Bernanke says Nothing fundamentally broken on Wall Street.

There is nothing fundamentally broken on Wall Street that a little regulation and incentives for participants to be slightly more honest couldn’t fix, said Federal Reserve Chairman Ben Bernanke said Thursday.

Bernanke’s comments put him at odds with former Fed chairman Paul Volcker, who said in a speech earlier this week that the financial turmoil that began last summer showed that the “new Wall Street” hadn’t passed the market test.

Volcker vs. Bernanke

Canadian based Globe and Mail is writing A blunt former Fed chairman takes on Bernanke.

A few days ago an unusual event took place: Paul Volcker, the mythical U.S. Federal Reserve Board chairman from the Reagan years, criticized the policy of the current Fed chairman, Ben Bernanke, in a speech to the Economic Club of New York.

Just so you grasp how extraordinary this was, you should first understand that normally a past Fed chairman scrupulously avoids saying anything at all about current Fed policy – for the simple reason that the current Fed chairman’s words are one of his most important tools: They can sway markets.

This ability does not fade entirely when a Fed chairman leaves.

So when a past Fed chairman speaks, his words can clash with those of the present one and make that one’s job difficult. Out of professional courtesy, past Fed chairmen therefore keep quiet; Mr. Volcker especially – the man who hiked interest rates to 20 per cent to kill inflation, at the cost of a deep recession. But last week Mr. Volcker spoke his mind bluntly. He said, in effect, that the current Fed is not doing its job.

This would have been unusual enough. But Mr. Volcker went further. Not only is the Fed not doing its job, he said, but it is doing the wrong job: It is defending the economy and the market, instead of defending the dollar. And just to stick the knife in, Mr. Volcker added that this bad job now will make the real job – defending the greenback – much harder later. It’ll cause even greater economic suffering.

In plain words, Mr. Volcker implied that the current Fed is not only incompetent, but that its actions are dangerous.

I agree and I will also add the words “acting illegally” in its bailout of Bear Stearns (JP Morgan actually as JP Morgan was a big counterparty to Bear Stearns swaps).

Inquiring minds will want to read the Fed Uncertainty Principle for more on the illegality of the Fed’s actions.

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Mike “Mish” Shedlock
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