Bear Stearns Trash Still in the FED Roach Motel (Graph)

On June 26, 2008, the Federal Reserve Bank of New York (FRBNY) extended credit to Maiden Lane LLC under the authority of section 13(3) of the Federal Reserve Act. This limited liability company was formed to acquire certain assets of Bear Stearns and to manage those assets through time to maximize repayment of the credit extended and to minimize disruption to financial markets.

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Original content Bob DeMarco, All American Investor

Reserve Bank Credit (Graph) - Securities Held Outright - Federal Agency Debt Securities

Up, Up, and Away.



Note: The current face value of federal agency obligations held by Federal Reserve Banks. These securities are direct obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

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St. Louis Source Monetary Base (Graph)

Wonder why gold is trading up? Here is one good reason.

• Sum of currency in circulation, 
• Reserve balances with Federal Reserve Banks, 
• and service-related adjustments to compensate for float.

Calculated by the Federal Reserve Bank of St. Louis.

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Reserve Bank Credit Remains Stubbornly High (Graph)

This is the truest measure of Fed liquidity. While Reserve Bank credit has peaked it still remains high and well above trend. This series needs to be watched closely. It is likely that the market will experience a sharp correction when the Fed starts to take out this over abundance of liquidity.

Is the market strong, or is what we are seeing being caused by this aggressive liquidity injection on the part of the Fed. In other words, are we seeing a real case of excessive exuberance?

Reserve Bank credit is the sum of securities held outright, repurchase agreements, term auction credit, other loans, net portfolio holdings of Commercial Paper Funding Facility LLC, net portfolio holdings of LLCs funded through the Money Market Investor Funding Facility, net portfolio holdings of Maiden Lane LLC, net portfolio holdings of Maiden Lane II LLC, net portfolio holdings of Maiden Lane III LLC, float, central bank liquidity swaps, and other Federal Reserve assets.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 700 articles with more than 18,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Reserve Bank Credit Dropping are Higher Interest Rates Ahead (Graph)

Reserve Bank Credit is peaking. Reserve credit is down from the peak of $2,236 billions during December, 2008, the secondary top at $2,165 billions during May, 2009. The current reading is $2,010 billions.

This series should be watched closely. The current drop in the dollar could force the Federal Reserve to continue draining reserves from the system to protect the dollar from an all out free fall.

This will likely lead to an increase in long term interest rates. However, it is time to start watching the two year treasury security closely.



Note: Reserve Bank credit is the sum of securities held outright, repurchase agreements, term auction credit, other loans, net portfolio holdings of Commercial Paper Funding Facility LLC, net portfolio holdings of LLCs funded through the Money Market Investor Funding Facility, net portfolio holdings of Maiden Lane LLC, net portfolio holdings of Maiden Lane II LLC, net portfolio holdings of Maiden Lane III LLC, float, central bank liquidity swaps, and other Federal Reserve assets.

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Fed Holdings of Bear Stearns Assets Still Huge (Maiden Lane LLC, Graph)

Still near $26 Billion. What next? Something has to give at some point in time.

This limited liability company, Maiden Lane LLC, was formed to acquire certain assets of Bear Stearns and to manage those assets through time to maximize repayment of the credit extended and to minimize disruption to financial markets. On June 26, 2008, the Federal Reserve Bank of New York (FRBNY) extended credit to Maiden Lane LLC under the authority of section 13(3) of the Federal Reserve Act.



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Industrial Production (Graph)

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Industrial production decreased 0.4 percent in June after having fallen 1.2 percent in May. For the second quarter as a whole, output fell at an annual rate of 11.6 percent, a more moderate contraction than in the first quarter, when output fell 19.1 percent. Manufacturing output moved down 0.6 percent in June, with declines at both durable and nondurable goods producers. Outside of manufacturing, the output of mines fell 0.5 percent in June, and the output of utilities increased 0.8 percent. The rate of capacity utilization for total industry declined in June to 68.0 percent, a level 12.9 percentage points below its average for 1972-2008. Prior to the current recession, the low over the history of this series, which begins in 1967, was 70.9 percent in December 1982.

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 700 articles with more than 18,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Money Supply Climbs to New High (M2, Graph)

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 700 articles with more than 18,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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FED Bank Reserve Credit (Graph)

Reserve Bank credit is the sum of securities held outright, repurchase agreements, term auction credit, other loans, net portfolio holdings of Commercial Paper Funding Facility LLC, net portfolio holdings of LLCs funded through the Money Market Investor Funding Facility, net portfolio holdings of Maiden Lane LLC, net portfolio holdings of Maiden Lane II LLC, net portfolio holdings of Maiden Lane III LLC, float, central bank liquidity swaps, and other Federal Reserve assets.

