How Bernanke Stunned Congress with the Truth

by: Michael Shedlock September 19, 2008    
Michael Shedlock

Michael Shedlock

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The New York Times is reporting Congressional Leaders Stunned by Warnings

It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.

Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.

“When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.

As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

Mr. Schumer added, “History was sort of hanging over it, like this was a moment.”

When Mr. Schumer described the meeting as “somber,” Mr. Dodd cut in. “Somber doesn’t begin to justify the words,” he said. “We have never heard language like this.”

Congress was stunned because Bernanke finally admitted the truth (or at least came closer to doing so). Congress ought to be reading blogs rather than listening to clowns like Paulson and Bernanke.

How many times have we heard Paulson the Parrot sing the praises of the strong dollar and the soundness of the US financial system?

The market called Bernanke's Bluff, and came close to a virtual meltdown.. For now, Armageddon was postponed as the Fed intervened In money markets.

The list of reasons the financial system is unsound grew massively today, by the tune of a $1.2 trillion taxpayer funded bailout designed to bail out the wealthy at the expense of the poor.

Earlier today Paulson had the gall to state "this will cost the tax payer less than the alternative".

No one bothered to ask why it should cost the taxpayer anything at all.

Furthermore, Paulson once again proved he needs simple arithmetic lessons. Shifting losses from those who should bear them (stock and bond holders of failing companies) to the taxpayers is not going to save the taxpayers a dime, rather it is going to cost them plenty, $1.2 trillion plenty as noted in US Taxpayer: A Giant Dumpster For Illiquid Assets.

The Whole Truth And Nothing But The Truth?

Of course not.

Bernanke did not really admit the truth, he only hinted at it. Congress was too dumb to pick it up. The truth is the US financial system is insolvent.

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This article has 43 comments:

  •  
    Sep 19 09:57 PM
    If the US financial system is insolvent, maybe at some point the AAA credit rating of the US would be called into question as seen from comments in internet space.
    Reply | Link to Comment
  •  
    Sep 19 10:36 PM
    "The list of reasons the financial system is unsound grew massively today, by the tune of a $1.2 trillion taxpayer funded bailout designed to bail out the wealthy at the expense of the poor."

    The government should tax coporations and the wealthy to pay for this. Just so happens the wealthy already pay 90% of income taxes. They also start and run businesses and provide and create jobs. Not many poor do that. The wealthy help and hurt, much like any other group, but with greater influence.

    Just to be accurate - everyone, not just the poor will be paying for this. It is a huge amount for sure. There are only 100 million taxable households. We are going to be hit big in 2010 when this combines with greater gov't spending and elimination of the Bush tax cuts.
    Reply | Link to Comment
  •  
    Sep 19 10:50 PM
    mike, l like the tone. there is no reason for anyone to believe we were not seconds away from a complete economic collapse.

    on the other hand, i also believe there was no other option. the path we are on i believe completely mortgages economic growth at the expense of a depression.

    heaven help us.
    Reply | Link to Comment
  •  
    Sep 19 11:03 PM
    No matter how bad the US financial system is, things are not much better outside the US, they never have been and probably never will for a while. The bailout is the right thing to do, Bernanke and Paulson are doing it the right way, they gave a chance to everything and now are resorting to the last option. This option will not fail (it better not), and meanwhile, a lot of people will be crying foul, some people will always complain. I am yet to hear a better alternative. If the system melts, we will be screwed for years and years. Americans have learned the bad things about leverage and the next generation will play it safe and then 30 years or so later, we will again forget all of this and again make the same mistakes, its called the human nature of over indulgence.

    We will be fine. Get ready for a short bull market followed by a short bear market before the next expansion phase begins.

