KWAME HOLMAN: The Federal Reserve kept interest rates at historic lows today, near zero. And, in a statement, it reported, the fragile economy continues to pick up and job losses are slowing.
To the man at the helm, Chairman Ben Bernanke, it may be further evidence the Fed’s policies are working, as he told a Senate hearing this month.
BEN BERNANKE: We played a central role in efforts to quell the financial turmoil, for example, through our joint efforts with other agencies and foreign authorities to avert a collapse of the global banking system last fall.
KWAME HOLMAN: And, today, Bernanke received a boost of his own. The Fed chairman was named “TIME” magazine’s person of the year for helping, in the magazine’s words, ensure that 2009 was a period of weak recovery, rather than catastrophic depression.
In an interview, Bernanke countered criticisms that his actions have helped Wall Street, at the expense of Main Street. “I come from Main Street, from a small town that’s really depressed. This is all very real to me,” he said, adding, “I’m not happy with where we are, but it’s a lot better than where we could be.”
The former Princeton economics professor is expected to be confirmed by the Senate for a second four-year term in the near future. But he’s also been taking some heat, like this from Republican Senator Jim Bunning.
SEN. JIM BUNNING, R-KY.: The AIG bailout alone is reason enough to send you back to Princeton.
KWAME HOLMAN: His critics on the right, left and in between say Bernanke did too little before last year’s crash, but used unchecked powers after crisis set in.
And, today, Vermont independent Senator Bernie Sanders, who has put a hold on Bernanke’s nomination, continued his push to have the chairman replaced.
SEN. BERNIE SANDERS, I-Vt: One of key functions, as you all know, of the Fed is to oversee the safety and soundness of our financial system. He was chairman of the Fed. And, all around him, wild speculation, illegal behavior, gambling, casino-type activities were taking place. Where was Ben Bernanke, the chairman of the Fed, when all this was happening?
KWAME HOLMAN: The nation’s top banker has taken extraordinary actions, using the Fed’s power in novel ways to pump trillions of dollars into the financial system. Last year, amid debate over the Wall Street bailout, he answered critics who said the government should let the crisis take its course.
REP. KEVIN BRADY, R-Texas: Why don’t we allow free market system to correct itself?
BEN BERNANKE: My response is that the pain would be very significant. It would be very difficult for Main Street. If this credit system broke down, it would be very costly to average people.
Here’s a better solution. The better solution is to recognize that things went wrong. We have got a problem now that we can solve if we address it with enough force.
KWAME HOLMAN: Bernanke defended his use of that force again at his Senate confirmation hearing two weeks ago.
BEN BERNANKE: Taken together, the Federal Reserve’s actions have contributed substantially to the significant improvement in financial conditions and to what now appear to be the beginnings of a turnaround in both the U.S. and foreign economies.
KWAME HOLMAN: Even with that nascent recovery, the Fed faces moves in both the House and the Senate to strip it of some powers and increase oversight of its balance sheet.
JIM LEHRER: Now two differing views of Chairman Bernanke’s performance.
Alice Rivlin served as vice chair of the Federal Reserve during the Greenspan era, and she was director of the Congressional Budget Office. She’s now at the Brookings Institution. James Galbraith is a longtime observer of the Fed. He’s a professor of government and business relations at the University of Texas at Austin.
Professor Galbraith, you do not believe Bernanke should be confirmed. Why not?
JAMES GALBRAITH, Professor of Government and Business Relations, University of Texas at Austin: Well, I have a great deal of respect for Chairman Bernanke, both as a civil servant and as a professional economist.
But this was an institutional failure of the first magnitude. He was chairman of the Fed in advance of the crisis. He failed to heed the warnings that were being offered about the dangers in the housing market, about the dangers in derivatives. The Fed was lax in its approach to the regulation of the financial system at that time.
And the crisis happened on his watch. In a sense, he was the admiral of a fleet. It went aground. It seems to me that, in the principle of command responsibility, the institution should get new leadership at this time.
JIM LEHRER: Alice Rivlin, you see it differently.
ALICE RIVLIN, Former Congressional Budget Office Director: I do.
