Tuesday marks the fifth anniversary of Ben Bernanke’s taking the reins at the Federal Reserve, not that anyone’s counting.
It has been an eventful few years, to say the least. After a mostly placid 2006, the tide turned against Bernanke in 2007, as the housing market collapsed and the U.S. economy followed. A massive financial crisis ensued in 2008. Only now, more than two years later, is the recovery starting to pick up, and even then it will be years before joblessness falls to an acceptable level, as Bernanke well knows.
Those would make challenging conditions for anyone. But throughout his tenure Bernanke has shown an unfortunate tendency to soft-pedal the enormous problems facing the country. If anything this habit increases the impact when the bad news hits -- which makes it easy for critics to depict Bernanke as out of his depth and the Fed as the gang that couldn’t shoot straight.
In truth, making monetary policy work was next to impossible by the time Bernanke took over. The global economy was utterly screwed up, thanks in no small part to policies Bernanke advocated while at predecessor Alan Greenspan’s side. Complacent U.S. political leadership, if that’s the word for it, certainly hasn’t made things any easier.
Even so, Bernanke could have made his hapless half-decade a little easier if only he had kept a stronger grip on reality and eased off on the free markets Kool-aid. Bernanke has spoken at length about the need for central bank independence, but a lack of independent-mindedness has been his greatest weakness at the Fed – a fact not lost on Bernanke’s countless critics.
Here are Bernanke’s biggest blunders:
March 2007: Saying subprime was contained. Bernanke will never live down his remark to Congress that “the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” The damage to Bernanke's reputation, by contrast, has turned out to be almost unlimited.
July 2008: Claiming Fannie and Freddie were fine. This comment is largely forgotten because Bernanke made it the same week Hank Paulson blurted out that what he really needed to solve the Fannie-Freddie problem was, um, a bazooka. Bernanke was never quite that much of a bozo, but his remark does portray him in his natural habitat, denial. “The GSEs are adequately capitalized,” Bernanke told the House Financial Services Committee. “They are in no danger of failing.” Actually they were, as taxpayers have learned the hard way to the tune of $163 billion.
September 2008: Changing his story on Lehman. Many commentators say letting Lehman Brothers fail was a catastrophic error. But that wasn’t actually the biggest misstep here. Something was going to crack at some point in the crisis, no matter how many firms the Fed rescued. “Whether Lehman itself got saved or not . . . the crisis would have unfolded along a different path, but it probably would have unfolded,” JPMorgan Chase (jpm) chief Jamie Dimon told the Financial Crisis Inquiry Commission (see page 370).
So letting Lehman fail is a defensible position. But Bernanke didn’t defend it -- not consistently, at least. He could have hammered at the huge hole on Lehman’s balance sheet and the Fed’s desire to lend only prudently. Instead, he claimed inexplicably that the market had had time to prepare for a Lehman filing, which only confused the issue and made it sound like he was making excuses. Which, come to think of it, he was.
March 2009: Dodging and weaving on AIG. Bernanke didn’t do himself any favors by pledging to run a more transparent central bank, then backpedaling on cries for exposure of the parties that got taxpayer funds when the Fed rescued AIG (aig). Bernanke’s lieutenant Don Kohn even told the Senate that showing where the money went could “undermine confidence” in the financial system. That argument suddenly went out the window about a week later, which didn't exactly add to anyone's confidence in the Fed.
Could the hangover from that episode explain why Bernanke lobbied the Senate Banking Committee so hard ahead of his renomination at the end of 2009? He met with 18 of 23 committee members between August and November 2009, a level of outreach that banking consultant Kenneth Thomas of Miami calls unheard of.
“My analyses of Fed chairmen's calendars since 1996 had never turned up such unprecedented political contact in so short a time,” he wrote last month in a piece in the American Banker. “This was inconsistent with Bernanke's vow before his first Senate confirmation, on Nov. 15, 2005, that he would ‘be strictly independent of all political influences.’"
March 2010: Swerving for the exit. Ever since Bernanke flooded the banking system with new money to offset the collapse of the shadow banking system, he has been getting beaten up by the inflation hawks, who argue his policies will lead to runaway U.S. prices. There is little evidence that’s happening, but Bernanke has been so eager to placate the hawks that he spent the early part of 2010 waxing on at great length about the Fed’s exit strategy – how it would unwind its massive support for the financial markets without setting off inflation.
It wasn’t time well spent. Within months of Bernanke sketching out his daring exit, a short-lived U.S. jobs recovery collapsed, sending bond yields back within reach of their 2008 crisis levels. With that Bernanke did a U-turn and laid the groundwork for this past November’s launch of QE2, the $600 billion program in which the Fed buys Treasury bonds to prop up demand for goods and services.
He was promptly savaged round the world for supposedly starting various wars and, lately, for stealing from the mouths of the poor -- not that the fearless leaders in other countries would ever use Bernanke as a scapegoat for their own craven policies, no sirree.
That aside, could Bernanke have avoided the ugliness of QE2 had he kept his eye on the ball at the end of QE1, the $1.75 trillion purchase of mortgage and Treasury bonds that wound down in March 2010? Thomas thinks so.
“Had QE1 been continued in this amount for the remainder of 2010, he would have helped the economy more when it needed it and avoided the QE2 criticism,” he writes.
Of course, being Bernanke, he would then have gotten criticized for something else. For what, sad to say, we may never know.