    The only thing that sinks my heart is the choices we have for the president, neither of them excites me for a good president, no kidding, George W had more promise than either of these 2 candidates. Whatever happened to Ron Paul...
    Reply | Link to Comment
  •  
    Sep 19 11:14 PM
    His authoritative tone hides the arrogance of shallow analysis. The asertion of insolvency does not explain that mortgages worth 95 cents on the dollar are being forced to be reported at "mark to market" vulture prices of 50 cents on the dollar, and that Sarbane Oxley regulations have exacerbated what is admittedly critical stress, but that our "insolvency" is partially self imposed fabrication of ill conceived accounting regulation.
    Reply | Link to Comment
  •  
    Sep 19 11:21 PM
    As for costing the taxpayer, it is more likely that the Federal reserve will make money on the deal. The government MADE money on the Chrysler bail out, The RTC trust from the S&L Crisis in 1990 MADE money in the end. Taking over 80% of AIG just to LOAN 85 billion and then get it back is in fact high stakes loan sharking. The term "bailout" is hugely inaccurate, just ask shareholders of Bear Stearns, Fannie Mae, Lehman Brothers, etc,..........but it makes for good headlines for main stream media to whoop up ignorance in the heartland
    Reply | Link to Comment
  •  
    Sep 20 12:49 AM
    >>There are only 100 million taxable households. We are going to be hit big in 2010 when this combines with greater gov't spending and elimination of the Bush tax cuts.<<

    1.1 Trillion divided amongst 110 million households means each household will be paying $11,000. That may seem like a lot, but there is a simple solution. All they have to do is put it on their credit card and pay the minimum amount.

    And since the Iraq war will likely cost $3 trillion (because most of the equipment will need replacing), each family will need to get 3 more credit cards.

    I don't know why Bush didn't think of this himself. :-)

    Willhe
    Reply | Link to Comment
  •  
    Sep 20 04:53 AM
    If interest rates can remain substantially below inflation rates,the cost of this "solution" will not be as painful as would appear at first glance...Bernanke knows this,but its another dirty secret....
    Reply | Link to Comment
  •  
    Sep 20 08:10 AM
    The decision of George W. Bush to save our Nation is as brave, courageous and intelligent of leadership we want in a President. His resolution to move quickly roughly equals George Washington in combat.
    Reply | Link to Comment
  •  
    Sep 20 08:53 AM
    Interesting,

    And no one had a clue this would happen sooner or later? Greenspan's loose money policies set the tone for this financial meltdown, and yet he still is out there pumping his book. As with wallstreeters, they got their's, so the hell with everyone else, and here Greenspan is still milking us dry.

    As usual, the taxpayer will be left holding the bag, and with the useless worthless dollar floundering, and inflation the only thing I see ahead of us, this is a disaster which like all disasters won't be totally known for some time. Thanks to all the greed motivated politicians, wallstreeters and bankers, a depression is unavoidable, no matter who gets elected.

    Disgusted,
    Reply | Link to Comment
  •  
    Sep 20 09:25 AM
    "The decision of George W. Bush to save our Nation is as brave, courageous and intelligent of leadership we want in a President. His resolution to move quickly roughly equals George Washington in combat."

    god, i love a good laugh i the morning. tks.
    Reply | Link to Comment
  •  
    Sep 20 09:38 AM
    punk_ash, don't try the defence that the rest of the world is just as bad off, this is a line being pushed by the US media to create a false illusion.

    The rest of the world has something strange and wonderful called "SAVINGS" They have not blindly been led into debt like the US, and what debt they do have they can afford to repay !
    Reply | Link to Comment
  •  
    Sep 20 10:42 AM
    "The decision of George W. Bush to save our Nation is as brave, courageous and intelligent of leadership we want in a President. His resolution to move quickly roughly equals George Washington in combat."

    Can I "report abuse"? Perhaps it is leadership like this, and people who support leaders like this that we are in the worst financial crisis of the century!

    This is exactly why I moved my money into Gold and Silver. Not only can I not trust our leaders to get us out of this, I don't have faith in the majority of the population to understand the issues or the gravity of the situation.

    Reply | Link to Comment
  •  
    Sep 20 11:11 AM
    So much scaremongering. What explains the meltdown that you all are so afraid of? You say how bad it is. That there is no solution. That somebody in power should have been listening to "the blogs" all this time. But where is the proposed alternate solution that you supposed geniuses have in mind? You are just a bit light on detail.

    I agree that W showed his mettle on this. Laugh if you will. Deride my opinion if you will. Derision is no substitute for a convincing counter-argument.

