The Guardian Unlimited, August 3, 2009
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Departing from the normal practice of Federal Reserve Board Chairmen, Ben Bernanke has taken to barnstorming the country in recent months, giving public talks and recently appearing in a lengthy interview on the Jim Lehrer Newshour. The reason for seeking a higher profile is simple: Mr. Bernanke wants to keep his job.
Bernanke’s term ends in January. He was appointed by President Bush. It would be understandable if President Obama wanted to get his own person into this vital position. On the other hand, Bernanke has never been a right-wing ideologue and he is one of the country’s top monetary economists. In addition, President Obama may be reluctant to change the Fed’s leadership at a time when the financial system and economy are still fragile, so Bernanke may have a decent shot.
Of course if we were to grade his performance at the Fed, it would be hard to give Bernanke anything other than a huge “F.” After all, it was the Fed’s policy to allow the housing bubble to grow unchecked, with the idea that it could just pick up the pieces after it burst. This has led to the worst downturn since the Great Depression, likely costing the United States more than $6 trillion ($50,000 per family) in lost output.
While Alan Greenspan, Bernanke’s predecessor, may deserve more of the blame, Bernanke is a close rival. He was one of the Fed’s governors from 2002 to 2005, and then did a brief stint as head of the Council of Economic Advisors before taking over as Fed chair in early 2006. There were few people who were better situated to try to burst the bubble than Mr. Bernanke.
Mr. Bernanke would ask the public to ignore this monumental mistake and just consider the job he did trying to rescue the economy following the collapse. This is like the captain of the Titanic asking for another command based on how quickly he got people into lifeboats after hitting the iceberg. Asking us to ignore the housing crash recession is a bit of a stretch, but in fairness to Bernanke, none of his likely competitors for the chairmanship warned of the bubble either, so maybe we should agree to grade him on a curve.
Even by this standard, it’s hard to give Bernanke a passing grade. He did have the Fed move quickly and in unprecedented ways to flood the system with liquidity. Its balance sheet expanded from $600 billion before the crisis to more than $2 trillion. Given the strains on the financial system, there can be little doubt that this expansion of liquidity was the right policy.
However, expanding liquidity is only half of the story. The other part is expanding liquidity in a way that is both fair and responsible. After all, in the current slump just throwing $2 trillion from trucks would have also helped the economy.
By this measure, Bernanke’s performance is very poor. He has refused to provide the public, or even the relevant congressional committees, with information on the trillions of dollars of loans that were made through the Fed’s special lending facilities. While anyone can go to the Treasury’s website and see how much each bank received through the TARP and under what terms, Bernanke refuses to share any information on the loans that banks and other institutions received from the Fed.
Where we do have information, it is not encouraging. At the peak of the financial crisis in October, Goldman Sachs converted itself from an investment bank into a bank holding company, in part so that it could tap an FDIC loan guarantee program. Remarkably, Bernanke allowed Goldman to continue to act as an investment bank, taking highly speculative positions, even after it had borrowed $28 billion with the FDIC’s guarantee. This totally obliterated the separation between commercial banking and investment banking. Even supporters of the repeal of Glass-Steagall claimed to recognize the need for such a separation. The lack of concern for such issues raises more concerns about the secret $2 trillion that the Fed has lent out.
Finally, we have to ask about Bernanke’s conduct during the debate over the TARP. Mr. Bernanke played a central role in supporting the Bush administration’s request, insisting that the financial system would collapse if Congress did not act immediately. In fact, he contributed one of the central story lines in their scenario, that the commercial paper market was shutting down. This was key, because if businesses could not issue commercial paper, then they would soon be unable to pay suppliers and meet their payroll, and the economy would shut down.
The important fact that Bernanke did not share with the members of Congress debating the TARP was that the Fed had the authority to directly buy commercial paper from businesses. In fact, he announced the Fed’s plans to start doing this the weekend after Congress approved the TARP. In other words, the Fed could by itself prevent the shutdown of the commercial paper market. If Congress had known this before it approved the TARP, it may have taken more time to debate the package and insisted on more serious conditions on items like executive compensation.
Just to be clear, if Bernanke were in any other line of work, it would be absurd to imagine him being reappointed. He is the cook who burnt down the restaurant by leaving the stove on overnight; the doctor who amputated the wrong leg; the school bus driver who drunkenly drove into oncoming traffic. But even by the low standards of economic policymakers, Mr. Bernanke does not deserve another 4 years.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.