The Case for Bernanke: A Really Bad Joke

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Dean Baker
The Guardian Unlimited, January 11, 2009

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The conventional wisdom (CW) is that Ben Bernanke deserves a second term as Fed chairman because of the extraordinary measures he took to prevent the economy from collapsing into another Great Depression. Bernanke is one of the country’s leading experts on the causes of the Great Depression and therefore was especially well prepared for dealing with the downturn. The promulgators of the CW argue that we were fortunate to have the right person in the job when we faced this crisis. Of course we would not want to get rid of Mr. Bernanke at a time when the economy is still so vulnerable.

The problem with the CW is that it doesn’t fit the facts in the world. Yes, Bernanke took unusual steps that helped to stabilize the financial system and prevent a complete collapse. But before we become too euphoric in celebrating our good fortune, it is worth remembering that England, Japan, Germany, China and everyone else (with the possible exceptions of Latvia and Iceland) seems to have also escaped a second Great Depression.

These other countries managed to avoid complete collapse even without the benefit of Mr. Bernanke’s expertise, so clearly it was not essential. This obvious fact, which somehow escaped the promulgators of the CW on Bernanke, should be sufficient to put to rest the argument that we somehow cannot survive without Bernanke.

If it is not essential to retain Bernanke, then it is certainly appropriate for the Senate to give his record more scrutiny before rushing to approve a second term. This record is not good. Bernanke bears much of the responsibility for the worst economic downturn since the Great Depression. He sat alongside Alan Greenspan at the Fed since 2002 as the housing bubble expanded to ever more dangerous levels. While some of us were trying to raise the alarm, Greenspan and Bernanke dismissed these concerns and repeatedly assured the country that the housing market was being driven by fundamentals.

He continued to ignore the problems even as junk mortgages proliferated in the years 2004-2006. This is not a question of 20-20 hindsight. These mortgages were being issued in the millions, how could the country's top regulators be unaware of them?

Mr. Bernanke recently blamed the problems that led to crash on faulty regulation, not loose monetary policy. That assessment is right, but this hardly exonerates Bernanke. The Fed is the country's preeminent financial regulator. Greenspan and Bernanke’s insistence that everything was fine ensured that there would be no effective regulatory actions to stem the growth of the bubble and the proliferation of bad mortgages. Lesser regulators were not going to stick their necks out and insist that the Maestro and his sidekick were wrong.

In addition to be largely responsible for the current crisis, Bernanke’s conduct in response to the crisis also raised many important questions. When Bush’s Treasury Secretary asked Congress for a $700 billion blank check for the TARP program, Bernanke went along to make the case to Congress. He warned Congress that the commercial paper market was shutting down, an event that really would bring the economy to a halt. He didn’t bother to tell Congress that he was about to set up a special Fed lending facility to directly buy commercial paper, thereby alleviating this source of pressure on the financial system. Bernanke waited until the weekend after Congress approved the TARP to announce this facility.

Bernanke has also refused to provide any information to Congress about the trillions of dollars that it has lent out through its special facilities. While the Treasury has posted a full record of the TARP loans on its website, Bernanke refuses to provide any information on which banks received money and the terms under which they received it. It is difficult to understand how the Treasury is able to disclose this information without any obvious problems for the banking system, while somehow we are supposed to believe a calamity will befall the economy if the Fed tells us what it did with our money.

Senator Byron Dorgan has insisted that he will not vote for Bernanke unless he discloses what he did with the taxpayers’ money. It would be good if other members of the Senate shared the same concern for accountability.

There is no doubt that Bernanke is a very good economist and has been effective in preventing the downturn from being even worse. However, given his responsibility for bringing on this crisis and his continuing refusal to disclose the terms of the Fed’s loans, the Bernanke rejectionists have a pretty solid case.
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.