    My understanding is that Congress overreacted to Enron by requiring companies to mark their assets to market. In a tumbling market, when no one knows the value of an asset, buyers are scarce. That makes the current market value zero. Hence, assets that might have significant value in time are marked as zero present value.

    RTC 2.0 fixes this by buying such assets -- assigning conservative non-zero value to them -- but valuing them above zero. This stops the slide in asset values. Since the assets are covered by collateral that will almost certainly have significant future value (after the panic subsides).

    Since the RTC is acquiring these assets for a song, and since these assets are ultimately owned by the taxpayers, this is actually going to end up enriching the Treasury (not necessarily the taxpayers). True, this requires taking on debt in the meantime, but in a panic, people seem to be happy buying US gov't debt as it seems pretty stable in comparison even to money market accts.

    I am going to work on Monday, as usual. I expect close to 94% of those eligible to work are also going to work on Monday. The great, ultimate money machine that is our economy is going to continue its massive momentum.

    But squirm and panic if it makes you feel better.

    As for this being a transfer from poor to rich -- that constitutes one of the most bizarre misstatements I have read in a long time. If the taxpayer is actually being put on the hook for this to the tune of trillions of dollars, then it is high-income earners (aka "the rich") who would pay 90% of such tax. Hence, this is no help at all to the vast majority of wealthy. But, as has been pointed out, this is probably not going to be a net drain on gov't coffers, as these assets are being bought at low prices and will eventually be liquidated at a profit (not a profit for the current owners of the asset, who will take a bath, but these private asset holders prefer something rather than nothing).
    Reply | Link to Comment
  •  
    Sep 20 11:14 AM
    I hate sentence fragments and I left one in my previous comment (this happens when interrupted to restart the "64 Zoo Lane" DVD).

    Since the assets are covered by collateral that will almost certainly have significant future value (after the panic subsides), these assets will be sold and the proceeds used to retire the debt the RTC takes on to buy them in the first place.
    Reply | Link to Comment
  •  
    Sep 20 11:18 AM
    kelly, I'm hoping nobody could truly be as stupid as that guy was comparing dumbya to GW... but then again I look at the polls and see McCant and Tootsie in a dead heat with Obama, and I just shake my head.

    Then again, I haven't heard much out of the Obama camp on the economy either.

    Hope Ron Paul is on the ballot in FL when I get down there this Fall.

    Of course, explain this nightmare financial situation to McCant and Tootsie, and their faces will go blank, and then a light will come into their eyes....

    "Hmmm, guess its time to start a war, that's always good for the economy, and what's good for the economy is good for the GOP!"
    Reply | Link to Comment
  •  
    Sep 20 11:39 AM
    Our financial system is more unstable and unsafier today than yesterday.
    Government printing funny money now to reinflate the economy. Only problem is theirs too many holes and it goes right out again, for now. Once they system is deleveraged, it can inflate again. Massive deflation for the last 2-3 years. Now you will see massive inflation(money supply not prices, prices are not inflation, increased prices are increased prices)
    Reply | Link to Comment
  •  
    Sep 20 11:42 AM
    Congress shouldnt be stunned to learn how the economy works , 20 years into their jobs. Ya right, they were flaggergasted!!! OoookkkkkayyY!!!!! RIIIGHHHHTTTT!!!!!
    Reply | Link to Comment
  •  
    Sep 20 12:04 PM
    No relmore congress wasn't stunned by finally learning how the economy works.

    They were stunned by the fact they needed to commit political suicide on Friday 9/19 instead of the following week, after the inevitable run on the banks that would have occurred sans bail-out.
    Reply | Link to Comment
  •  
    Sep 20 12:40 PM
    Who to believe now? I sometimes feel that this all economy burst are all part of the larger 'international-conspir...
    Reply | Link to Comment
  •  
    Sep 20 12:49 PM
    Mish: You left out the second part of the "stunner" of Paulson's Super SIV 2.0:

    The government is going to hire outside advisers to manage this "trust"... So basically, the very people who did such a bang up job managing these assets on their own books-- will now be paid by the taxpayer to mismanage them on the public's books.

