In My Humble Opinion

Federal Reserve Chairman Ben Bernanke is being nominated for a second term by President Obama. The hearings were televised on CSPAN and are available on the Senate’s website. It was interesting to hear individual Senators’ opinions on the job performance of Chairman Bernanke. Some Senators praised him for his decisive and effective efforts to prevent the collapse of the global banking system last fall. Some Senators acknowledged these efforts but were critical of other decisions while Senator (R) Bunning from Kentucky blamed Chairman Bernanke for everything since the Civil War.

Chairman Bernanke will surely serve another term during a critical time in our nation’s history. There are several major propositions that Congress is considering.

• First - The possible consolidation of the federal financial regulators. This, in my opinion, would be the worst possible outcome. The federal thrift charter remains an important mechanism in this country to finance residential mortgages by an insured depository institution. Many consumers are wary of obtaining financing through mortgage brokers and they should be. Also, there is the possibility that the Federal Reserve should not have direct supervisory responsibility over member banks. In my opinion this would also not be a beneficial change to the regulatory structure. Federal Reserve examiners provide valuable insight and direct access to banking issues during their examination processes.

• Second - The possible oversight of the Federal Reserve’s monetary policy function. This is also an area that should not be tampered with. Monetary policy is a long-term objective and should be conducted by individuals independent of political functions. There is plenty of transparency of the Federal Reserve board who issue the minutes of their meetings and frequently testify before Congress during hearings. The most successful countries are ones that allow monetary policy to be independent of the legislative or executive branches of government. 

• Third –Addressing the “too big to fail” concept. Never in this country’s history has this concept been more evident than over the last two years and if Congress can accomplish only one objective it should be this one. The nation’s largest institutions took on tremendous risk by filling their balance sheets with subprime and high risk/high LTV loans and the taxpayers subsidized this risk. The subsidy allowed these institutions to write off these bad loans and now bounce back to profitability from income streams derived from their nontraditional banking activities. Chairman Bernanke is in favor of empowering the FDIC with the authority to “wind down” the resolution of failed large institutions. This is a suggestion Congress should act on because the FDIC clearly has the infrastructure and experience to assume this new and incredibly important responsibility.

The nation is recovering from a large financial disaster, although the recovery is a shaky one. Many Americans are out of work, the credit markets are still not lending to their full capacity, and delinquencies and defaults on commercial real estate loans are rising. Because of this, the FDIC continues to close failed institutions and incur losses to the deposit insurance fund. Hopefully, we as a nation, and bankers especially, have learned valuable lessons from this economic recession. Going forward, better risk management practices are in everyone’s best interest.