Are We Setting Ourselves Up For Another Economic Crisis?

Today, during the confirmation hearing for Fed chairman Ben Bernanke, U.S. Senate lawmakers voiced their opinions on the role of the Federal Reserve in our economic meltdown and subsequent partial recovery.

As business leaders and corporate managers, this is critical to each and every one of us, and I'll tell you why. With unemployment over 10 percent, a record federal deficit, and the looming specter of runaway inflation, the financial crisis had and continues to have a profound effect on the U.S. economy. And it's not at all clear that we're going to do anything differently, going forward.
Listening to the Senate Banking Committee Q&A, I was reminded of hearings with then-Fed chairman Alan Greenspan, whose monitery policy is cited by many as a catalyst for the housing bubble and subsequent economic crisis. Those hearings were generally characterized by a gentlemanly and almost reverent tone with respect to Greenspan.
Today, in stark contrast to the eerily similar calm and reverent handling of Bernanke, one Senator - former baseball pitcher Jim Bunning of Kentucky - stood out. I thought his testimony was poignant, so I've transcribed this excerpt:

I want to read a quote to you, Mr. Greenspan -- Mr. Bernanke. That's a Freudian slip, believe me [laughter]. Here's the quote:

"I believe that the tools available to the banking agencies, including the ability to require adequate capital and an effective banking receivership process, are sufficient to allow the agencies to minimize the systemic risk associated with large banks. Moreover, the agencies have made clear that no bank is too big to fail. So that bank management, shareholders, and uninsured debt holders understand that they will not escape the consequences of excessive risk taking. In short, although vigilance is necessary, I believe the systemic risk inherent in the banking system is well managed and well controlled."

That should sound familiar to you, since it was part of your response to a question I asked about the systemic risk of large financial institutions at your last confirmation hearing (four years ago).

Now, if that statement was true and you had acted according to it, I might be supporting your nomination today. But since then, you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies, are too big to fail. Rather than making management, shareholders, and debt holders feel the consequences of their risk taking, you bailed them out.

Instead of taking that money and lending it to consumers and cleaning up their balance sheets, the banks started to pocket record profits and pay out billions of dollars in bonuses to their management. Because you bowed to pressure from the banks and refused to ... force them to clean up their balance sheets and clean up their management, you have created zombie banks that are only enriching their traders and executives. You are repeating the same mistakes of Japan during the 1990s, on a much larger scale, while sowing the seeds for the next bubble.

Under your watch -- you put the printing presses into overdrive to fund federal spending and hand out cheap money to your masters on Wall Street which they used to rake in record profits while ordinary Americans and small businesses can't even get loans for their everyday needs.

[Image of Fed Chairman Ben Bernanke courtesy Federal Reserve; Image of Senator Jim Bunning with General David Petraeus courtesy Senator Bunning's official website]