Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
If interested there is a massive story on the Fed’s Ben Bernanke in The Atlantic – looks like it will be the cover story based on length. The article salutes Bernanke in many ways, although ironically it is titled “The Villain”. It is far too early to judge Bernanke – about this time 12 years ago Greenspan was considered possibly the smartest human on the planet – he created a wonderful stock market, essentially defeated the economic cycle (remember the “great moderation”?) and within 5 years would also help stoke the flames of a housing bubble. All with easy money.
He is not viewed quite so favorably now… and I’m being kind. Bernanke missed just about every sign of the crisis along the way (one he helped create), and saluting him is in many ways applauding an arsonist who returns to the scene of the crime with 50 fire engines. (if you haven’t seen the “Ben Bernanke was Wrong” video, you should) Now with that said, once the man realized what he and his merry band of central bankers had helped create, he did many unconventional actions that are now credited for “saving the system” – some are still extremely controversial. And in the past few years, his stance has been much more like Greenspan on steroids even as there is no ‘crisis’.
Obviously not an easy job, and there are no simple prescriptions or analysis. However at this point it seems Bernanke is very much like Greenspan in the theme that they do not want to allow brush fires ever on their watch. The lack of brush fires on Greenspan’s watch (easing at any hint of recession or slowdown), created very shallow and short recessions – but led to massive imbalances. Eventually those imbalances toppled the system. So is that good policy? A forest firefighter (to simplify) would say it is stupid. But we’ve doubled (or tripled) down on the same bet. We’ll have to check back in a decade or so to see what this era leads to. I am not as sanguine as many, but that’s because I don’t think just in the here and now, and/or with Wall Street or stock price appreciation in mind. For those groups, Bernanke is a walking rock star… just as Greenspan was. Until he wasn’t.
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The left hates him. The right hates him even more. But Ben Bernanke saved the economy—and has navigated masterfully through the most trying of times.
Over the past four and a half years, Bernanke, 58, has presided over the most sustained period of crisis of any civilian official in recent history, with the fate of millions of unemployed and underemployed Americans hanging in the balance. Only recently has the economy begun to show signs that the recovery is gaining steam. Since August 2007, Bernanke has deployed the Fed as the lender of last resort to the banking system and worked overtime to furnish an “elastic currency”—that is, to keep enough money in circulation for the economy to function. These were the very tasks that the founders of the Fed envisioned. Bernanke has performed them by tripling the size of the Fed’s balance sheet—to an eye-popping $2.9 trillion—and by inventing a welter of new programs to lend to banks and other private-sector institutions. For most of the Fed’s history, popular opinion—being generally opposed to depressions—has favored such efforts, but today the public’s disgust with government, and with banks, has cast a shadow of suspicion upon Bernanke.
Bernanke’s unconventional programs have been implemented in two phases. During the financial crisis of 2007–09, he bailed out a handful of large banks and devised a series of innovative lending operations to disperse credit to banks, small businesses, and consumers (virtually all of these loans have been repaid at a profit to taxpayers). He also lowered short-term interest rates to nearly zero and made private banks run a gantlet of stress tests to ensure some minimal level of solvency going forward. Although fierce anger against the bailouts persists, there is little argument that this first stage was a success. However untidily the rescue was managed, the financial crisis is over.
In the second stage, Bernanke has sought to revive a weak economy by maintaining short-term interest rates at close to zero, and by purchasing, in vast quantities, long-term Treasury bonds and mortgage-backed securities. This second phase has been, if anything, more controversial than the first. Its success is much harder to measure (we have no way of knowing whether the economy’s improvement would have been less robust, and how much so, without Bernanke’s efforts). And it has exposed Bernanke to charges of meddling too deeply in the private sector, of disrupting the economy’s natural rhythms long past the point when such intervention is necessary. In particular, critics note that the Fed has stuffed the banking system with $1.5 trillion in excess reserves—money for which the banks have no present use, loan demand being modest, but which could one day spark an epidemic of inflation.
Michael Bordo, a monetary historian at Rutgers, told me that in this second phase, “Bernanke has moved into areas that were quite different from what the framers had in mind. One of the risks the Fed is facing is of overreach.”
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