JIM LEHRER: Tell us why.
ALICE RIVLIN: I think the whole financial community bears a lot of responsibility. And there were regulatory failures. And the Fed acted too slowly.
But, when the crisis came, Ben Bernanke was absolutely the right person to be there. He was calm and collected. He was very knowledgeable. He was bold in using the powers of the Fed to stabilize the financial system. It was a really dangerous, chaotic situation. We could have had domino effect, big institution after big institution going down, and a total meltdown of the financial system. He avoided that.
JIM LEHRER: But you don’t believe — you don’t buy Professor Galbraith’s captain-of-the-ship analogy, right, that he was — it happened to his watch, so he should go?
ALICE RIVLIN: No, I don’t.
I don’t have a good explanation of why so many people who watched the Fed carefully and who watched the markets carefully missed this crisis, but almost all of us did. And I don’t think Bernanke, who came in rather late in the development — he took over the Fed in 2006 — now, they might have acted more quickly in 2006 and ’07, before the crash, but nobody saw this coming.
And I don’t think it’s fair to say Bernanke should have seen it, when nobody else did.
JIM LEHRER: What about that, Professor Galbraith? Nobody else saw it. Why should Bernanke have seen it?
JAMES GALBRAITH: Well, I might change my — go to court and change my name to nobody.
There were people who saw it, very well respected people. Warren Buffett warned that derivatives were weapons of financial mass destruction. There were warnings from within the Federal Reserve Board about the dangers that were emerging in the mortgage market in the subprime sector. There were warnings.
This, I think — it is the job of the Federal Reserve to be on top of financial danger, to be skeptical about speculative activity in the system, to both warn and to act. And it’s of course characteristic, in advance of a crisis, that that is very difficult to do. But it is their responsibility.
And while I agree with Alice that action on a very, very large scale was warranted and carried out in the wake of the crisis, I also think it’s a mistake to personalize this too much. Ben Bernanke played a useful role, but so did the Congress in extending insurance on bank deposits. So did the president in putting the Exchange Stabilization Fund to work behind the commercial paper market.
In many ways, this was a team effort. And it — it would not be right to do what “TIME” magazine did today and essentially attribute it to the extraordinary powers of a single individual.
JIM LEHRER: Well, Alice Rivlin also just said that he was the right man at the right time to go forward, in other words, to — to meet the crisis head-on.
You don’t see it that way at all.
JAMES GALBRAITH: Well, I — as I say, I think Ben Bernanke performed well…
JIM LEHRER: Well.
JAMES GALBRAITH: … under extreme pressure in the fall of 2008.
But I don’t think that should qualify him to lead an institution which very, very much needs a new culture, an institutional reform at this time. If he were coming up for chairman for the first time, I would be in favor, but I think the overriding consideration now is, are we going to get a regulatory structure which acts with the aggressiveness and the skepticism that was so lacking in advance of the crisis?
JIM LEHRER: Alice Rivlin, you have served in the Fed. You have watched it for many years…
ALICE RIVLIN: Right.
JIM LEHRER: … as has Professor Galbraith. He says a whole new culture is needed, and it can’t happen on — with the current chairman.
You don’t see it that — you think there needs to be a new culture, to begin with?
ALICE RIVLIN: I think a lot of changes are necessary. And some of them are in the process of being made. We have a bill from Barney Frank’s committee that will change the…
JIM LEHRER: In the House, right.
ALICE RIVLIN: … in the House — that will change the regulatory structure rather considerably. I don’t agree with all of it.
But I think Bernanke is an experienced person who was a student of the Great Depression, has handled himself extremely well under fire, as
Jamie Galbraith says, and is the right person to go on leading the Fed now.
JIM LEHRER: Jamie Galbraith, Professor Galbraith, if — if not Bernanke, who? Is there — or do you think in terms like that, that, well, there is a better person out there who could do the job? Or is it — is it what you say, a culture problem, not an individual problem?
JAMES GALBRAITH: I think there are capable people. There are capable people in the Federal Reserve system now who would be put in charge, people who have the requisite experience and the leadership capacity.
