IE 11 is not supported. For an optimal experience visit our site on another browser.

Crisis illustrates power of the unelected

Image: Henry Paulson, Ben Bernanke
Treasury Secretary Henry Paulson, left, chats with Federal Reserve Board Chairman Ben Bernanke as they prepare to testify before the Senate Banking Committee last month.Shawn Thew / EPA file

Step aside Clinton, Obama, and McCain. Make way for Bernanke, Paulson, and Geithner.

In an election year in which the public and the news media have been focused on the presidential contenders, the crisis playing out in the financial markets is a reminder that for the time being, the most consequential decision-makers are unelected officials.

Despite the hoopla about the November election, the next president’s limited options will be determined largely by three unelected men: Federal Reserve Board chairman Ben Bernanke, Treasury Secretary Henry Paulson, and Timothy Geithner.

Not a household name, Geithner is a central player in this drama in his role as president of the Federal Reserve Bank of New York, the clearinghouse for the investment houses and banks that lubricate the economy.

Presidential contenders Hillary Clinton, John McCain, and Barack Obama can’t make you any richer or poorer, at least not yet. But Bernanke, Paulson, and Geithner can by the decisions they make in the next several weeks.

For richer or for poorer?
If they succeed in stabilizing the financial markets, then your 401-k and paycheck may be more secure; if not, then you could find yourself poorer by the time the new president takes the oath of office.

Bernanke, by the way, serves a 14-year term as a Federal Reserve Board governor and a four-year term as Fed chairman, so he’ll likely be around next year no matter who the new president is.

Despite the partisan divide, the running of the U.S. financial system is bipartisan in its staffing. Geithner served in the Clinton administration’s Treasury Department under secretaries Robert Rubin and Larry Summers. And he got his job with support from former Nixon administration Commerce Secretary Peter Peterson and the eminent Wall Street veteran John Whitehead, who served in the Reagan administration.

Paulson, while head of Goldman Sachs, gave campaign contributions both to Democrats such as Bill Bradley, and to Republicans such as George W. Bush.

The major presidential contenders themselves were notably wary and even bland Monday in their written statements on the turmoil in the markets.

Obama and Clinton were sticking to the relatively familiar territory of urging President Bush to help prevent more home foreclosures, but neither one addressed the bigger issue of systemic risk to the entire financial system.

Dollar dwindling in value
Also absent from their statements: a concern about the effects on consumers of a dollar that is dwindling in value (more costly food and fuel), and whether the Federal Reserve’s actions will further weaken the dollar.

McCain said through his economic adviser Doug Holtz-Eakin that he had “complete confidence in Chairman Bernanke and the actions of the Federal Reserve…. John McCain understands the federal government’s responsibility to ensure the stability of the U.S. financial system….”

Obama’s statement predicted that “Many other steps will be required to reverse this downturn in the weeks to come.” But he didn’t specify what those steps might be.

Neither Clinton nor Obama said they approved of what Bernanke did — in effect, bailing out Bear Stearns indirectly through JPMorgan Chase — but neither did they say they disapproved of it.

It’s worth noting that if economic expertise or, at least, experience with legislating on financial matters is now a more valued commodity in the next president, none of the major contenders serves on the committees with jurisdiction over Bernanke: Banking and Finance.

Paul denounces 'bailout'
One presidential contender who does serve on the House Financial Services Committee and regularly gets to grill Bernanke, is out of the running and out of the mainstream: Rep. Ron Paul, R-Texas.

The Texan warned last month that “if the federal government bails out banks, investors, or homeowners, the lessons of sound investment and fiscal discipline will not take hold….” He complained that “the Fed never allows a complete shakeout, so that before a return to a sound market can occur, the Fed has already bailed out numerous market participants by undertaking another bout of loose money ….”

Clinton supporter Sen. Charles Schumer, D-N.Y., who does serve on both the Banking and Finance committees, was more forthright than Obama or Clinton in a CNBC interview Monday morning.

“What’s just as important as standing behind Bear Stearns is the idea that they will stand behind other institutions,” Schumer said. “What we’re in here is the closest thing we’ve seen to a bank panic since the Depression.” He said the Fed would “run the risk of a full-fledged panic” if it let Bear Stearns go bankrupt. 

Banking Committee chairman Sen. Chris Dodd, D-Conn., praised Bernanke in a conference call with reporters Monday afternoon. “I’m grateful we have a chairman of the Federal Reserve who’s exercising his power and authority to step up and move aggressively.”

He said, “I hope it’s not too late, I believe it’s not,” adding that “there’s no reason to be racing for the exits here. This problem, I think, is going to get contained” by the decisions made by the Fed.

Dodd and Schumer, as well as Clinton and Obama, have sharply criticized Bush for not acting sooner to assist Americans who, having bought a house in the past few years, now find they can't meet their monthly mortgage payments.

Dodd urged Bush to support his plan to refinance some home mortgages at a discount through the Federal Housing Administration. "I think there's a greater receptivity to this idea" among Bush administration officials "than there was 48 hours ago," Dodd told reporters Monday.

Supplying a note of dissenting populism was famed investor Jimmy Rogers who put it bluntly in an interview with Bloomberg News Monday, calling it “outrageous that the Federal Reserve is just throwing the dollar out of the window…. They are driving the dollar down. They are printing money as fast as they can.”

He added, acerbically, “This man Bernanke was never elected by anybody. I don’t know where he gets the audacity to spend $230 billion of our money to bail out a few friends on Wall Street. This is totally outrageous…. Who gave him the authority to do that, to destroy the dollar ….? And nobody ever voted for the man.”

Who voted for Bernanke?
That is not quite true. In January of 2006 the Senate did vote unanimously by voice vote to hand the Fed chairman’s job to Bernanke.

Former Federal Reserve vice chairman Alan Blinder noted in a column in the New York Times on the day after Bernanke’s confirmation hearing in November of 2005 that “these are pretty placid times for the nation's central bank.”

Blinder noted how different the situation was 1979 when Paul Volcker was up for Senate confirmation as Fed chairman. “High inflation had plagued the country for years and was about to get worse…. So the Federal Reserve's monetary policy claimed the public's and the news media's attention,” Blinder said.

But in 2005, he explained, “The happy truth is that monetary policy is not very controversial — and is certainly not very political — these days.”

There was, however, one harsh dissenter at the Bernanke love feast in 2005, a senator whose criticism now seems almost prophetic.

Bunning foresaw trouble in 2005
Sen. Jim Bunning, R-Ky., a member of both the Banking and Finance committees, said “I oppose Dr. Bernanke because he says he will continue the policies of Chairman Greenspan. That does not sit well with me.”

Bunning blamed Greenspan for allowing “creation of a fat market bubble that ultimately popped. Then there was a housing bubble. It led to an unbalanced economic recovery fueled by cash raised from soaring home prices. This resulted in record household debt and negative consumer savings rates.”

Bunning also denounced “the endless bailouts of Chairman Greenspan. There was the 1997 Fed bailout of the Asian crisis. There was the Long Term Capital Management bailout in 1998. We had a financial crisis and the Fed got involved with Mexico and all this led to a huge trade and Federal budget deficits.”

He concluded gloomily, “Chairman Greenspan leaves knowing that his mess will fall to his apprentice, Ben Bernanke. I hope there is no damaging recession or financial crisis looming. If so, I hope Ben Bernanke does not live up to his nickname of ‘Helicopter Ben,’ and throw the U.S. mint's printing presses into overdrive.”

If you believe Rogers, Bunning’s prophecy is coming true.

But if you believe Dodd, Schumer and McCain, Bernanke may well be the hero of the moment.