Princeton’s Alan Blinder gives old friend Ben Bernanke an A-

Paul Solman: For a close-up and yet critical look at Ben Bernanke, we interviewed eminent economist Alan Blinder for a NewsHour story Friday, balanced by Columbia University’s Charles Calomiris. You can watch the story below.

It was Blinder who played a major role in recruiting Bernanke to Princeton in the 1980s and preceded him at the Fed as its vice-chairman in the mid-1990s. Blinder quit because the man in charge, Alan Greenspan, “just ran everything,” as Blinder told Zachary Goldfarb in the Princeton Alumni Weekly in 2011. “It sort of didn’t matter what Alan Blinder thought about anything. At the time, I felt I accomplished nothing or next to nothing.” The main effort? To make the Fed more transparent to the public.

Bernanke managed to accomplish what Blinder didn’t once he assumed the Fed’s chairmanship exactly eight years ago Saturday: Feb. 1, 2006. He opened up the Fed, ran a TV town meeting with the NewsHour in 2009, appeared on “60 Minutes,” spoke in public regularly and openly — or as openly as a Federal Reserve chair can speak without roiling world markets.

As I say, Blinder had his say on the show Friday. But with his bestselling book “After the Music Stopped” just coming out in paperback, we asked him if he would expand on his remarks for Making Sense. He was gracious enough to agree, and he’s even given his former colleague a grade, A-, though grade inflation being what it is in the Ivy League, Bernanke might well be disappointed.

“We’re a little tougher than most of the rest of the Ivy League,” says Blinder: “It’s not quite the average grade, but you’re right, it’s not extraordinary; I use the grade A+ for my students for a really extraordinary performance.”

Here’s why Bernanke fails to get that A+ from Princeton pal Blinder for his tenure at the Fed.

Alan Blinder: The retirement of a chairman of the Federal Reserve Board is a momentous event in the financial world. The Fed has had only 13 chairmen over its 100-year history. Two of them (William McChesney Martin and Alan Greenspan) served over 18 years each; two of them have buildings at the Fed’s headquarters in Washington named after them (Martin and Marriner Eccles); one of them (Paul Volcker) is justly regarded as nearly a saint.

When Volcker approached the end of his term in August 1987, and when Greenspan approached the end of his term in February 2006, the financial markets veritably quaked in their boots, wondering if the coming transition (to a too-political Greenspan or a too-academic Ben Bernanke) would mark the end of western civilization. (Happily, neither did.) It is a tribute to Janet Yellen that nothing like that is happening now, as she replaces Bernanke.

As the initial histories of the Bernanke era begin to be written, what stands out?

I think you must start with the heroic — that is the right word — efforts, beginning in the frightening fall of 2008 — first, to save the economy from a second Great Depression, then to end the Great Recession as quickly as possible, and then to add some much-needed juice to the languid recovery. (The latter continues to this day.) Did every step the Bernanke Fed took work? No. But enough did. The nation is forever in his debt.

In devising and promulgating a variety of these measures, Bernanke, once a quiet (but brilliant) academic economist, showed himself to be not only clever and imaginative — if you knew him before, you knew that — but also bold, and even brave. More than once, he put his head on the chopping block, fully aware that people were lining up to chop it off. Here are a few examples:

  • The decision to “save” the failing investment bank Bear Stearns by taking a variety of dodgy assets as collateral for loans.
  • The virtual nationalization of the giant insurance company AIG — even though the Fed had never been responsible for insurance companies.
  • The invention of unprecedented ways for the Fed to lend to endangered financial institutions and markets.
  • The multiple experiments with “quantitative easing” — different ways for the Fed to boost asset values and inject liquidity into the economy.

    There were others.

    You may notice one conspicuous omission from this list: the decision, made jointly with then-Secretary of the Treasury Henry Paulson, to let Lehman Brothers fail. Historians will long debate the wisdom of this decision. But to my mind, it stands as the one big blot on the Bernanke record.

    Bernanke, I know, disputes this judgment on the grounds that the Fed lacked the legal authority to do what he thought best: to “save” Lehman with a big loan, much as it had done with Bear Stearns six months earlier. (Remember, the Lehman decision came before the Troubled Asset Relief Program [TARP] provided the Treasury with $700 billion to save the financial system.) Maybe so — if you construed the law narrowly and evaluated the quality of Lehman’s collateral with green eyeshades. But were those Bear Stearns assets, which JP Morgan Chase had refused to accept, really of such fabulous quality? And can’t you always find lawyers who will say yes, rather than no? After all, just days after the Lehman failure, the U.S. Treasury suddenly discovered $50 billion that it could use — legally, according to Treasury lawyers! — to save the money market mutual funds. No one sued Paulson.

    The Lehman episode is the reason I grade the performance of the Bernanke Fed A-. If you start the marking period a few days later, I’d give the Fed a flat A.

    But that’s not all. Ben Bernanke has ended the mystery that used to surround our central bank, and opened the Fed both to greater understanding and greater scrutiny as never before. The process of clearing away the traditional blue smoke and mirrors actually began, if grudgingly, under Greenspan. But Bernanke sped it up and took the process much further than even transparency hawks like me thought possible eight years ago. Some examples:

  • Embracing specific numerical targets for inflation and unemployment instead of hiding behind the vague phrases in the law: “stable prices” and “maximum employment.”

  • Giving extensive and detailed “forward guidance” indicating what the Fed is likely to do next — and why.
  • Answering questions at regular, televised press conferences.

    With these and other communication innovations, Bernanke leaves the Fed a vastly more open and democratically accountable place than it was when he walked in the door.

    The Fed also emerged — almost miraculously — from the tumultuous years of 2008-2010 pretty much unscathed as an institution. That was quite an accomplishment, one that took political skills that probably even Bernanke circa 2006 did not know he had.

    The Fed took a lot of abuse for its actions before and during the crisis, some of it well-deserved. It’s easy to forget now that as the Dodd-Frank Act was wending its way through Congress in 2009-2010, many senators and members of the House made legislative proposals for clipping the Fed’s wings (i.e., taking away its regulatory authority) and/or for making it more politically accountable (i.e., making Federal Reserve Bank presidents political appointees).

    With precious few exceptions, Bernanke quietly but effectively fended them all off. In what was a minor political miracle, the egghead Princeton professor managed to run the Federal Reserve System through the legislative gauntlet, helping the Fed emerge more powerful than when it went in. As I write these words, I can barely believe that he pulled it off. But he did.

    Add it all up. The Bernanke legacy includes a substantially less severe recession and better recovery than we might otherwise have had, a stronger Federal Reserve in the end, and a more open and transparent central bank. That’s a pretty good eight years’ work.

    Thanks, Ben. We will miss you.