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• Bond Vigilantes Take over in the Long End (Graph)
• Ten Year Treasury Yield in Orbit (Graph)
• Ten Year Interest Rates Rising (Chart)
  
• Option ARM--The Toxic Mortgage
• Systemic Risk Defined--Too Big to Fail
• Ray Dalio on the current state of affairs in the market
• Roubini Predicts U.S. Losses May Reach $3.6 Trillion
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Fed UP UP and Away (Chart)

Net Free and Borrowed Reserves Soaring. M2, Money Supply Soaring. Monetary Base Soaring. Fed Balance sheet Soaring. Nonperforming loans Soaring.

Long term interest rates rising. Mortgage interest rates rising. Stocks topping and weakening. Gold surging.

Bull market in stocks? Not likely in the short term. It is getting more risky by the week.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Roubini on the U.S. Dollar and the Chinese Yuan

The Almighty Renminbi?

Now, imagine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.

Also see Roubini vs. Zhou on the U.S. Dollar and the Chinese Yuan

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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30 Year Conventional Mortgage Rate (Chart)

Top Hedge Fund Managers Make Billions in 2008

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Ray Dalio on the current state of affairs in the market

Roubini Predicts U.S. Losses May Reach $3.6 Trillion

Option ARM--The Toxic Mortgage

Warren Buffett's Annual Letter to Investors (Cliff Notes Version)

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Reserve Bank Credit Soaring Again (Graph)

Reserve Bank Credit, Factors Affecting Reserve Balances

The Federal Reserve is starting to expand their balance sheet again. Week over Week.

• The biggest increase this week is in the purchase of Mortgage Backed Securities (MBS) -- up $75 Billion. 
• An additional $18 Billion increase in Maiden Lane LLC (Bear Stearns bailout).
  
• An additional $ 34 Billion increase in Maiden Lane II LLC and Maiden Lane III LLC (AIG bailout).
• U.S. Treasury securities held outright rose $94 Billion, and $405 Billion versus a year ago.
  
• Reserve Bank Credit rose $70 Billion week, and $1.3 Trillion versus a year ago.
• Reserve Bank Credit now stands at $2.169 Trillion and is once again approaching the peak of $2.31 Trillion (December, 2008).
  

Notes: H.4.1 Reserve Bank credit is the sum of securities held outright, repurchase agreements, term auction credit, other loans, net portfolio holdings of Commercial Paper Funding Facility LLC, net portfolio holdings of LLCs funded through the Money Market Investor Funding Facility, net portfolio holdings of Maiden Lane LLC, net portfolio holdings of Maiden Lane II LLC, net portfolio holdings of Maiden Lane III LLC, float, central bank liquidity swaps, and other Federal Reserve assets

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Condition of Banks Continues to Deteriorate (Chart)

The Report of Condition and Income for All Insured U.S. Commercial Banks continues to deteriorate and is worrisome.

This really calls into question if the new bank bailout plan is going to work. The newest proposal is similar, if not the same, as the plan that was put into effect in September. However, if conditions continue to deteriorate it is likely that banks will need to be seized by the Federal government much like what happened during the Savings and Loan crisis.

Right now the hope remains that banks can earn their way out of the problem. This explains, in part, why the Federal Reserve is keeping interest rates artificially low and is buying Treasury securities. This strategy worked for the banks in the 1992-1993 period. It is not well known but many banks were "technically" insolvent at the time.

It appears that bank failures, a bank panic, and bank nationalizations are all still real possibilities.

We will continue to watch this situation at All American Investor.

Sidenote: Federal regulators Friday seized control of the two largest wholesale credit unions — U.S. Central Federal Credit Union and Western Corporate Federal Credit Union — which together had $57 billion in assets. This went virtually unnoticed.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Dollar versus Euro Exchange Rate (Chart)

The chart has an interesting long term double bottom. The chart is evidencing a fear of inflation in the U. S. Along with the Chart on Money Supply, M2, these series should be watched closely.

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Money Supply continues to Soar (Chart)

M2, Money Stock continues to soar and accelerate. Chart current through March 20.

