Last week, former Fed chair Ben Bernanke won the Nobel Prize in Economics.
I went on Fox Business to share my thoughts with viewers. But there’s one thing I couldn’t say on live TV…
Which is that Bernanke’s win is just plain ridiculous.
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Nomi shares her thoughts on Bernanke’s win with Fox Business viewers
Bernanke, along with two other U.S.-based economists, won the prize for research they did in the 1980s.
The Nobel panel said their research on bank failures showed “why avoiding bank collapses is vital.”
This was long before Bernanke became Fed chair in early 2006, serving until 2014.
Now, I’ll be honest with you. I thought Bernanke’s win was a joke… and that the people at the Nobel Committee must have an ironic sense of humor.
Were they asleep when, as Fed chair, Bernanke’s easy money policies and his lack of acknowledgement of a growing crisis helped lay the groundwork for the worst financial crisis since the Great Depression?
If you remember how the financial crisis of 2007-2008 unfolded, I’ll bet you’re not surprised by my reaction.
Why? Where do I even begin…
Toxic House of Cards
As Fed chief, Bernanke was tasked with steering the U.S. economy through the 2007-2008 financial crisis. And, to put it mildly, he didn’t do a very good job for the real economy.
Granted, that crisis wasn’t easy to navigate. It was the worst recession in the developed world since the Great Depression of 1929.
I’m also not saying that Bernanke was the only one responsible for it.
Weak regulations for Wall Street banks had been in place long before he got the job.
The same is true for reckless monetary policy. And for that, we can thank Alan Greenspan, Bernanke’s predecessor at the Fed.
Greenspan’s policy of “easy money,” for instance, encouraged the type of risky lending that spurred the subprime mortgage crisis. That crisis was what ultimately triggered a financial catastrophe in 2008.
This, coupled with faulty legislation on the government’s part, enabled – and even pushed – lenders to act as they did. But the story isn’t that simple.
See, Bernanke wasn’t uninformed as to what was going on. He got warnings several times before the 2008 crisis. In fact, the FBI had already warned of an “epidemic” of mortgage fraud back in 2004.
CNN reported at the time:
Assistant FBI Director Chris Swecker said the booming mortgage market, fueled by low interest rates and soaring home values, has attracted unscrupulous professionals and criminal groups whose fraudulent activities could cause multibillion-dollar losses to financial institutions.
“It has the potential to be an epidemic,” said Swecker, who heads the Criminal Division at FBI headquarters in Washington.
These “unscrupulous” lenders offered subprime loans to people that didn’t understand how risky these loans were. And they failed to provide adequate explanations about their risk.
In some cases, they even led borrowers to provide misleading financial information to get subprime mortgages… or they misled the borrowers themselves… all to get commissions.
Pyramid Scheme
The net result of all this?
As I wrote in my 2009 book, It Takes a Pillage, defaults on subprime loans leading up to the financial crisis of 2008 already totaled about half a trillion dollars.
But it was Wall Street that took that episode to a whole other dangerous level. They concocted more than $14 trillion worth of what were later called “toxic assets.”
These toxic assets all relied on the interest payments on these subprime loans. Some were laced with complicated derivatives as well. But it was a complete pyramid scheme.
Wall Street financial mechanics found ways to hide the fact that so many toxic assets relied on the interest payments of so few subprime loans.
That house of cards amplified subprime loan defaults by a factor of 28 times (from half a trillion to more than $14 trillion). The rest is history.
The subprime mortgage crisis resulted in the fall of Lehman Brothers, where I worked as a global investment banker in the 1990s.
And it took other “too big to fail” banks to the brink of collapse.
My former employers, JPMorgan Chase and Goldman Sachs, made that list… along with other major banks, like Bank of America and Morgan Stanley.
It was a big deal made bigger by these mega-banks and their risky behavior.
So big, in fact, that its ripple effects soon caused a global recession, and led to a significant drop in the growth rate of the world economies.
This kind of reckless behavior is exactly why, in 2002, I walked away from my seven-figure career at Goldman. I had to speak the truth about all the shady things going on inside Wall Street.
Bailing Out Wall Street
As for Bernanke, how did he respond?
On Friday, October 3, 2008, he went before Congress and effectively scared them into funding a huge Wall Street bailout.
“If you don’t pass this legislation,” he told Congress, “you may not even have an economy by Monday.”
This was about a year after the same Bernanke assured everyone that the subprime mortgage crisis was “largely contained.” (If he was truly a student of depression, crises, and financial markets, as the Nobel panel paints him… with the abundance of information the Fed has, why would he have made that claim?)
But Congress fell for it… and Bernanke and his legions at the Federal Reserve swooped in with the biggest Wall Street bailout in history.
They doled out $7 trillion to big banks in emergency funding, with little to no oversight.
This fueled The Great Distortion I’ve been writing to you about in these pages… and destroyed any chance of bridging the gap between the markets and the real economy.
And now, 15 years later, we’re feeling the consequences of Bernanke’s money bazooka.
With inflation close to 40-year highs, and the Federal Reserve scrambling to raise interest rates to “cool” the economy… we’re seeing what happens when the Fed suddenly has to withdraw its monetary stimulus.
So what does this mean for your money today?
I’ll have more to say on that on Monday, after I answer your latest questions in our usual Friday mailbag edition tomorrow. So stay tuned…
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins