Last Updated Feb 25, 2010 1:43 PM EST
See if you can spot what's missing in Bernanke's response to a question from Sen. Richard Shelby, R-Ala., about why the Fed should remain the banking industry's chief supervisor:
First, we've learned from the crisis [that] large complex financial firms that pose a threat to the stability of the financial system need strong consolidated supervision. That means they need to be seen and overseen as a complete company, reflecting the developments not only in their banks but also in their securities dealers and various aspects of their operations. A bank supervisor, which focuses on looking at credit files, is not prepared to look at the wide range of activities of a complex international financial firm. The Federal Reserve, in contrast, by virtue of its efforts in monetary policy, has substantial knowledge of financial markets, payments systems, economics and a wide range of areas other than just bank supervision....What is this? An alibi for what the hell he was doing at the Fed from 2003 to 2008, as banks went hog crazy? Ooh, nice try! But what we were looking for is this: Anything suggesting that Bernanke knows what to do about financial companies that are "too big to fail."
It's hard for me to understand why in the face of a crisis that was so complex and covered so many markets and institutions, you would want to take out of the regulatory system the one institution that has the full breadth and range of those skills to address those issues.
Because "consolidated supervision" isn't going to cut it. And that, in turn, underlines one the main lessons about financial regulation -- it's A. Supremely political; B. Unequal to the task of policing huge institutions; C. Riven with conflicts of interest that undermine its effectiveness.
It's absurd to think that the Fed, FDIC or any other supervisory agency is immune to the pressure that megabanks put on their paid hands in government. Under Alan Greenspan, the Fed itself let these companies out of their cage in the years before the meltdown. So for Bernanke to suggest that proper oversight of the banking sector is chiefly a matter of the Fed drawing on it "substantial knowledge of financial markets" is deeply unconvincing.
So what should Bernanke have said? That the only way to deal with dangerously large banks is to make them smaller. Thing is, he doesn't believe that. Bernanke has said repeatedly, including during his December confirmation hearings, that big banks aren't a problem. Under this fantasy, the Fed chief believes it's sufficient to give regulators greater power to shut big financial firms.
Except that these companies operate under the presumption -- by bankers, investors, government officials -- that they're too systemically vital to shut. Surely Bernanke must understand that.