The president made a choice to — in effect, to continue Mr. Bernanke, but the Senate can, if it chooses, oblige the president to make a different choice. And I think — I guess my view is, without disagreeing with Alice very strongly about Chairman Bernanke’s personal merits, that that would be the better policy decision at this moment.
JIM LEHRER: But that’s not going to happen, is it, Alice Rivlin?
ALICE RIVLIN: No, I don’t think it’s going to happen. I think the Senate will take some opportunity for those who are angry, and angry at the Fed, angry at the banks, angry at something — and they have a right to be angry — they will take an opportunity to vent, but they will confirm Bernanke.
JIM LEHRER: Well, let’s move ahead.
Let’s assume, for discussion purposes only, Professor Galbraith, that — that Bernanke is going to remain chairman of the Federal Reserve. What do you expect him to do, or what do you think he should do from this point on that’s different than what he’s doing now, or otherwise?
ALICE RIVLIN: Well, he has a very…
JAMES GALBRAITH: Well, there are several important…
JIM LEHRER: Yes. OK.
Let’s go to Alice Rivlin first, and then to you, Professor. Sorry.
JAMES GALBRAITH: OK. That’s fine.
ALICE RIVLIN: He has a very delicate job at the moment, because the economy is beginning to recover, but it’s certainly not there yet. And anything like raising interest rates would slow down the recovery.
On the other…
JIM LEHRER: And, today, the Fed and his colleagues, the chairman and his colleagues, said, keep interest rates low, almost nonexistent.
ALICE RIVLIN: Right, and I expect them to keep them there…
JIM LEHRER: Is that a good thing to do, in your opinion?
ALICE RIVLIN: Yes, I think so. And I expect them to keep them low until we have quite strong evidence in the labor market that unemployment is on the way down.
JIM LEHRER: How do you feel about that, Professor Galbraith, what the Fed did — did today under Bernanke and what you look — what you see when you look ahead, under his tenure?
JAMES GALBRAITH: I think monetary policy is an extremely weak reed going forward.
The banks are simply not prepared to resume lending to the private sector in the way that we would need to see in order to have a strong economic recovery. So, the — the task of generating a recovery really remains with the president’s team and with Congress, with the tools of fiscal policy.
And I don’t think that — that Chairman Bernanke is all that central to that problem.
On another set of issues, it seems to me that Chairman Bernanke is heading toward a serious confrontation with the Congress on the Fed’s responsibility to come clean about its activities during the crisis.
The Congress — members of Congress are pressing, I think, in a very serious way for more information. Chairman Bernanke is refusing to give them that information. And it seems to me that the Federal Reserve really does not have the authority or the right to make a decision about what information it may give or not give to Congress.
So, I expect that — assuming that he is confirmed, that that issue is going to cause him a great deal of trouble in the months ahead.
JIM LEHRER: Do you agree with that, Alice Rivlin, a great deal of trouble for this man still to come?
ALICE RIVLIN: I think there will be trouble, but the chairman’s main thrust will be to protect the independence of monetary policy, as he should.
JIM LEHRER: And that’s the Federal Reserve?
ALICE RIVLIN: That — well, but it’s the monetary policy function of the Federal Reserve, setting interest rates, if you will, and acting as a lender of last resort. That’s not something you want politicians mucking around in. That’s why we have an independent Federal Reserve.
Now, sharing information about what their — opening their books — their books are mostly open already, and I don’t think that’s going to be a controversy. But allowing the Congress or another agency to second-guess them on monetary policy would, I think, be a disaster.
JIM LEHRER: OK. Alice Rivlin, Jamie…
JAMES GALBRAITH: My view is that it is the Congress that — that can decide what information it’s entitled to and what information should be withheld. And if information needs to be provided in confidence, the Congress has ways of doing that, as it does with other sensitive information…
JIM LEHRER: OK.
JAMES GALBRAITH: … national security information, for example.
JIM LEHRER: All right.
Jamie Galbraith, Alice Rivlin, thank you both very much.
ALICE RIVLIN: Thank you.
JAMES GALBRAITH: Thank you.