Paul Tucker, a former member of the Bank of England’s Monetary Policy Committee, raised an interesting point about central bank independence.  Their independence from political oversight gives them tremendous power.  What he calls “unelected power”.

He wonders to what extent did this unelected power factor into the global response to the Great Financial Crisis?

In other words,

Without the aggressive moves by the Fed, might Congress have been more willing to rescue the 9.3 million American families who lost their homes?

Regular readers know the US response to the financial crisis was chosen by the Committee to Save the Banks.  The Committee consisted of Hank Paulson, then the US Treasury Secretary, Ben Bernanke, then Fed Chair, and Tim Geithner, then NY Fed President.  It was their choice to bailout the banks and to pursue “foam the runway” policies to ease the burden of loss recognition on the bad assets.

I agree with Mr. Tucker they exerted a tremendous amount of unelected power.  They just didn’t exert it in quite the way he thinks.

They exerted their unelected power by creating a false narrative about the crisis.

One example of this false narrative was the choice they gave to Congress in September 2008:  either give us the bailout funds or “we may not have an economy on Monday” (Ben Bernanke).

Where in this choice is the option to rescue 9.3 million American families from foreclosure?  It isn’t there and this was intentional.

Where in this choice is the option to have the banks take the losses on the portion of the mortgages these 9.3 million American families can not afford to repay?  It isn’t there and this was intentional.

The very unelected officials who should know how the financial system is designed never bothered to explain to Congress insolvent banks never need to be bailed out*.  This was intentional.  [*The combination of deposit insurance and the Fed acting as a lender of last resort makes it possible for these insolvent institutions to continue operating and supporting the real economy indefinitely.  This gives regulators like the FDIC all the time they need to close an insolvent bank with minimal losses to the deposit insurance fund.]

Another example of the false narrative was Bernanke’s statement at the time the first stress test results were announced.

These examinations were not tests of solvency; we knew already that all these institutions meet regulatory capital standards. …

The results released today should provide considerable comfort to investors and the public. … However, our government, through the Treasury Department, stands ready to provide whatever additional capital may be necessary to ensure that our banking system is able to navigate a challenging economic downturn.

Surely the Fed Chair should know a bank can both meet regulatory capital standards and be insolvent at the same time.  Solvency is based on the market value of a bank’s assets minus the book value of its liabilities.  If it is less than zero, a bank is insolvent.  Regulatory capital is based on a bank’s equity account.  This account almost never fully reflects the decline in the value of the bank’s assets.

Dexia, a large EU bank, demonstrated this.  At the time it was closed, its capital ratios were among the highest for all EU banks.

Mr. Bernanke’s statement also revealed another type of unelected power.  He observed “the Treasury Department stands ready to provide whatever additional capital may be necessary”.  In making this statement, he promised further taxpayer bailouts that required Congressional approval.

I agree with Mr. Tucker unelected power like this is problematic.  This is especially true when banks are opaque.  Had banks provided transparency and disclosed their current exposure details, the ability to spin a false narrative would have been greatly diminished.