By Pedro Nicolaci da Costa
WASHINGTON, Oct 9 (Reuters) – Ben Bernanke spent his whole
life training for the job of Fed chairman – even if he didn’t
know it at the time.
One of the Great Depression’s most prominent scholars,
Bernanke inherited a historic slump of his own not long after
taking the helm of the Federal Reserve eight years ago.
He took the central bank on an aggressive and unorthodox
course that came to define his legacy as Fed chairman, making
his shoes very tough to fill according to economists and current
and former policymakers.
They describe his responses to the sagging economy as
nothing short of heroic, possibly helping the U.S. avert a
repeat of the Great Depression.
“Once Ben spotted the crisis, I think he saved the world,”
said David Blanchflower, a former official at the Bank of
England who is now a professor at Dartmouth College.
The current head of the BoE and former chief of Canada’s
central bank, Mark Carney, offered similar praise.
“He played a decisive role in stabilizing the U.S. and
global economies,” Carney said. “His contributions to central
banking and the prosperity of the global economy have been
enormous.”
President Barack Obama stood with Bernanke by his side on
Wednesday as he nominated Janet Yellen to be the next Fed chair.
He called Bernanke a “stabilizing force.”
Yellen, who has served as Fed vice chair since 2010, said
she had learned from Bernanke’s “wise, courageous and skillful
leadership.” In seeking Senate confirmation to replace Bernanke
at the end of his term in January, she will undoubtedly face
questions about the Fed’s aggressive actions to shore up the
economy.
SIGNS OF TROUBLE
Bernanke, appointed in 2006 by President George W. Bush,
came into the job as a shy academic who promised continuity with
the policies of his larger-than-life predecessor, Alan
Greenspan.
He made clear he took the central bank’s role as lender of
last resort seriously in the summer of 2007 when the Fed faced
troubling rumblings in some of Wall Street’s more esoteric
markets.
After opening the Fed’s liquidity spigots to large banks
through its “discount window” emergency lending facility,
Bernanke and his staff implemented a novel auction process aimed
at removing the stigma normally associated with such borrowing.
It was one of several innovative lending mechanisms the
central bank created to keep at least some credit flowing during
a deepening crisis.
“I will remember Chairman Ben Bernanke as an individual who
– in the midst of very stressful circumstances – led the Fed in
taking bold, decisive, and creative actions to avoid a global
financial catastrophe,” said Dana Saporta, senior economist at
Credit Suisse.
The enormity of what lay ahead would not crystallize until
2008, when U.S. investment firms came under speculative attack.
Only two of the five biggest, Goldman Sachs and Morgan
Stanley, survived – and only because of taxpayer support.
The bank bailout generated a powerful public backlash.
Critics charged that the bank aid was not matched by similarly
aggressive rescues for troubled homeowners or jobless Americans.
But Bernanke, drawing insights from his Princeton research,
argued that rescuing the financial system was central to saving
the economy.
His main academic focus, sparked by the experiences of his
small businessman grandfather, was the central role of the Fed
in creating the Great Depression when it kept monetary policy
too tight and allowed banks to fail en masse.
As Bernanke rewrote the rules on providing liquidity to
parched financial markets, he also led an historic easing of
monetary policy.
By December 2008, the Fed had brought overnight interest
rates down to effectively zero for the first time in its
100-year history. It then further pushed down borrowing costs
with three rounds of bond purchases that have quadrupled its
balance sheet to a record $3.7 trillion.
Bernanke’s efforts were recognized when Time Magazine named
him as “Person of the Year” in 2009, dubbing him “the most
powerful nerd on the planet.”
But the unconventional policy attracted critics, including
those who argued it risked fanning inflation or creating asset
price bubbles – concerns yet to be substantiated.
When Bernanke came up for reappointment to a second
four-year term in January 2010, the Senate confirmed him on a
tepid 70-30 vote, the narrowest margin in the position’s
history.
Both Democrats and Republicans assailed his leadership,
blasting him for the unpopular $182 billion taxpayer bailout of
insurer American International Group and for regulatory
failures that fueled the crisis. Many criticized the bank’s
closeness to Wall Street.
By his own admission, Bernanke failed to predict the housing
bubble fall-out. In March 2007, he told Congress that “the
problems in the subprime (mortgage) market seem likely to be
contained.” Several other times he expressed optimism about the
financial system’s soundness.
RECOVERY NOT
Another Bernanke legacy will be his push for greater Fed
transparency, particularly in convincing his colleagues to adopt
a numerical inflation target.
He also created a more collegial, less hierarchical central
bank than the one Greenspan left behind.
“One of the things that I hoped to accomplish and was not
entirely successful at … was to try to depersonalize, to some
extent, monetary policy,” he told reporters in March 2013.
Bernanke might prefer to leave with the nation on a more
solid economic footing but reality has not cooperated. U.S.
unemployment remains high at 7.3 percent and labor force
participation continues to decline.
There also are doubts about the Fed’s rosy 2014 growth
forecasts given a deteriorating global outlook, with rising
tensions in key emerging markets such as India.
Fed officials’ faith in the recovery’s strength is
sufficiently weak that they surprised markets with a decision
not to begin cutting back bond purchases in September. That
sparked criticism about the Fed’s communications – despite
Bernanke’s transparency drive.
Some now see the decision as prescient given fresh clouds of
economic uncertainty from a federal government shutdown and a
political standoff over raising the nation’s $16.7 trillion debt
ceiling that could lead to a default.
