TOPICS > Economy

Tough Criticism for Bernanke

BY Carolyn O'Hara  December 3, 2009 at 1:51 PM EDT

Fed Chairman Ben Bernanke testifies before the Senate Banking Cmte.; Win McNamee/Getty Images

Appearing before the Senate Banking Committee to make a case for his second term as head of the Federal Reserve, Ben Bernanke admitted that the Fed made mistakes in the run-up to the financial crisis, but defended its subsequent actions to stem the crisis, calling its moves both prompt and forceful.

“We didn’t do a perfect job by any means,” Bernanke acknowledged. But “we didn’t do the worst job” either, he added.

Senators in attendance offered polite, if reserved, support for Bernanke’s second term, and he appears likely to be reconfirmed when his term expires January 31. Sen. Christopher Dodd, D-Conn., chairman of the committee, announced his intention to vote for Bernanke’s reconfirmation, saying it would send the right message to the markets. But Dodd cautioned that the Fed should not assume more authority over the financial system, as has been proposed.

“Under your leadership, the Fed has taken extraordinary actions to right the economy,” Dodd said. “And while I congratulate you for these efforts, I remain very concerned about the weaknesses in the overall financial regulatory system….I fear…additional responsibilities [for the Fed] would distract from the Fed’s core mission and leave it open to dangerous politicization, undermining its critical independence.”

Several lawmakers echoed that sentiment with withering criticism for the Fed as an institution. Sen. Richard Shelby, R-Ala., the ranking Republican on the committee, said “[m]any of the Fed’s responses [to the financial crisis], in my view, greatly amplified the problem of moral hazard stemming from too big to fail treatment of large financial institutions and activities.”

“Certainly, we are still deep in the woods,” Shelby said. “The question is whether Chairman Bernanke is the person best suited to lead us out and keep us out.”

Sen. Bernie Sanders, I-Vt., announced this week that he would put a hold on Bernanke’s nomination, effectively signaling to Senate leadership that he does not want the measure to be put to a vote. The move is expected to slow, but not imperil, Bernanke’s confirmation.

The NewsHour asked several economists and Fed watchers to grade Bernanke’s first term, and to offer advice for his likely second.

Amar Bhide

Visiting scholar at the Mossavar-Rahmani Center for Business and Government, Harvard University

The Fed Chairman’s job is beyond human capacity. The Chairman must lead the nation’s monetary policy — making a few high level choices, rather like George Soros running a hedge fund. But the Chairman is also supposed to oversee the Fed’s regulatory functions. These comprise wide range of “boots on the ground” activities — very likely too wide — and their management is much like running a large brokerage house or any other big business. And although there may be great value to coordinating monetary policy with some of the regulatory function, it is specious to imagine that such coordination is best achieved by lumping everything together into one Soviet-style organization. Inevitable such an organization becomes secretive, unaccountable and often ineffective.

Chairman Volcker certainly pulled it off, but he was one of a kind. He had lived his life in the Fed and Treasury and had great judgment. And both of the Fed’s responsibilities were simpler. The world was an easier place both for monetary policy — and the Feds administrative challenges hadn’t spiraled out of control. Chairman Bernanke may or may not have been the best available candidate to lead monetary policy making. But someone whose managerial experience was confined to heading up Princeton’s economic department was almost certainly unqualified to lead the Fed’s diverse regulatory activities — and probably even unaware of what it would take. It was as if a star strategy professor had been asked to run General Electric — and not knowing any better, had taken the job. It was very likely to turn out badly — and it certainly has. The Fed’s oversight of Bank holding companies was catastrophically inadequate.

Douglas Elliott

Economic studies fellow at the Brookings Institution and former investment banker

Bernanke gets a B+ for his first term. It would be impossible to give the central banker of the world’s largest economy any higher grade given that he was in charge for a significant portion of the bubble period that led to the worst recession since the Great Depression. However, one really needs to give him two grades, a rather low one for the bubble period and an “A” since about September of last year.

Although the Fed has made mistakes since September 2008, the response has been appropriately vigorous, imaginative, and generally well-executed. We are indeed fortunate to have had a Fed Chairman in the crisis who was brilliant, resolute, and a deep student of the Great Depression. My B+ is as high as it is because many Fed Chairmen would have made the mistakes that Bernanke did during the bubble. Very few chairmen could have performed as well in responding to the full-blown crisis.

My main advice for the future is to “stick to your guns.” I believe Bernanke has an appropriately balanced view of how to wind down the crisis responses without triggering either too much inflation or the opposite danger of deflation and a second recession. Unfortunately, doing this right will be very difficult. It will be even tougher if he responds too much to the immense political pressures that will be exerted on the Fed. I’d also request that he, and the other banking regulators, step back from their turf wars over banking supervision and work more closely together to find the best answers for America. The Fed is no guiltier than the other supervisors, but it has been dismaying to see all of them scrapping over the question of who gets to regulate which parts of the financial system going forward. Too many of the arguments seem more self-serving than wise.