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Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

The Big Fight Against Deflation

Sometimes you have to look beyond the obvious. It should be clear that the state of angst over the potential for deflation to bring down the financial system is enormous. The Federal Reserve announcement that they will be buying Treasuries, mortgage backed securities, and agency securities is clearly aimed at bringing liquidity back into the market. If 30 year mortgages were to fall to 4.5 percent, and if all homeownwers were able to refinance, it would create about $200 billion in cash flow savings to the consumer.

However, there are still many question that need to be answered. Will all consumers be able to refinance? What will consumers do with these cash flow savings? Will consumers spend or save? Will lower mortgage interest rates bring the supply and demand of houses into balance, or will the market continue to suffer from over supply?

The big questions is--what will be the longer term effects of the monetization of debt by the Federal Reserve? Short term this policy should bring an end to the deflations psychology. This is needed. It will bring liquidity into all debt markets; but, at what price? The monetization of debt right now looks like the necessary strategy in the short term. I agree. But, I have severe reservations about the long term.

The goal right now is to get us out of recession.

Is this new strategy a panacea or is it a Pandora's box? We will be looking at this over the weekend.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

60 Minutes Ben Bernanke's Greatest Challenge (Video and Text)

60 Minutes features a rare interview with a Federal Reserve chairman - the first in 20 years - Bernanke tells correspondent Scott Pelley what he thinks went wrong with America's financial system, how it caused the economic crisis, what the Federal Reserve is doing to help fix it and when he expects the crippling recession to end.

In the interview, Bernanke also talks about the failure of Lehman Brothers, the rescue plan for AIG and the Fed’s extraordinary actions taken since the beginning of the economic crisis. The Fed Chairman also discusses how regulations might change in the future.

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"Mr. Chairman, I'm gonna start with a question that everyone wants me to ask: when does this end?" 60 Minutes correspondent Scott Pelley asked Bernanke.

"It depends a lot on the financial system," he replied. "The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis. We've seen some progress in the financial markets, absolutely. But until we get that stabilized and working normally, we're not gonna see recovery. But we do have a plan. We're working on it. And I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year. We'll see recovery beginning next year. And it will pick up steam over time."

Asked if he thinks the recession is going to end this year, Bernanke said, "In the sense that this decline will begin to moderate and we'll begin to see leveling off. We won't be back to full employment. But we will see, I hope, the end of these declines that have been so strong in a last couple of quarters."

"But you wouldn't say at this point that we're out of the woods?" Pelley asked.

"No," Bernanke replied. "I think the key issue is the banking system and the financial system."

"Unemployment, as we sit here, is about 8.1 percent. I wonder, do you expect double digit unemployment?" Pelley asked.

"Well, it's hard to forecast exactly where we're going. Unemployment is rising. Job losses are still very severe. And no doubt, the unemployment rate's gonna go higher than it is. But I think, again, that if we do succeed in stabilizing the financial system, that we'll begin to see a slower pace of decline, and eventually, a stabilization that will set the basis for a recovery," Bernanke said.

"You seem to be saying that we're not heading into a new American Depression?" Pelley asked.

"I think we've averted that risk. I think we've gotten past that and now the problem is to get the thing working properly again," the chairman said.

Bernanke, age 55, has been chairman of the Federal Reserve Board since 2006. He had previously served as a Fed governor, then chairman of the President's Council of Economic Advisers, before being appointed as Fed chairman by President George W. Bush.

For this interview, he opened up the Fed headquarters, rarely seen by the public. It's a monumental building along the National Mall. Construction started in 1935 in the depths of the Great Depression.

"You know Mr. Chairman I think the Federal Reserve, for most people, is a mystery," Pelley remarked.

"Well, it's an institution that people don't hear so much about but it's a very important one. It manages monetary policy for the country. It's one of the main tools we have for stabilizing our economy and keeping prices stable," Bernanke said.

Asked when it was founded, Bernanke told Pelley, "The Fed was created by Congress in 1913. And its original purpose was to deal with financial panics, which is what we're doing right now."

Bernanke's crisis started in 2007 with the mortgage meltdown; lenders began to fail. Bernanke cut interest rates repeatedly. In 2008, the Fed stopped the collapse of Bear Stearns by arranging a sale to another firm.

But then came the end of Wall Street as we knew it. Mortgage giants Fannie Mae and Freddie Mac were seized by the government. On Sept. 14, Merrill Lynch was sold in distress. The next day, the 158-year-old investment bank Lehman Brothers failed

"You didn't rescue Lehman Brothers. It set off a worldwide panic when it went bankrupt. And I wonder, looking back, whether you think that was a mistake," Pelley asked.

