Tue 19 Aug 2008
Poll: Grading Bernanke & Paulson
Posted by Prieur du Plessis under Money, Markets, Investment
On the one-year anniversary of the credit crisis it makes for interesting debate to reflect on how well the situation has been handled by Messrs Ben Bernanke and Hank Paulson. I have therefore deemed it appropriate to ask your assistance to assess the gentlemen’s performance by means of a quick poll.
To set the ball rolling, Mohamed El-Erian, co-CEO of PIMCO, and author of the must-read When Markets Collide, provides his assessment (and also comments on why Alan Greenspan is not to blame for the financial meltdown).
Source: The Street, August 17, 2008.
Now for the fun part. How do you rate the performance of the two gentls? All you need to do is to provide your grading by clicking the appropriate button on each of the two poll images below, followed by “cast your vote”. The polls will run until 17:00 EST on Thursday, August 21, 2008, whereafter I will post the results.
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August 19th, 2008 at 4:40 pmPoll: Grading Bernanke & Paulson…
On the one-year anniversary of the credit crisis it makes for interesting debate to reflect on how well the situation has been handled by Messrs Ben Bernanke and Hank Paulson. Let’s have some fun and assess the gentlemen’s performance by means of a…
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August 19th, 2008 at 5:34 pm
PdP: I am not sure how I would rate them but your photos don’t do them any justice. Whoooo!!!
One scenario that is rarely talked about is that Paulson and Bernanke are doing everything they can to talk the market lower and avoid a panic. And in this sense, they are doing a good job. Now let’s say that 6 months ago either one of them says, “This financial crisis is the worst since the 1930’s” and if they said that, then there would have been a financial panic. Maybe 6 months ago they knew how bad things would be and if they said so, then we would have gotten that panic. Maybe their tack has been to talk the market lower - in this sense, they have done a good job.
August 19th, 2008 at 7:38 pm
Guy: Hey, this is the way the guys looked after hearing we’re doing the grading! Wait till they see the results.
August 19th, 2008 at 8:27 pm
PdP:
Well I was trying to be nice to them as in just maybe (but unlikely) they understood the magnitude of the mess the markets are in and their only hope was to “talk” the markets lower; they can’t come out and say things are a disaster so they have done the what they can do. I have spent an entire career preparing for disaster, and I would suggest that we never should have gotten in this mess in the first place; it took multiple oversights for this mess to develop. How complicit Bernanke and Paulson and their cronies before them were is hard to tell, but it seems like we were headed down this path long before they ever got on the scene.
I always remember the story of the space shuttle that blew up because of the “O” rings. Several NASA scientists knew there was a problem and reported this to their superiors. Their superiors ignored this because the space shuttle program was under pressure to produce and put payloads into space. Not only did the superiors ignore the concerns of these scientists, they also had several of them fired for their “insubordinate” behavior. Go figure! But that seems to be human nature.
August 19th, 2008 at 8:47 pm
You think Mr. El-Erian could be slighly biased regarding Greenspan, seeing Greenspan is on Pimco’s payroll.
August 19th, 2008 at 9:02 pm
Fiona: The thought has certainly crossed my mind. For the record, and as mentioned on my blog many times before, I’m not a fan of the Green Man. I wonder how he splits his time and “know how” between PIMCO and John Paulson. Also, why do these guys, both pretty serious operators, see fit to pay Greenie huge consulting fees?
August 19th, 2008 at 9:17 pm
Greenspan can still move markets (unfortunately), which, with prior knowledge, Paulson and Pimco could position themselves to benefit.
Not much different than both Presidential candidates - bought and paid for by the special interest groups.
Wish things were different.
August 19th, 2008 at 9:38 pm
PdP:
The question is really out of context, since no criteria are provided to make a judgement.
For instance, if the question is whether they did well to save us from a potential disaster then the answer is ‘yes’.
On the other hand if their actions and their subsequent message set a precedent, specifically that the FED is fully capable of dealing with crises of this kind and worse, then the answer is ‘no’.
In the absence of regulatory constraints, big investment banks will drag the smaller regional banks, and other lending institutions, down the road of unacceptable risk - the consequences of which are already too painfully familiar.
Moreover, there are enormous profits to be made from this laissez faire - or rather laissez mourir - modus operandi, by those who know what they are doing and ‘happen’ to be on the right side of the trade.
So, the action was necessary. It is the message that is so dangerous.
KIrk C Valanis Ph.D.
August 20th, 2008 at 2:23 pm
Why doesn’t anyone talk about the fact that the fed, treasury, fiat currency need to be left in the sewer for chemical breakdown. This is history not conspiracy.
August 20th, 2008 at 6:35 pm
Dr. du Plessis,
I enjoy your Postcards. However, your emotional involvement (especially your clear personal dislike for Messrs. Greenspan, Bernanke, and Paulson) dilute confidence in your objectivity.
