George S. May Business Blog

Ben Bernanke — Will he stay, or will he go?

Despite being named Time’s “Person of the Year”, coupled with the fact that the Senate Banking Committee has already voted him through, many seem to believe Mr. Bernanke’s road to reconfirmation will not be an easy one.

Bernanke’s next step is to seek approval from the full Senate, however tough questions from the committee and a “hold” placed on the nomination by Senator Bernie Sanders, have raised doubts as to whether the current chairman of the Federal Reserve Board will be back for another run.

The more that I read about Mr. Bernanke, and moreover the gripes that many politicians, columnists, and bloggers have with the man, the more I realize that the main issue is essentially rooted in trust. Will Bernanke do what he says he intends to do should another crisis come crashing down into America’s lap?

In other words:

If and when one of the banks that are ‘too big to fail’ falls into trouble, what will you do?

Bernanke’s answer, in short: we will take over and impose serious losses on the creditors.

Here are Mr. Bernanke’s words:

“A new regulatory structure should address this problem. In particular, a stronger financial regulatory structure would include: a consolidated supervisory framework for all financial institutions that may pose significant risk to the financial system; consideration in this framework of the risks that an entity may pose, either through its own actions or through interactions with other firms or markets, to the broader financial system; a systemic risk oversight council to identify, and coordinate responses to, emerging risks to financial stability; and a new special resolution process that would allow the government to wind down in an orderly way a failing systemically important nonbank financial institution (the disorderly failure of which would otherwise threaten the entire financial system), while also imposing losses on the firm’s shareholders and creditors. The imposition of losses would reduce the costs to taxpayers should a failure occur.”

A.K.A. NO MORE BAILOUTS.

The question is: Is this really conceivable?

The whole issue, as complex as it may appear, boils down to common sense really. If restrictions aren’t put on the banks that will keep them small enough to fail, then what is keeping them from repeating history? If big time creditors aren’t afraid of losses, then what will stop them from giving banks money on the same super-lax terms as before?

Furthermore, if and when another BofA-like bank takes a dive, will Bernanke have the juevos, or more importantly the ability to say “sorry this time it’s on you”.

I guess that will be up to the Senate to decide.

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