers: Free Morphine for Pain

Total up the costs and the benefits of the cash for clunkers program -- it is nuts.  The government is borrowing $3 billion at 3.5% to buy old cars, will the government get a return of over this (4% on the 3 billion)??  No.  Tax revenue is highly unlikely to increase that much just due to the program.  The benefits:  An illusory temporary stimulus of the car industry and an insignificant affect on CO2 emissions and on the use of gasoline.  The stimulus of the car industry is illusory because -- pick one -- it is temporary (once the program goes away so do the "new jobs" at dealorships, if any), people will not buy other goods, people are buying foreign cars over American cars, people are buying cars they will not buy in the future, people are buying cars they do not prefer because inventories of wanted cars (Toyota Fit) are stretched.  Economists have long noted that temporary stimulus cash grants are pointless; people take the cash and resume their pre-stimulus behavior.  Scientists have calculated the CO2 reduction and gasoline reduction as peanuts because of its small size and the fact that people will use the new cars more than the old ones (due to cheaper cost per mile).  The costs are understated.  Not only is the government borrowing money for the program that it does not have and will not have for decades, it is destroying valuble assets (the old cars, running and usable are destroyed), it is driving up the price of older cars for low enevel users, it is driving up the price of parts for the repair of older cars, and it is encouraging a bailout out mentality among the general population.  To make the point, suppose the government decided to buy and destroy all homes on which the owners had defaulted (to stop blight).  The destruction of valuable assets adds to the cost of the program.  The government is just giving free morphine to people in pain; it masks the symptoms for a while and when the gifts are over the pain returns, more severe perhaps. 

SEC Enforcement

The Wall Street Journal has an article on C1 on the "urgency" of SEC enforcement.  Listing three new settlements, BofA, GE and Greenberg, the author applauds the SEC chairman's efforts.  The headline has it backwards.  The settlements are too small, too late and come with no admission of guilt--they are pathetic.  The SEC has long spent way too much time and energy on fine tuning market mechanisms and passing new rules of behavior and far too little time enforcing the rules it has.  At time I have wondered whether we need two agencies, one for pure enforcement and a second for securities rule making.  The efforts of the first would not be compromised by the second and the good work of the first would not give a free ride to the silly efforts of the second.   

Judge Rakoff Questions SEC Settlement with BofA

A federal district court judge, charged with approving the SEC settlement with Bank of America on the Merrill Lynch deal has delayed ruling, a very unusual move, after 90 minutes of negative questioning of the presenting lawyers.  The questions were painfully obvious.  A $30 million settlement over $3.6 billion in bonuses that were not properly disclosed in a $50 billion merger???   The government paid in $45 billion.  Why were no executives sued???   Someone made decisions for BofA.  And the government and or shareholders will pay part of the fine.  Why no admission of guilt???  At some point an admission ought to be required to set up the private litigation.  The private litigation, of course, is the elephant in the room. There is much to be said for and against this confluence of public/private enforcement actions.  But for the moment let me say that the SEC ought not let the private actions have an effect on what it does -- as it seems to have here.