This poll is one example. You write, “Guy: Hey, this is the way the guys looked after hearing we’re doing the grading! Wait till they see the results.” That implies that you expect poor results. Manipulating poll results by manipulating emotions and expectations is unacceptable for a pollster. The results are thereby invalidated.
The performance of Bernanke and Paulson over the past year is a different question than their performance over their entire tenure.
The Fed deserves low pre-crisis marks for not using their regulatory authority to put a stop to egregious lending practices. Treasury (and the SEC, OFHEO and FDIC, which you left out) didn’t use their authority to try to bring state-chartered banks into compliance with national bank standards. They also didn’t make any attempt to force securitizers (banks, the GSEs, the ratings agencies and the investment community) to force mortgage brokers to meet realistic lending and rating standards before the loans were bought, securitized, and sold to investors. They didn’t (and still haven’t) forced banks to put risky SIVs (structured investment vehicles) onto their balance sheets. They allowed (and still allow) banks and investment banks to use internal models to “mark to fantasy” (Level 3) and allow the enormous market for credit default swaps to be unregulated, opaque, and the recordkeeping not current.
By ignoring the foundations of the crisis, even as the cracks were forming and propogating, the Fed, the Treasury, the SEC, the FDIC, OFHEO and the bond rating companies all deserve an “F.”
However, since the crisis broke, a year ago, their performance has been much better.
Bernanke and Paulson have both been very active. Importantly, they have collaborated more than any Fed and Treasury heads that I can remember.
They have both actively tried to prevent a panic, by jawboning constantly in a clear and balanced way. Without their involvement, the financial structure would have shuddered, and possibly crumbled, several times in the past year.
I give Bernanke high marks for using unconventional moves, such as lending Treasuries with Level 3 securities as collateral to unregulated investment banks (possibly illegal, but it’s easier to ask for foregiveness than permission). Such moves increase liquidity and keep the financial system from seizing up, without the knock-on effects that the Fed’s previous tool — the Fed funds rate — would have (most notably, by impacting the dollar).
I give Paulson medium marks for trying his darndest to talk the dollar up, giving the Fed’s medicine of interest rate cuts time to work through the economy. Also, I give Paulson high marks for trying so hard to alleviate the SIV crisis (although it didn’t work).
However, I downgraded Paulson’s mark because I think his proposal to make the U.S. taxpayer the bagholder for the GSEs is a terrible mistake and a very bad precedent.
Ultimately, I gave Bernanke a high grade and Paulson an average grade, although these certainly aren’t average times.
The entire regulatory regime of the U.S. financial community requires the largest overhaul since the Great Depression. Regulations that have been gradually repealed need to be put back into place. However, since so many new financial tools have been developed, the whole system needs to be rethought. This must include the Fed, Treasury, SEC, FDIC, the GSEs, and the governmental housing agencies (GNMA, the FHA). The state regulators must also be involved, since many of the most egregious practices happened on the state level, not regulated by any federal agency.
To accomplish this while preventing an outright financial crisis is like trying to repair an aircraft that is sporadically losing aileron control while trying to set up final approach in turbulence.
Not to mention that the U.S. is in the middle of a Presidential election. Whichever side wins, there will be a big change in the cast of characters, especially the Agency heads (Treasury, SEC, FDIC, and FHFA, which is the new agency that will be doing OFHEO’s job to regulate the GSEs).
In summary, I think that your manipulative poll which gives a number grade to two of the many important actors in this drama (leaving out Chris Cox, the weak head of the SEC, who, unlike Bernanke and Paulson, hasn’t even tried to help) is not very useful.
Intead of beating up the most obvious actors (for some reason, many guys seem to get ego satisfaction from futile screaming at the silverbacks), it would be far more useful to investors to try to forecast how to make wise investing decisions during these unsettled times.
Wendy
August 21st, 2008 at 3:26 pm
Wendy: Thank you for your insightful input.
I would not have thought a tongue-in-the-cheek remark on Guy’s comment on the “photos” could be seen as manipulating the poll. As a matter of fact, a large percentage of the votes was already in when my comment was posted (with the results available for everybody to see), and the voting pattern has since remained more or less the same.
For the record, I have no axe to grind with Messrs Bernanke and Paulson, but don’t hold Greenspan in particularly high regard.
August 24th, 2008 at 9:03 am
Thank you Wendy, I appreciated your straight talking article.
The elephant in the room is why the wise regulations that were scrapped have not been re-introduced. The mentality of most investors seems to be a fanatical anti-regulation verging on paranoia and they are certainly not in the vanguard of calls for any re-introduction. It looks as if the whole system will have to go down before the regulations are re-introduced against the anti-social solipsism of most investors.