Bernanke has a long history and record of predicting the market wrong. Whatever he says, in less than half year, everything seems to go very wrong in the other direction. Now he says the recession will be over by end of this year, this alone should get all of us worried.
In March 2007, he said the subprime crisis was contained when it was barely starting. Then about half later when the problem of delinquencies and foreclosures started to surface, he said, “Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.” We all know what happened next.
Now switching from real estate to banking, after a year when he said subprime was not a problem, in February 2008, this time he said, “among the largest banks, the capital ratios remain good and I don’t anticipate any serious problems of that sort among the large, internationally active banks that make up a very substantial part of our banking system.”
Obviously he wouldn’t count Bear Stearns, Lehman as large banks referred in his speech since he can blame them as only investment banks. He wouldn’t count Fannie Mae and Freddie Mac either since they don’t make up a very substantial part of our banking system, or do they? To keep his words, he had to bump trillions of taxpayers’ money to save Citi, Bank of America, forced Merill and Wachovia to be sold, instead of letting the bondholders of those banks taking the losses in the normal "pre-packaged bankruptcy" process, since he wants to protect the big guys as bondholders are mainly large financial institutions. But how about Washington Mutual? Its failure in September 2008 is the largest bank failure in history with $307 billion in assets. Both common and preferred stockholders got totally wiped out, all subordinate bondholders were also totoally wiped out, only the most senior bondholders received merely pennies back for the dollar. This is the example of "too big to fail" becoming "too big to save".
Sometimes I don’t know whether he is speaking from his mind, or he just says what he has to say because he has no choice. In his role as a cheerleader for the financial market, he actually gets his hands tied and is not supposed to speak freely on what is in his mind. This is actually the biggest problem for the existence of the Fed and the whole banking industry - like a secretive skull & bones society with only a few elite members, you are sworn to protect the secrecy at all costs, including lying. If you know the truth, you just can’t say it, or better yet, you say the opposite. Let us see what happens this time, whether he remains 100% “correct” on his prediction record.
I fully expect Bernanke won’t be able to last after his first term ending next year. Even if the President nominates him again, which is very likely, as an academic person, he may not want to go through such suffering for another term. Especially if his prediction of recession ending this year again turns out to be wrong, I am no sure he has the thick skin and endurance to take it anymore either.
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