James Galbraith

Chair in government/business relations at the Lyndon B. Johnson School of Public Affairs, University of Texas at Austin

I mean no disrespect to Chairman Bernanke to say that, were I a member of the Senate Banking Committee, I would vote against his reconfirmation.

When Bernanke was first appointed, I praised him: “a careful mind, an open manner, a not-very-partisan disposition.” Further, he deserves credit for dropping his preconceptions, and for throwing everything he had at the crisis in late 2008.

What then?

In advance of the crisis, Ben Bernanke was asleep on the bridge. He testified that derivatives were beneficial: He should have known they were dangerous. He testified that the sub-prime mortgage problem was manageable: He should have known it was not. He testified — right up through July 2007 — that inflation was the Federal Reserve’s “predominant” concern. Inflation had been dead for 25 years and Ben Bernanke should have known this.

Chairman Bernanke spoke for an entire institution that was grossly incompetent, lethargic, and complacent as disaster loomed. He was the captain of a ship — the admiral of a fleet — that ran aground. When this happens, you have to change commanders. Mitigating circumstances — if any — those are for a board of inquiry to determine, later on.

Today, the Federal Reserve remains unaccountable. Chairman Bernanke has refused to answer fundamental questions about his vast bailouts. He is running a campaign of distortion against the long-overdue audit bill. His incredible response to past regulatory failures was to ask for even more power.

The Federal Reserve needs new leadership — a leader not in thrall to its clients, its myths, and not addicted to the unaccountable power of that institution.

The NewsHour asks for a grade. I give Ben Bernanke an “F” for foresight, an “A” for effort, a “D” on financial reform. Overall, you might stretch that to a “C.” But in graduate school, “C” is not a passing grade.

Catherine Mann

Professor of economics, Brandeis University

Overall grade B-

There are three aspects to my grade: On his dramatic response to the financial emergency last fall and early 2009, Bernanke gets an A. But, in his continued intervention in the financial markets, including purchase of mortgages and U.S. Treasury securities, Bernanke gets a C. Finally, with regard to on-going low interest rates, which merely serve to promote a new round of ‘looking for yield in all the wrong places’, Bernanke gets a B-.

Going forward, Bernanke needs to do two things. First, he has to wean the economy and financial institutions away from excessively low interest rates. Many think that low interest rates support economic activity; indeed that is the theory. But in fact, such persistently low interest rates encourage leveraged borrowing and promote financial investment into increasingly risky activities and positions in an effort to get a spread — these activities by and large do not support “Main Street” economic recovery. Second, he needs to work more effectively with the FDIC, SEC, and CFTC to ensure more seamless oversight of financial activities and institutions. The argument that certain institutions and activities do not need oversight or regulation because they are ‘sophisticated’ entities and users is no excuse — one or another of these is sure to be the source of the next financial debacle. At least with more pervasive oversight and transparency of operations, we might see the lights of the on-coming train in time to take remedial or evasive action.

Stephen Roach

Chairman of Morgan Stanley Asia

The grading period for the current Fed chairman didn’t start with the demise of Lehman Brothers. While Mr. Bernanke has handled the ensuing 15 months very well, there are very serious questions about the role and conduct of U.S. monetary policy in the years before the bursting of the subprime bubble.

By condoning asset and credit bubbles and by failing to exercise the Fed’s regulatory authority over abusive mortgage lending practices, the Greenspan-Bernanke Fed allowed self-regulation to replace monetary discipline in guiding the U.S. economy. This approach was very much in keeping with the thrust of Bernanke’s academic research — that central banks should clean up the mess after the bursting of a bubble rather than lean against the excesses that lead to bubbles and bubble-related distortions to real economies.

America shouldn’t have central bankers that excel in the art of post-crisis damage control. We need central bankers who are much more determined to avoid the damage of destabilizing bubbles and the crises they spawn. I’ve never been in favor of allowing a student to throw out the bad grades and just focus on the good ones. I would apply the same standards to America’s most important financial steward — the Chairman on the Federal Reserve Board.

Diane Swonk

Chief economist of Mesirow Financial

Bernanke gets an A-. He was slow to acknowledge the depth of the crisis, but once he understood the degree of the losses we were risking, he acted aggressively and decisively to right the situation. Once Lehman failed, there was nowhere for the economy to go but down. The Fed’s actions helped to measurably stem the extent of those losses.

Going forward, Ben’s most difficult job will be to defend and protect the Fed’s independence and exit its strategy at the same time. This will be particularly difficult in an election year, where incumbents are looking for scapegoats. It is easier to blame Ben than look in the mirror.