    Of course, they will now be managing the books under the watchful eye of Congressional politicians (democrats and republicans) who cannot balance a checkbook.

    Starting in January of next year, we have two choices. Choice one: General Patton, who wants to go to war with somebody and doesnt seem to care who. General Patton has himself stated that economics are not his thing. Choice two: Peter Pan, whose naivety is more stunning than the financial crisis. Peter Pan plans to fill us with hope by spending money we don't have, and sending the bill to our children. Both General Patton and Peter Pan want to fix the economy by raising taxes and expanding the size of government -- which has never worked in any country in any period of recorded history.

    And this being a democracy, we cannot forget about the voters. 300 million people who insist on living way beyond their means and blaming politicians, Chinese, rich people, French people, OPEC, the boogie man, the monsters in the closet -- pretty much anyone other than the face in the mirror.

    "We the people" caused this financial crisis. We are addicted to debt. We spend way beyond our means. We vote in politicians who make unrealistic promises of benefits we won't have to pay for. We thought we needed 10,000 square foot homes, because the 2,000sq ft homes we grew up in and the rest of the world has are not good enough. We don't have the income to pay for these McMansions, so we have our politicians bully banks into giving us mortgages with less than 20% down -- which was the standard down payment for our parents and grandparents. We insist on blaming the banks for selling us this mistake, even though we had every right to put down 20% if we wanted. In short, we refuse to take any responsibility for our own actions.

    I am very afraid for the future of this country. Neither presidential candidate has the skill set to deal with our debt situation, and even more importantly, neither man has the courage to tell us that we are our own biggest enemy.
    Reply | Link to Comment
  •  
    Sep 20 01:00 PM
    Let's get back to the Gold Standard and meltdown the dollar printing machines and get rid of the Federal Reserve Banking system and issue $10.00 Treasury Notes that can be only be purchased by low income households, giving the them a sense of investing in their government. This sort of War Bonds where every American invested in America. Only US citizens can purchase these bonds. And make the interest rates very attractive to hold on to them. Let any bank sell them at any times. The $10,000 Treasury is beyond most folks but only designed for china and japan and russia and india, did I leave anyone out to purchase them. Let America be America to support ourselves. What a concept!!!!
    By the way let's stop this war immediately if not sooner. THERE ARE NO WINNERS IN WAR, ONLY DEAD PEOPLE SO WE CAN HAVE PARADES AND DRY OUT THE TRESURY FOR THE WEALTHY GUN AND BOMB MAKERS. THEY ARE THE TRUE WINNERS.
    Sorry to hurt anyone feelings but better than being dead. Wars and the creation of the old men looking for glory before going to hell to meet the devil and for the young to die before 21 and for the mistakes of the old men. By the way I am 74 years old and a 30 year vet. If we can destory all weapons and have only knives to defend ourselves then we can sit down and talk things over. You I see generals with medals all the way to their butts, they must be 150 years old to gain so many. All the medals and a dollar gets you a cup of coffee somewhere but Starbucks. There a few who really earned their medals like Audie Murphy the most decorated combat soldier in WWII who met the enemy eyeball to eyeball or those who jumped on a bomb to save his fellow soldiers in the battlefield. Read antiwar.com or costofwar.com. Just maybe we can make sense of all this.
    Reply | Link to Comment
  •  
    Sep 20 01:09 PM
    Dear Michael,
    "$1.2 trillion taxpayer funded bailout designed to bail out the wealthy at the expense of the poor", why do you think only wealthy are being protected here, you're missing the whole picture. If the US financial system(supposedly a paragon) fails what would be the implication on the world markets and job scenario. I think we should appreciate Ben & Paul for being the Dark Knights here, for the greater good. Only time will tell.
    Thankyou.
    Reply | Link to Comment
  •  
    Sep 20 01:27 PM
    We have a choice McSane and a Moose with lipstick together don't have a half a brain, McSane was 5th FROM THE BOTTOM OF HIS CLASS AT THE NAVAL ACADEMY and Tootsie role shooting up the woods. Let's see her trackle the moose with a knive. She would win after the moose see the her face and run back into woods. Her state of Alaska has the highest rate of rapes and incest in the US with a population of 350,000. What do we have a bunch of animals screwing anything or anyone in front of them. I lived in alaska for 4 years. We should make them a territory once again. By the way alaska is not larger than Texas. With the planet warming up we will soon find out how realy big alaska is after the snow melts. Did I put anyone short hairs???? Oh it feel so good.....................
    Reply | Link to Comment
  •  
    Sep 20 01:35 PM
    i love you mish keep up the good work
    Reply | Link to Comment
  •  
    Sep 20 01:44 PM
    Methinks the reason there was so much silence in Pelosi's conference room was that many of the pols in attendance have a small glimmer of their culpability for this mess. Both parties have taken campaign contributions from Fannie and Freddie and Dodd and Frank reportedly have received "sweetheart" home loans from CountryWide. The very people at that meeting have dug the financial and moral cesspool we now have.
    Reply | Link to Comment
  •  
    Sep 20 02:18 PM
    But. actually, wasn't "persecuted" the right term in the president's speech?
    Reply | Link to Comment
  •  
    Sep 20 02:56 PM
    Every US Senator and House of Representatives member that got as much as a dime from Fannie or Freddie should be made to resign and be held personally and finacially accountable for the mess that they have gotten their countrymen into.
    Reply | Link to Comment
  •  
    Sep 20 03:28 PM
    After everything is said : Why are the same old asses ( of both parties )
    re-elected time and time again ??

