Former Federal Reserve Chairman Ben Bernanke’s new book, “The Courage to Act: A Memoir of a Crisis and Its Aftermath,” hit the streets this past week.
In the book Bernanke expresses his opinion that some of the bankers involved in the financial crisis should have been criminally prosecuted. This opinion, or, more accurately, the timing of it, moved at least one TV news anchor, Fox News’ Shepard Smith, out of his customary calm and into an unmistakably genuine expression of anger and frustration.
Noting that the statute of limitations on the crash-related deeds had just expired, and suspicious of the timing of the book’s release, he demanded to know, “Where was his opinion when it might have meant something?”
The question echoed earlier criticisms of Bernanke for failing to share any doubts he had, or should have had, about the mortgage market when it would have made a difference. On economic subjects, the former Federal Reserve chairman was then the most authoritative voice in the government. When he spoke people listened. If he had said that the mortgage market looked troubling maybe something would have been done about it — before it collapsed and took our economy down with it.
Bernanke deserves much credit for leading the government’s successful actions to stem the financial panic that accompanied the Wall Street crash, and to help the economy regain its footing. But it is just possible that an earlier warning about the collateralized mortgage game going on might have averted the crash and recession entirely.
His explanation for his silence about the mortgage situation was that, in addition to the technical difficulties in defining a bubble from the Fed’s standpoint, the regulators responsible for mortgage lending all seemed good with it.
While his explanation for either not recognizing or not speaking out about the dangerously inflated mortgage market is, at best, unsatisfying, the story behind launching his opinion about prosecutions — after the statute of limitations had run out — is a lot more interesting. What his actual motives for waiting were we do not know, but there were certainly good reasons for the government to hold back.
To start with, prosecuting financial crimes under federal law isn’t as easy as we might think. A modern bank is a complex organization, with diffuse and dispersed responsibilities. A prosecution can easily find itself pursuing a case filled with a mix of accounting trivia, vaguely defined issues of fiduciary responsibilities, and investment prudence. These are not ideal cases to present to a jury.
More importantly, though, if it prosecuted bankers for their actions related to the Wall Street crash, the government would have to consider how the defense would present its side of things. It is difficult to imagine a banker’s defense that would not involve subpoenaed evidence and testimony about the role of the government itself in causing the crash.
To be sure, it was not strictly the government but the quasi-governmental agency, the Federal National Mortgage Administration (FNMA, or “Fannie Mae”) that would have been drawn into the case. Fannie Mae’s decision to expand its lending into the sub-prime mortgage market dominated by higher risk, zero-down, and so-called Low-Doc and No-Doc loans was unwise, certainly, and perhaps misleading because of the example it set and the way it presented risk factors in its financial reports and mortgage loan packaging.
During a trial it could easily be interpreted as a practice that encouraged precisely the market activity that the government was prosecuting as a crime. It might be difficult to convince a jury that it was criminally wrong for a bank to rely on government information and actions to base its decisions. And while it doesn’t precisely fit any of the case law standards for entrapment a sympathetic judge might allow that type of defense, even alongside a not-guilty plea.
No matter how these cases were resolved, convictions or not, the government was going to end up with two black eyes — one for negligent oversight and one for being partially to blame for causing so much economic pain and disruption to so many Americans. No wonder the government chose to collect fines from the banks instead.
Former Chairman Bernanke’s book is mostly about the Federal Reserve’s actions in the crisis days of near-panic before the financial markets touched bottom. It is, essentially, a commander’s account of a successful combat engagement. The Fed and the Treasury Department did an excellent job of restoring viability to the markets, even if some of the actions taken were imperfect or smelled bad.
Did we learn anything from the crash? Maybe. The important lesson is that we need a better financial market intelligence system and better analysis of its structure and weak points. We’re working on it.
James McCusker is a Bothell economist, educator and consultant. He also writes a column for the monthly Herald Business Journal.
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