It was really dismaying to read the stream of vitriol that followed President Obama's decision to reappoint Ben Bernanke as chairman of the Federal Reserve. I think history will show that Bernanke was a true hero whose out-of-the-box thinking saved the global economy from collapse.
The criticism usually focused on Bernanke's shortcomings before the financial crisis began. "Bernanke was head of the Fed and the nation's chief economist as this crisis, driven by reckless speculation, developed," said Sen. Bernie Sanders of Vermont, a socialist. "Tragically, like the rest of the Bush Administration, he was asleep at the wheel during this period and did nothing to move our financial system onto safer grounds."
Stephen Roach, who is chairman of Morgan Stanley Asia, blamed Bernanke for three failings. In an op-ed article in the Financial Times, Roach said Bernanke was "deeply wedded to the philosophical conviction that central banks should be agnostic when it comes to asset bubbles." Second, he blamed the crisis on excess savings in Asia, rather than failings at home in the U.S. And third, Bernanke was "aligned with the prevailing Fed mindset that abrogated its regulatory authority in the era of excess."
Even a supporter like Sen. Charles Schumer of New York gave him backhanded praise. "Whatever one's view of the Fed's past lapses, there is no disputing that Bernanke is the best person for the job going forward," he said.
Bernanke did make some mistakes in the runup to the crisis. Remember his infamous 2007 remark that "the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained." That was a true blooper. But failing to diagnosis a problem early is not the same as failing to cure it once it emerges.
Bernanke was the right man in the right place when the crisis finally erupted. As an academic at Princeton, Bernanke had spent his whole career studying the mistakes that were made during the Great Depression. This knowledge enabled him to formulate an action plan that helped the country avoid Depression 2.0.
Bernanke adopted an activist policy to deal with the crisis that stretched his authority to the limit. In March, 2008, he invoked emergency authority to back the $29 billion rescue of Bear Stearns. In September, he bailed out AIG with $85 billion. In October, the Fed started buying commercial paper to unlock that market. In November, the Fed began buying mortgage securities to help thaw the housing market, which was frozen shut.
All of these steps helped the country narrowly sidestep a much deeper financial panic than the one we had. Let's recall that in July, analysts began issuing reports saying that the "recession is over."
The one mystery of this time is why the Fed allowed investment bank Lehman Brothers to go bankrupt, while rescuing AIG, an insurer, a couple of days later. But at the Fed's annual retreat in Jackson Hole, Wyoming, this past week, Bernanke laid out his reasoning. Lehman Brothers had insufficient collateral to merit a Fed loan "of sufficient size to meet its funding needs," Bernanke said. The government also lacked the authority at that time to treat an investment bank like a regular commercial bank and inject funds, he said. Lehman Brother s filed for bankruptcy in September. "Although concerted policy actions avoided much worse outcomes, the financial shocks of September and October nevertheless severely damaged the global economy," Bernanke explained.
At the Jackson Hole retreat, his fellow economists saluted his actions to save the economy. Asked about Bernanke's reappointment as Fed chairman, Harvard economist Martin Feldstein said, "He certainly deserves it. He has done a remarkably creative job of dealing with these problems."
Having supported Bernanke's appointment, I have only one criticism: the cynical way the Obama Administration rolled out Bernanke during the President's summer vacation -- his term is not up until January -- which led many to believe the Administration was trying to mask the fallout from new budget estimates that showed the U.S. would have a deficit that is $2 trillion higher in the next decade than previously believed. That left critics ammunition to say that Obama was trying to put some honey on the bad deficit news.
But that doesn't detract from Bernanke's enormous accomplishments. He now faces an even more difficult task: undoing huge increases in the money supply without forcing the economy into a premature stall or hyperinflation. He'll need all of his out-of-the-box thinking to prevail again this time.