Bernanke echoes old solutions to a new problem; new changes needed

Federal Reserve Chairman Ben Bernanke went back to the scene of the crime to declare the bank stress tests a success. The crime in question took place almost 99 years ago. It was on Jekyll Island, GA that a small group of bankers met to conceive a way to stabilize the currency in the wake of the Panic of 1907, resulting in the creation of the Federal Reserve System.

Why is the Fed a crime? Because it creates the illusion that our economic system is stable when its excessive reliance on borrowing makes it anything but.

That's why Bernanke's defense of the stress tests -- which resulted in a demand that 10 of the 19 top financial institutions (FIs) raise $75 billion -- rang hollow.

As I've posted, the solution to financial panics -- which is the reason the Fed was originally created in 1913 -- is to move to a post-bubble economy which depends less on finance and more on technology-based innovation, limits leverage, and cuts the pay of bankers who pile into big bad deals.

To be fair to Bernanke, some of the banks that were required to raise capital have been able to sell shares and to issue new debt without FDIC assistance. That extra capital is good for banks to have. But, as I've posted, the stress tests are really a piece of Washington street theater. If Washington was really serious about fixing banks, it would require at-risk FIs to produce viability tests, rather than the pass/pass grading system it applied in its stress test.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.

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