"There were many people who said, 'Let 'em fail.' You know, 'It's not a problem. The markets will take care of it.' And I think I knew better than that. And Lehman proved that you cannot let a large internationally active firm fail in the middle of a financial crisis. Now was it a mistake? It wasn't a mistake for the following reason: we didn't have the option, we didn't have the tools. All the Federal Reserve can do is make loans against collateral," Bernanke replied.

The day after Lehman, Bernanke's Fed did something astounding: it loaned $85 billion to a company that wasn't a bank at all - American International Group (AIG), the global insurance giant that was also involved in backing risky mortgage investments. Bernanke says, unlike Lehman, the Fed could make the loans based on good collateral in AIG's portfolio.

"There have now been four rescues of AIG, $160 billion. Why is that necessary?" Pelley asked.

"Let me just first say that of all the events and all of the things we've done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with AIG. Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, we had a situation where the failure of that company would have brought down the financial system," Bernanke said.

"You say it makes you angry?" Pelley asked.

"It makes me angry. I slammed the phone more than a few times on discussing AIG. I understand why the American people are angry. It's absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets, that was operating out of the sight of regulators, but which we have no choice but the stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy," Bernanke explained.

By September, Bernanke and then-Treasury Secretary Hank Paulson went to Capitol Hill to urge a massive bailout of the banking system, which lawmakers soon passed.

Asked how close of a call it was, Bernanke said, "It was very close. It was very close. The Congress passed the bill that gave Treasury the right to put capital into the banks in the first week of October. And it was in the second week of October that the crisis reached its peak. If we had not had those powers, we could have had a much, much worse outcome. So it was a very dangerous situation."

"Was anyone on Capitol Hill skeptical? Did they push back at all, you know, 'Mr. Chairman, it's probably not quite that bad'?" Pelley asked.

"Well, I do remember one conversation I had where I was addressing a caucus of congressmen. And a congressman said to me, 'Mr. Chairman, you know, I'm talking to bankers in my town. I'm talking to shopkeepers in my town. And they say things are normal. Nothing's going on. We don't see any problem.' And I turned to him and I said, 'You will,'" Bernanke recalled.

That second week of October, the Dow fell 18 percent - its worst week in history. At that point, $8 trillion had been lost.

In the crisis, Bernanke had freedom to act immediately - he doesn't need permission from Congress or the president. While they debated on Capitol Hill, Bernanke cut interest rates nearly to zero; then he used Depression-era emergency powers to launch a dozen rescue programs of his own. There was support for money market funds, mortgages, short term lending to small business, and support for auto loans, student loans and small business loans - commitments of a trillion dollars, doubling the size of the Fed's balance sheet.

Asked if it's tax money the Fed is spending, Bernanke said, "It's not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed. It's much more akin to printing money than it is to borrowing."

"You've been printing money?" Pelley asked.

"Well, effectively," Bernanke said. "And we need to do that, because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation."

He's not kidding about printing money: the Fed issues U.S. currency, which is why it says "Federal Reserve Note" on all the bills in your wallet. The Treasury Department's Bureau of Engraving and Printing is just a few blocks from Bernanke's office. It prints the money at the Fed's request.

The Fed's mandate from Congress is to put enough money i the system for maximum employment, but not so much that it sets off inflation.

The Fed actually pays for itself and returns billions in profits to the Treasury.

In a sense, Bernanke has been preparing for this emergency his whole professional life. He got a PhD in economics from MIT. He chaired the economics department at Princeton, where his specialty was the Great Depression.

He's among many economists who now believe it was the Federal Reserve itself that helped turn a recession in 1929 into a global calamity.

"They made two mistakes, basically. One was they let the money supply contract very sharply. Prices fell. Deflation. So monetary policy was, in fact, very contractionary. Very tight during that period. And then the second mistake they made was they let the banks fail. They didn't make any strong effort to prevent the failure of thousands of banks. And that failure had terrible effects on credit and on the ability of the economy to right itself," Bernanke explained.

Bernanke told 60 Minutes we were close to a second Depression and he is determined to not let the major banks fail on his watch.

"One of the things that I think many people watching this interview don't understand, is why there are multiple bailouts, four bailouts of AIG, three bailouts of Citigroup. There is a sense that this is a band-aid approach, that we're not getting to the root of the problem," Pelley remarked.

