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Mon January 27, 2014
Bernanke's Fed Legacy: A Tenure Full Of Tough Decisions
Originally published on Mon January 27, 2014 7:25 am
Federal Reserve Chairman Ben Bernanke will preside over his last Fed policy-making meeting on Tuesday and Wednesday. On Saturday morning, the first woman ever to lead the nation's central bank, Janet Yellen, will take over.
There's no doubt that during his two terms as chairman, Bernanke faced a challenge unlike any Fed chairman since the Great Depression: a global financial crisis that threatened to become financial Armageddon and followed by a deep recession.
Bernanke talked about how he survived it all during an appearance at the Brookings Institution recently.
"I was so absorbed in what was happening and trying to find response to it that I wasn't really in that reflective mode," Bernanke said. He said that "reflective mode" didn't come until later on.
Former Treasury Secretary Henry Paulson, who worked arm-in-arm with Bernanke to keep the financial system from total collapse, thinks he will to go down as "one of the greatest Fed chairman of all times."
"He made tough, courageous [and] sometimes unpopular decisions," Paulson says. "Which I think were necessary to avoid economic catastrophe and prevent a second Great Depression."
And Bernanke's decisions were also extremely creative, says Harvard economist Ken Rogoff. He recalls when the Fed had turned investment banks into regular banks in order to lend them money.
"It was crazy that places like Goldman Sachs and Morgan Stanley, that do these fancy operations, we're going to call them banks," Rogoff says. "But it was a very creative way to try to prevent a complete implosion in the system."
Rogoff, who has studied and written about the aftermath of financial crisis, says a hundred years from now economists may still be marveling at what the Bernanke Fed did.
There are, of course, some critics of Bernanke's decisions during the crisis. Vincent Reinhart, a top staff member at the Fed under both Alan Greenspan and Ben Bernanke, says the popular, but in his eyes mistaken version of events, is that the global financial system was hit by a perfect storm and the Fed came to the rescue.
"The vision then we have is Ben Bernanke in the yellow slicker, fighting the elements to keep the ship of the economy afloat," Reinhart says. "I think that's the wrong metaphor, because policy actions influenced the course of the storm."
Reinhart says those policy actions actually made the financial crisis worse. Specifically, he has argued that Bernanke, Treasury Secretary Paulson and Timothy Geithner, then-president of the New York Fed, made a big mistake when they decided the government should aid in the rescue of the Wall Street bank Bear Stearns back in March of 2008.
"Policymakers didn't seem to explore enough alternatives before they arrived at the conclusion that they should lend to an investment bank for the first time in 60 years," he says.
Reinhart says that set up the panic of September 2008, when the government failed to rescue another big investment bank, Lehman Brothers. Alan Blinder, a former vice-chairman of the Fed and colleague of Bernanke's at Princeton, thinks he was a terrific chairman of the Fed, but Blinder doesn't give him a perfect grade.
"I have to give him an A-minus, and the minus is Lehman Brothers," Blinder says.
Bernanke responded to the criticism over the Lehman's collapse in an interview on CBS's 60 Minutes in March of 2009.
"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."
The legal tools, that is. Blinder says the legal argument was that the Fed couldn't lend to Lehman to prop it up because the bank didn't have enough solid collateral.
"Therefore it was illegal for the Fed to extend credit to Lehman Brothers, as it had six months earlier to Bear Stearns," he says.
Blinder thinks the Fed could have found a way around the legal obstacles given the immense stakes.
After the financial crisis subsided, the Bernanke Fed also took extraordinary action to try to stimulate growth, including pumping money into the financial system by purchasing $85 billion a month in government bonds and mortgage-backed securities. The aim was to reduce longer term interest rates, but critics warned it could lead to financial bubbles. Indeed, many analysts believe it helped fuel a run-up in the stock market.
That, along with the rescue of Wall Street banks, has led to charges that Bernanke's Fed cared more about Wall Street than Main Street and hard hit homeowners. Bernanke rejected that assessment during his recent Brookings appearance.
"We hope that as the economy improves, and as we tell our story and as more information comes out about why we did what we did ... that people will appreciate and understand that what we did was necessary."
Telling the Fed's story more successfully and better communicating its policies was a goal for Bernanke when he took over the chairmanship in 2006, even before the financial crisis. He has made great strides at that, including instituting regular news conferences to explain policy decisions.
"I personally have always been a big believer in providing as much information as you can to help the public understand what you're doing, to help the markets understand what you're doing and to be accountable to the public for what you're doing," Bernanke said at the first ever news conference by a Fed chairman in April of 2011.
Former Treasury Secretary Paulson says, given the extraordinary circumstances he faced, Bernanke has left a remarkable legacy.
"I think very importantly he's leaving the Fed with its independence and credibility intact, and that's no small accomplishment giving the things both he and the Fed were forced to do," Paulson says.
On Friday, Ben Bernanke will step down from what many view as the second most powerful job in America and become a private citizen again.