Thursday, November 10, 2011

Lunch with Ben Bernanke Part I

I had lunch today with Federal Reserve Chairman Ben Bernanke.  No, that's not a joke or a metaphor.  Bernanke was here in El Paso, Texas to greet returning troops from Iraq--the first time in history that a Federal Reserve chair had ever visited a military base--and as part of his visit, the Dallas Federal Reserve had coordinated with the local Federal Reserve board to arrange for Bernanke to have a private roundtable luncheon with invited guests from the El Paso Hispanic Chamber of Commerce.  That luncheon was made possible in part because our CEO, Cindy Ramos-Davidson, is also the President-Elect for the local Federal Reserve board.

I had known about this luncheon for a couple of months, and I have to admit I had very mixed feelings about it. As the 2011 Chairwoman of the Board for the El Paso Hispanic Chamber of Commerce, I had already been informed that my attendance was not optional, and I do appreciate that this is a once in a lifetime opportunity to eat lunch with one of the most powerful men in the world.  On the other hand, as a mortgage broker of 13 and a half years who has seen my business die this year because of Dodd Frank and specifically because of the implementation of the Federal Reserve Rule on loan originator compensation--a rule which discriminates heavily against small businesses and in favor of major banks--I found it difficult to sit down and eat with the man who is at least partially responsible.  At best, he would ignore my comments on this matter completely and at worst he might secretly get some joy from seeing one small business person who lost her business because of his rule.

Only fifteen people were invited to this luncheon and the guest list had to be cleared by the Federal Reserve.  The Fed wanted to see a mix of business people from small, medium, and large businesses. They wanted to see a mix of industries and ownership to include minority and women-owned. No banks were allowed to attend; this was strictly a forum for small business people--as far as I know, the only one of its kind.

What was interesting to me as we got closer to the event was that although there was quite a lot of excitement from the invited guests, there is also a lot of anger toward Bernanke from both very left-leaning members of our organization and very right-leaning ones.  Even Bernanke's visit to Fort Bliss this morning to greet the returning troops drew a lot suspicion in the local media that he was only here as a response to Governor Perry's very open attacks against him.

The stated purpose of the luncheon was for us to get 2 minutes each to address Bernanke and tell him our concerns as small business people.  The Federal Reserve, Cindy told us, is turning its attention to job creation, and in order to accomplish that, they need to hear from small business people about what is keeping businesses from growing and hiring.

All of the businessmen and women in the room had carefully considered their remarks--most had written them down.  And over and over, they repeated the same basic concerns--lack of access to capital is hurting small businesses.  The excuse that these men and women get when the bank refuses their loans or cuts their lines of credit is that new regulations keep them from lending. (The regulations are, of course, the more than 500 new regulations that are part of the massive Dodd Frank bill.)  The small business owners also voiced their concerns over the general state of the economy and the presence of massive regulation in every area of business which discriminates against all forms of small business in favor of big corporations.

I spoke last.  I had thought a lot about what I wanted to say, and when my turn came I spoke in two minutes about the impact that the Federal Reserve rule on loan originator compensation had caused my business.  In thirteen and a half years, this has been the worst year I have ever had.  The rule does not allow me to lower my rates to compete with banks or other lenders that are exempt from its most binding restrictions.  I reminded Mr. Bernanke that 5 years ago there were 53,000 mortgage broker firms in the U.S. employing approximately 418,000 people.  Today, in Texas, a state which at one time had over 30,0000 licensees, there are about 1,200 licensed mortgage originators.  The only solution to the problems in the housing market is to dismantle the regulations.

Bernanke did not address my remarks at all, except to say that we would not want to return to the conditions present five years ago.  But he did remind all of us that the Federal Reserve sets monetary policy--it does not make laws.  Without saying it outright, he also reminded us that Dodd Frank is a bill passed by Congress.  The Federal Reserve is merely enforcing what has already been written into law.

He also made his case for quantitative easing, which I found interesting.  According to Bernanke, QE 1 and QE2 have not cost the tax payers a single dollar.  He stated that the Federal Reserve has actually paid the Treasury $125 billion for the bonds it has purchased, thereby reducing the deficit $125 billion.  When the economy gets better, the Fed will simply sell off the bonds it has purchased. 

Bernanke stated that in 2009, when the first quantitative easing took place, the lower interest rates did improve the housing market as people refinanced and purchased homes.  Today, housing prices are down 30% and interest rates are at all-time lows, but the effect on the housing market is very slight.  What is the difference? Aside from the first time homebuyer tax credits that were in place in 2009, which provided an artificial housing stimulus, the primary difference between 2009 and today is regulation. Bernanke himself admitted that a lot of potential candidates no longer qualify, and this is a huge problem.  However, what he did not say is that the primary reason that homeowners no longer qualify is the strict underwriting standards imposed by Dodd Frank.  When standards for underwriting and qualifying borrowers become codified into federal law, there is very little room for common-sense underwriting.  At the end of the day, that means that more borrowers cannot purchase or refinance homes.

In response to the complaints that small business owners can't get loans, Bernanke told us that many banks have a lot of excess funds right now which are on deposit at the Federal Reserve. He said that he hears these same complaints all over the country, and he has instructed employees of the Federal Reserve to work with banks to encourage them to loan money to small businesses. What he did not say is that new FDIC regulations determine the fees that banks have to pay to the FDIC based on their loan portfolio rather than the amount of their deposits, which was formerly the criteria for assessing fees.  And federal requirements governing reserves for banks require that banks hold much more money in reserve against future disasters.  The end result of these regulations is that banks have a lot of incentive to take in deposits and very little to loan out the money. In light of this, Bernanke's advice to business owners in the room who can't get loans, "If your bank says they can't loan you money because of regulations, press them on that," sounds much less practical.  After all, the bank does not need a specific book and page regulation to deny your loan if they have been incentivized by the government to hang on to their money.

What were my impressions?  Bernanke is a very quiet man, which I knew from seeing his press conference which he gave this summer.  Do I think that he regrets his policies?  Not a bit.  But do I believe that it would make any difference if he did?  Not really.  Most of what the Federal Reserve is implementing and will continue to implement is the provisions of the Dodd Frank Bill.  Dodd Frank is a massive framework on which regulators and agencies can hang new rules without ever going back to Congress.  But it was Congress that passed this monstrosity in the first place. Without a full repeal of this destructive piece of legislation, no amount of quantitative easing, or round tables with business people, or positive thoughts for the future is going to make any difference in the financial sector of this country. 

We talk a lot about jobs and housing.  Hundreds of thousands of jobs have been lost in the financial sector alone since 2008.  Tens of thousands of small businesses have been forced to close their doors.  Now we are starting to see massive layoffs from the major banking entities and investment houses.  No part of the financial world is safe.  And as the financial world goes, so goes the rest of the country.

Next week:  Bernanke's predictions for the future of Fannie Mae and Freddie Mac.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books.  For more information, visit her website at

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