“I was not going to be the Federal Reserve chairman who presided over the second Great Depression.”
— Ben Bernanke
President Barack Obama decided to reappoint Ben Bernanke to a second term as chairman of the Federal Reserve because Obama felt the country benefited from continuity.
Obama extolled Bernanke’s “calm and wisdom, with bold action and out-of-the-box thinking.” Obama credited Bernanke with bringing the economy back from the brink.
But criticisms have come from both the left and the right.
Liberals questioned Bernanke’s propping up of the banking system.
They criticize the Fed for resuscitating essentially bankrupt banks. Liberals felt nationalizing the banks was preferable. They felt Bernanke squandered a golden opportunity by failing to require banks to use bailout funds to make additional loans or sell toxic assets.
Conservatives such as Sen. Shelby, senior Republican on the banking committee, chastised the Fed’s regulatory lapses, especially in the areas of derivatives and subprime mortgages.
“The Banking Committee should carefully examine the impact of the Fed’s failure as a bank regulator, how such failures contributed to the financial crisis and whether Chairman Bernanke’s performance as the chief regulator merits his reconfirmation,” Shelby said.
Initially, Bernanke did not comprehend the risks of modern financial practices. In June 2007, Bernanke declared that troubles in the subprime mortgage market were “unlikely to seriously spill over to the broader economy or the financial system.”
Bernanke mistakenly thought that many of the new financial instruments such as derivatives and mortgage-backed securities had increased the resilience of world markets. But they were financial weapons of mass destruction.
Sadly, Bernanke along with almost every other major financial leader did not foresee the full ramifications of Lehman Brothers’ failure. Within 24 hours, the British Bankers’ Association reported the greatest increase in the London Interbank Offering Rate, or LIBOR, which reflects the daily borrowing costs between banks. Its benchmark rate spiked to 6.44 percent from 3.11 percent.
Even worse, banks no longer were willing to lend to one another. By midweek, the market questioned the fate of the last two independent investment banks, Morgan Stanley and Goldman Sachs. In recognition of the growing crisis, Bernanke and then-Treasury Secretary Henry Paulson totally changed their position on saving AIG.
They nationalized the world’s largest insurance company, injecting $85 billion of liquidity. Four days after Lehman’s filing, Bernanke and Paulson set in motion The Emergency Economic Stabilization Act of 2008, commonly referred to as a bailout of the U.S. financial system. The law authorized the Treasury secretary to spend $700 billion to purchase distressed assets, especially mortgage-backed securities, and inject capital into banks.
In his second term, Bernanke must make certain that the economy can function without massive government intervention. To avoid inflation, the Fed will need to start its exit strategy via a combination of rate increases and actively shrinking its balance sheet. If the central bank starts too soon, the economy could weaken. If it waits too long, inflation could pick up.
The prospect of the federal deficit rising some $9 trillion during the next decade could undermine Bernanke’s ability to pursue a monetary course independent of the Obama administration, navigate the economy back toward its traditional dependence on private sector forces, and fight inflation.
Why did Bernanke’s reappointment make common sense? Obama’s closest advisers unanimously believed that reappointing was the best option.
We might recall the words of Abraham Lincoln when he invoked the old proverb that “it was not best to swap horses when crossing streams.”
Originally published in the Sarasota Herald-Tribune