"Well, part of the issue is that, you know, the economy has gotten a good bit worse. You know, the first part of the crisis was subprime and other assets that were toxic. Now, we're in a second phase, which is that the economy is very weak," he said. "So the economy's weakness has meant that some of the initial attempts to stabilize the banks haven't been enough, and we've had to do more."

"You know, Mr. Chairman, there are so many people outside this building, across this country, who say, 'To hell with them. They made bad bets. The wages of failure on Wall Street should be failure,'" Pelley remarked.

"Let me give you an analogy, if I might," Bernanke said. "If you have a neighbor, who smokes in bed. And he's a risk to everybody. If suppose he sets fire to his house, and you might say to yourself, you know, 'I'm not gonna call the fire department. Let his house burn down. It's fine with me.' But then, of course, but what if your house is made of wood? And it's right next door to his house? What if the whole town is made of wood? Well, I think we'd all agree that the right thing to do is put out that fire first, and then say, 'What punishment is appropriate? How should we change the fire code? What needs to be done to make sure this doesn't happen in the future? How can we fire proof our houses?' That's where we are now. We have a fire going on."

Bernanke told Pelley that "fire" is still burning.

Asked if all the big banks the Fed regulates are solvent, Bernanke said, "I believe they are, yes. But we are doing a stress test right now, where we're looking at what the positions of the banks are under a tougher economic scenario than the one that we currently expect. And what we plan to do is to say how much capital would each bank need to be well capitalized. Not just solvent, but well capitalized, even in these more adverse scenarios."

"Are you committing in this interview, that you are not going to let any of these banks fail? That no matter what their balance sheet actually looks like, they are not gonna fail?" Pelley asked.

"They are not gonna fail," Bernanke said. "But what we can do, should it be necessary, is try to wind it down in a safe way."

In other words, Bernanke thinks government should stabilize failed financial companies and take them apart slowly. "So, for example, in the case of AIG, we've prevented a bankruptcy, because of the chaos that would create. But we're also demanding that AIG divest itself, sell off its subsidiaries, and use the proceeds to pay back the government," he said.

"What are the dangers now? What keeps you up at night?" Pelley asked.

"I think the biggest risk is that, you know, we don't have the political will. We don't have the commitment to solve this problem, and that we let it just continue. In which case, you know, we can't count on recovery," Bernanke said.

The Fed estimates the wealth of American families fell 18 percent in 2008, the worst since the Great Depression.

Ben Bernanke is doing things with the Federal Reserve that have never been done before. It may be because he's not a creature of Washington or Wall Street.

He grew up, middle class, the smartest kid in a town now falling on hard times. He told Pelley, because the Fed is so powerful, it should be more open.

Bernanke meets with his six fellow governors of the Federal Reserve - all of them appointed by the president of the United States - at the Fed's headquarters. Bernanke also chairs the Federal Open Market Committee, which decides interest rates.

Those meetings, which take place inside the Fed’s boardroom in Washington, are secret. Asked why, Bernanke took Pelley inside the boardroom and explained, "If we held those things with a TV camera on us it would create lots of volatility and problems in the market. But I should say that, you know, we've come a long way. In 1994, when the Fed made a policy decision to change interest rates, wouldn't even announce that we made a change. But now, after every meeting, we put out a statement, say what we did, explain what we did, why we're doing it. And three weeks later, we put out minutes to describe everything that happened in the meeting. So we're becoming much more transparent."

"When I called and proposed this interview about a year ago, your representative laughed out loud. And said, 'The Fed chairman never does an interview.' Why are you doing this?" Pelley asked.

"Well, it's an extraordinary time. It's an extraordinary time. This is a chance for me, I think, to talk to America directly," Bernanke said.

It's also a chance for America to understand where he comes from.

Ben Shalom Bernanke grew up in one of the few Jewish families in Dillon, S.C., today a town of 6,000 people.

His grandfather, Jonas, immigrated from Eastern Europe, landed at Ellis Island, and came to Dillon to start a drug store.

"Our family came here in 1941. My grandfather, Jonas Bernanke bought this building, made it to the JB Drugs, after his initials," Bernanke told Pelley.

Later, his father and uncle took over the store which has since become a restaurant.

"We're sitting on this corner where your family's store was. And I see it's Main Street. People feel like guys like you are tuned into what happens on Wall Street and you forget places like this," Pelley remarked.

"I come from Main Street. That's my background," Bernanke said. "I've never been on Wall Street. And I care about Wall Street for one reason and one reason only because what happens on Wall Street matters to Main Street. And if we don't have stabilization in the financial markets, if we don't take the steps necessary to make sure that credit is flowing again, then my father couldn't get a loan to build his new store."

