With the Fed possessing a world-class stable of lawyers, it’s a safe bet that every jot and tittle of the boss’ sworn testimony is rock-hard supportable. Here I’m more interested in what he doesn’t say.
Hat tip to Crane’s on this one. Last Thursday Ben Bernanke unleashed a long, turgid clot of prepared Congressional testimony. (Now there’s a falsifiable statement and if you find it to be wrong congratulations on your good fortune! 😉 ) The prose was evidently so mind-numbing that even the Fed’s ace proofreaders’ glazed eyes read right through the not over-subtle typo in this sentence (towards the end) …
… However, studies of the empirical linkage between monetary policy and house prices have generally found that that that linkage is much weaker than would be needed to explain the behavior of house prices in terms of FOMC policies during this period.[refers paper’s note 9] …
Now fresh young researchers like Ms Barnett-Hart, not laboring under the preconceptions of nearly a century of Fed received wisdom, are starting to make real progress discovering what just hit us in the housing bust and financial crisis. I can only assume that Ben’s testimony was meant to throw a wet woolly passive-voiced blanket of gerunds over these emerging insights into what really happened.
But one thing is for sure. The true narrative of the crisis speaks not complexity, but simplicity.
And that being said, the 9/2 ’10 testimony looks to be a rich source of obfuscation pointing, by indirection, at profitable areas of study. I’ve selected one such from early on, the testimony’s fifth paragraph:
… To choose one of several possible key dates, on July 30, 2007, IKB, a medium-sized German bank, announced that in order to meet its obligations, it would be receiving extraordinary support from its government-owned parent and an association of German banks. IKB’s problem was that its Rhineland off-balance-sheet vehicle was no longer able to roll over the asset-backed commercial paper (ABCP) it had been issuing in U.S. markets to fund its large portfolio of asset-backed securities. …
That particular choice feels to me like Alan Greenspan’s efforts to deflect attention away from the decisive events of 9/18 ’08. My assertion is that the key event in that sequence was a little less than three weeks later, the Rôtisseries St-Hubert Crisis of the evening August 16 / 17 (MSWord Doc file).
Tuesday, Aug. 14,  was little better in the market, and the risks were mounting. Trusts had only a three-day grace period before they would begin to default. There would be a fire sale of assets in tumbling markets, and ABCP investors would have no chance of getting all their money back.
Doomers should read the material before and after that quote carefully. It soon becomes clear that Goldman alumnus and then- senior Finance Dept bureaucrat Mark Carney was the mastermind behind the take-out chicken -fueled decision Thursday night into the wee hours to freeze the whole Canadian ABCP market. Among other things, this gifted Canadian banks with a critical C$33 billion subsidy (the customers’ frozen commercial paper investments) for some seventeen months until, in a move eerily foreshadowing Geithner’s secret Santa support of the GSEs, Canadian Finance Minister Jim Flaherty bailed out the resulting “Montreal Accord” on December 24, 2008. Except for the weird flaw in those investors’ protection explained higher up in the paper, then- Bank of Canada Governor David Dodge would have had a few hours to after all agree to lending facilities taking C$10s of billions of toxic sludge or watch the whole house of cards collapse then and there. Narrow escape that.
This fixed the paradigm for the credit crunch, except that in countries with a culture of consumer protection the burden of supporting those held and returned illiquid assets for private financial institutions did fall on the central banks because, like Dolly Haze, the bankers “… had absolutely nowhere else to go.”
The simplicity in this scenario comes out of reliving the panic that was gripping the guts of bankers who started descending on Caisse HQ from all over the world on Friday September 10th. Once it became clear that Canada’s ABCP market was contaminated with American subprime mortgages, it became imperative to start unwinding those deals. However … by then (post-Bear) it was abundantly clear that selling the collateral from those deals would result in discovering market prices for the assets well under a buck. Enough below to re-price similar assets on balance sheets down sufficiently to crash the entire world’s stock of financial services institutions. They were staring straight into The End Of The World[tm]. It wasn’t so much “fire sale” they were fighting, but ground truth. It was the start of the world-wide credit crunch, and they’re fighting the very same ground truth to this day.