    A country that can put a man on the moon cannot impose
    reasonable term-limits on it's politicians ??

    " We have no REAL pres. candidate ! ! " wake-up people !!
    Most politicians have the IQ and/or common-sense of a houseplant.
    It's the people they surround themselves with and whose advise they
    seek that give you a better picture.
    I'm personally less afraid of the McCain camp !
    All the BS aside: just ask yourself : Who should appoint the next
    Supreme Court Justices ? and: What direction will this country
    take then ?

    (PS for all the undecided : YOU might make a point with your vote, but Paul or Nader will never appoint anybody to anything !!

    Reply | Link to Comment
  •  
    Sep 20 04:17 PM
    Let's see. Reflated dollars will be used to purchase deflated (delveraged assets). Sounds like a good buy. That is, if the purchase is at arms length. But -- how is the Treasury Department going to set prices ? No details in any of the plans for the bailout. If the assets cannot be sold, then they probably are not worth anything.

    However, other than paying more than the assets are worth, there is a much simpler way to price. The investment banks, and the money center banks, have senior debt, priced on the open market. Why not take the 1.2 trillion, and slowly but surely, purchase the senior debt (and maybe the commercial paper as well) at open market prices.

    Have the US government hire some canny junk bond traders to purchase the now junk bank and investment bank senior bonds at market prices. Make the actual purchase plan a state secret, with the penalty of life imprisonment in the Texas Correctional system for anyone corrupting the process (that's the Huntsville Correctional Center). Market prices for the securities, and re-liquidification of the capital markets. Any questions ?

    That seems to me to be the issue. How are the purchased CDOs to be priced ?
    Reply | Link to Comment
  •  
    Sep 20 05:13 PM
    The linchpin to this fiasco goes back to Congressional refusal to reform the GSEs. If we had achieved reform and instituted a sound fiscal policy, the investment banks would have realized their greater risk of a reckless policy of leveraging up on securities that were rubber stamped AAA by the ratings agencies. Furthermore, the mortgage lenders would find no one buying up their crappy sub prime and alt a mortgages leading to a change in corporate policy.
    In 2002 and 2005 we had reform bills before Congress that were blocked in committee. Democrats would say its a sign of Republican leadership. But the truth is that they were the primary party blocking the vote. Check the record. Look up who was sponsoring the legislation and who was blocking it in committee. The blockers are our current leaders in the banking committee. I can show you newspaper quotes from a number of stupid politicians including Barney Frank and Christopher Dodd, who said the GSEs don't need this oversight. Its both a shame and a sham.
    Reply | Link to Comment