Bernanke and Pelley went to the old neighborhood the Bernankes left years ago. A recent owner couldn't quite make the mortgage, so the economy literally hit home.

"When you first heard that your childhood home had gone into foreclosure, what did you think?" Pelley asked.

"Well, I was sorry to hear it. But, you know, in a way, I wasn't surprised. Dillon has taken, you know, a pretty big hit in the economic downturn. Unemployment rate's about 14 percent. And there have been a good number of foreclosures and plant closings and those things I think about that," Bernanke said.

Numbers were always Bernanke's thing: he taught himself calculus and got an SAT score of 1590 out of 1600. A friend talked him into aiming high for college.

"I came home from school one day and there was a phone call for me. And I picked up the phone. They said, 'This is the Harvard Admissions Department. We'd like to let you know that you're accepted in the freshman class.' And I said, 'Come on, who is this really?' But my parents had their doubts about my leaving and going too far from home," Bernanke recalled.

"No! Wait a minute. Your parents weren't thrilled that you were going to Harvard?" Pelley asked.

"My mother was definitely against it. First of all, she said, you know, 'You don't have the clothes. You won't be able to dress properly for Harvard. And it's a long way from here. How you gonna come home on holidays and so on.' So, my parents ate into their savings to let me go, which I'm always grateful for."

Bernanke helped pay for college working construction and working at "South of the Border" - the future chairman of the Fed wore a poncho and waited tables.

Asked what he learned about work, Bernanke said, "Work is hard, that in order to feed your family and to give your kids opportunities you, it's not an easy thing."

Back in the marble confines of the Federal Reserve, Bernanke told Pelley he understands that many Americans are afraid.

"I've been kicking around the country. I spoke to a woman in Ohio, who took her son out of college, because she got laid off. I spoke to a woman in Nevada, who has an advanced stage of cancer. And she was told by her county hospital that they couldn't treat her because a hole had been blown in the state budget. What do you say to those people?" Pelley asked.

"Well, I got into economics, because I wanted to make things better for the average person. When I see a job loss number, 650,000, like we saw last month, I know that's not just a number. That's 650,000 lives that have been disrupted. Families that have had to move or take children out of school. Houses that may be in danger of foreclosure. I know something about what people are going through," Bernanke said.

And that makes it all the more outrageous when he hears of financial firms handing out perks and bonuses after they've taken bailout money. "The era of this high living, this is over now. And that they need to be responsible and use the money constructively," he said.

"And you would say what to those bankers right now in this interview?" Pelley asked.

"I'd say that their job right now is to find a way to make loans to creditworthy borrowers, to get their banks back on the path of making good loans, safe loans, and to have a reasonable sense of humility based on, you know, what's happened in the last 18 months," he replied.

We asked Bernanke what it's been like at the office the last 18 months, with his staff working 80 hour weeks.

"I noticed when we were in your office. You have a couch in there. You [have] been sleeping on that couch?" Pelley asked.

"Once in a while," Bernanke said. "And sometimes, it goes through the weekend. Sometimes it goes overnight."

The Federal Reserve is the life blood of the banking system. Its 12 regional banks are clearing houses for commercial banks.

One of the vaults associated with the Reserve Bank is in New York. Robots carry cash in the vault that's as big as a football field and four stories high. Each pallet, loaded with $100 bills, is worth $64 million. The Fed has 22,000 employees. It clears your checks and your ATM withdrawals. And it provides economic forecasts.

But one of its most important responsibilities is regulating the nation's biggest banks, to be the watchdog.

"You're supposed to keep them out of trouble. So, how did all this happen?" Pelley asked.

"Well, a lot of mistakes got made. No question about it. But, you know, this was a much bigger thing than any single firm or any single individual," Bernanke replied. "Over the last dozen years or so, enormous amounts of savings has flowed into the United States, and some other industrial countries. That savings has come from China and East Asia. It's come from oil producers. And hundreds of billions of dollars, it has come into our financial system. And, you know, that would be great if we took that money and invested it wisely, and got a high return. But instead, our financial system didn't do a good job. We had a regulatory system that was like a sandcastle on the beach. When you had little small waves just lapping up against the sand castle, everything looked good. But when you had a big breaker come in, suddenly the system wasn't strong enough to deal with it."

"Does the Federal Reserve bear any responsibility for missing what was happening to the banks, as it was happening?" Pelley asked.

"Well, like other regulators, we probably could have done more. We've already done a lot of - put a lot of effort into reviewing our practices. And reviewing the bank's practices. We are trying to strengthen our regulation at every point that we can. So, I don't want to deny that we certainly could have done a better job, and others could have done a better job," Bernanke conceded.

Now President Obama and the Congress have a fiscal stimulus plan of nearly $800 billion. There's that separate bailout for financial firms - at least $700 billion. And plans are developing for a way that would take on the bad debt of crippled institutions.

"There was a panic in 1907. So the Fed was created to prevent that from ever happening again. And then we got the Great Depression. And now we have this. How do we prevent this from occurring another time?" Pelley asked.

"Well, tougher regulation of large firms. It includes having a set of laws that allows us to wind down. A large, internationally active firm, without the adverse impacts on the markets that a disorderly bankruptcy would have. It includes possibly having a systemic regulator. A regulator that has some responsibility to look at the system as a whole," Bernanke said.

"Your response has been to do what the Fed didn't do in 1929, and that is pour money into the system. But there's an argument made today that that's not what the problem is. The problem isn't that there's too little money in the system. The problem is there's too much fear in the system. That with these companies being propped up by the government, no one on Wall Street can tell who's solvent and who's not. And therefore, business does not move," Pelley pointed out.

"Well, I absolutely agree that confidence is key," Bernanke said. "People don't know what's happening. And they're afraid. And they're not sure what, you know, whether or not the system is gonna recover. So, how do you get confidence, that's the question. And I think the way to get confidence is to show progress."

Asked if he's seeing any progress, Bernanke said, "I think all of our efforts, so far, have produced results. We're buying about $500 billion in mortgages, in package and securities by the G.S.E.s, Fannie Mae and Freddie Mac. And that seems to have brought down mortgage rates significantly. It allows people to refinance. To get out of high rate mortgages. We are seeing progress in the money market mutual funds, and in the business lending area. And I think as those green shoots begin to appear in different markets and as some confidence begins to come back that will begin the positive dynamic that brings our economy back."

"Do you see green shoots?" Pelley asked.

"I do. I do see green shoots. And not everywhere, but certainly in some of the markets that we've been functioning in. And we've seen some improvement in the banks, as well," Bernanke said.

Asked what the first signs of recovery will be, Bernanke told Pelley, "Well, I think that one sign would be that a large bank is successful in raising private equity. Right now, all the private money is sitting on the sidelines saying, 'We don't know what these banks are worth. We don't know that they're stable.' And they're not willing to put their money into the banks."

"If you had a message for the American People in this interview, what would it be?" Pelley asked.

"Scott, I'd say three things. I'd say, first of all, that the Federal Reserve is here, and is gonna do everything possible to support this recovery. The second thing I would say is that we have to understand, though, that recovery is not gonna happen until the financial markets and the banks are stabilized. And we do have a plan, we have a program for that. But it's gonna take some patience," Bernanke said.

"But the third and final thing I'd just like to say to the American People is that I have every confidence that this economy will recover, and recover in a strong and sustained way. The American people are among the most productive in the world. We have the best technologies. We have great universities. We have entrepreneurs. I just have every confidence that as we get through this crisis, that our economy will begin to grow again, and it will remain the most powerful and dynamic economy in the world."

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now

Alan Greenspan Defends Himself on the Housing Bubble

In the article--The Fed Didn't Cause the Housing Bubble--Alan Greenspan defends himself. No doubt this makes for interesting reading. And, equally interesting conclusions.

How much does it matter whether the bubble was caused by inappropriate monetary policy, over which policy makers have control, or broader global forces over which their control is limited? A great deal.

If it is monetary policy that is at fault, then that can be corrected in the future, at least in principle. If, however, we are dealing with global forces beyond the control of domestic monetary policy makers, as I strongly suspect is the case, then we are facing a broader issue.

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The Fed Didn't Cause the Housing Bubble

Any new regulations should help direct savings toward productive investments.

By ALAN GREENSPAN

We are in the midst of a global crisis that will unquestionably rank as the most virulent since the 1930s. It will eventually subside and pass into history. But how the interacting and reinforcing causes and effects of this severe contraction are interpreted will shape the reconfiguration of our currently disabled global financial system.

There are at least two broad and competing explanations of the origins of this crisis. The first is that the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess.

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages. Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.

This should not come as a surprise. After all, the prices of long-lived assets have always been determined by discounting the flow of income (or imputed services) by interest rates of the same maturities as the life of the asset. No one, to my knowledge, employs overnight interest rates -- such as the fed-funds rate -- to determine the capitalization rate of real estate, whether it be an office building or a single-family residence.

The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier -- in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments.

U.S. mortgage rates' linkage to short-term U.S. rates had been close for decades. Between 1971 and 2002, the fed-funds rate and the mortgage rate moved in lockstep. The correlation between them was a tight 0.85. Between 2002 and 2005, however, the correlation diminished to insignificance.

As I noted on this page in December 2007, the presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.

That decline in long-term interest rates across a wide spectrum of countries statistically explains, and is the most likely major cause of, real-estate capitalization rates that declined and converged across the globe, resulting in the global housing price bubble. (The U.S. price bubble was at, or below, the median according to the International Monetary Fund.) By 2006, long-term interest rates and the home mortgage rates driven by them, for all developed and the main developing economies, had declined to single digits -- I believe for the first time ever. I would have thought that the weight of such evidence would lead to wide support for this as a global explanation of the current crisis.

However, starting in mid-2007, history began to be rewritten, in large part by my good friend and former colleague, Stanford University Professor John Taylor, with whom I have rarely disagreed. Yet writing in these pages last month, Mr. Taylor unequivocally claimed that had the Federal Reserve from 2003-2005 kept short-term interest rates at the levels implied by his "Taylor Rule," "it would have prevented this housing boom and bust. "This notion has been cited and repeated so often that it has taken on the aura of conventional wisdom.

Aside from the inappropriate use of short-term rates to explain the value of long-term assets, his statistical indictment of Federal Reserve policy in the period 2003-2005 fails to address the aforementioned extraordinary structural developments in the global economy. His statistical analysis carries empirical relationships of earlier decades into the most recent period where they no longer apply.

Moreover, while I believe the "Taylor Rule" is a useful first approximation to the path of monetary policy, its parameters and predictions derive from model structures that have been consistently unable to anticipate the onset of recessions or financial crises. Counterfactuals from such flawed structures cannot form the sole basis for successful policy analysis or advice, with or without the benefit of hindsight.

Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have "prevented" the housing bubble. All things considered, I personally prefer Milton Friedman's performance appraisal of the Federal Reserve. In evaluating the period of 1987 to 2005, he wrote on this page in early 2006: "There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind."

How much does it matter whether the bubble was caused by inappropriate monetary policy, over which policy makers have control, or broader global forces over which their control is limited? A great deal.

If it is monetary policy that is at fault, then that can be corrected in the future, at least in principle. If, however, we are dealing with global forces beyond the control of domestic monetary policy makers, as I strongly suspect is the case, then we are facing a broader issue.

Global market competition and integration in goods, services and finance have brought unprecedented gains in material well being. But the growth path of highly competitive markets is cyclical. And on rare occasions it can break down, with consequences such as those we are currently experiencing. It is now very clear that the levels of complexity to which market practitioners at the height of their euphoria tried to push risk-management techniques and products were too much for even the most sophisticated market players to handle properly and prudently.

However, the appropriate policy response is not to bridle financial intermediation with heavy regulation. That would stifle important advances in finance that enhance standards of living. Remember, prior to the crisis, the U.S. economy exhibited an impressive degree of productivity advance. To achieve that with a modest level of combined domestic and borrowed foreign savings (our current account deficit) was a measure of our financial system's precrisis success. The solutions for the financial-market failures revealed by the crisis are higher capital requirements and a wider prosecution of fraud -- not increased micromanagement by government entities.

Any new regulations should improve the ability of financial institutions to effectively direct a nation's savings into the most productive capital investments. Much regulation fails that test, and is often costly and counterproductive. Adequate capital and collateral requirements can address the weaknesses that the crisis has unearthed. Such requirements will not be overly intrusive, and thus will not interfere unduly in private-sector business decisions.

If we are to retain a dynamic world economy capable of producing prosperity and future sustainable growth, we cannot rely on governments to intermediate saving and investment flows. Our challenge in the months ahead will be to install a regulatory regime that will ensure responsible risk management on the part of financial institutions, while encouraging them to continue taking the risks necessary and inherent in any successful market economy.

Mr. Greenspan, former chairman of the Federal Reserve, is president of Greenspan Associates LLC and author of "The Age of Turbulence: Adventures in a New World" (Penguin, 2007).

Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now