As Wall Street bankers and legislators headed to their yachts and the beaches of America’s east coast this August, they had the words of Ben Bernanke, Federal Reserve chairman, ringing in their ears. Two years after the official beginning of the credit crunch on August 9, 2007, Mr Bernanke — America’s most powerful economic policymaker — signalled for the first time that the US central bank may soon have to think about removing the “punch bowl” of near-zero interest rates and easy credit.
From the very start of the financial crisis, Mr Bernanke, a thoughtful former academic, was absolutely clear about what needed to be done if a 1930s-style collapse of global, trade and output was to be avoided. In his view, the big mistake the Fed had made during the Great Depression was “to allow the financial system to collapse”. That would not happen on his watch.
So as the crisis progressed through 2007 until the present time, Mr Bernanke’s inclination has been to keep the monetary system well oiled. Interest rates were rapidly lowered to a range just above “zero”; trillions of dollars were poured into the inter-bank market where banks lend to each other, and Mr Bernanke engaged in a series of spectacular rescue operations ranging from the bailout of mortgage lender Countrywide in the autumn of 2007 to Bear Stearns a year later.
On the weekend of September 15 2008, Mr Bernanke, together with the then US Treasury Secretary Hank Paulson, secured the fate of Merrill Lynch by merging it into Bank of America. And he effectively took into public ownership the giant insurer AIG, which had offered insurance cover for hundreds of billions of dollars of toxic debt.
But despite the Fed’s best efforts, it could not find a buyer for Lehman Brothers and reluctantly decided to allow it to fall into administration.
The result was nearly disastrous as the world’s banking system came as close to meltdown as at any time since the period leading up to the First World War.
Mr Bernanke’s answer to the near catastrophe in global finance was to do more of the same and provide assistance where necessary. The monetary system was flushed through with more cash. Those broker-dealers still trading, Goldman Sachs and Morgan Stanley, were offered a lifeline in the shape of direct access to the Fed’s discount window — from which banks borrow overnight and for longer — and for the first time, some of America’s biggest companies (who could no longer obtain finance from the banks) were invited to go directly to the Federal Reserve.
Unlike his immediate predecessor as Federal chairman, Alan Greenspan, who had both extensive Wall Street and Washington experience, Mr Bernanke brought a different set of talents to the financial crisis. Mr Bernanke grew up in the small town of Dillon, South Carolina, where his father and uncle — who immigrated to the US from Austria in the inter-war years — ran the town’s main pharmacy. The Bernankes were an observant Jewish family and young Ben, as well as showing prowess as a mathematician, was an accomplished saxophonist and became learned in Torah and would regularly lein on Shabbat.
This was a skill he would still be exercising many years later when he was on the first rungs of his academic career in Cambridge, Massachusetts.
While conducting research on the Great Depression at MIT, he met another young economist headed for the top — the future Governor of the Bank of England Mervyn King. At the age of just 31, Bernanke won his first chair as professor of economics at Princeton, another Ivy League university. It was at Princeton that he caught the attention of policymakers by writing a series of policy papers.
They were spotted by the administration of President George W Bush, who first appointed him to be a governor of the Federal Reserve before moving him to the White House to become chairman of the President’s Council of Economic Advisers. When Mr Greenspan retired in February 2006, no one was surprised when Mr Bush nominated him to America’s most influential economic post.
When the credit crunch first hit in the summer of 2008, Mr Bernanke was slower off the mark than his opposite number in Frankfurt, Jean-Claude Trichet. Nevertheless, he quickly caught up, and his main academic pursuit — the study of the Great Depression — proved to be more useful than anyone could have imagined. He has brought a more collegiate approach to the Federal Reserve than Mr Greenspan, giving everyone a chance to contribute before giving their own views, and this has been seen as a strength during the crisis.
The present debate in Washington is on when it would be appropriate for the Fed to start reversing the easy money policy of the past two years. The fear is that if it is left in place, it could lead to another unsustainable boom and a fresh burst of inflation. Mr Bernanke is also seen as politically vulnerable. Having worked in the Bush White House, he is seen as too Republican for some of Barack Obama’s people.
This has led to suggestions that he could be replaced by Mr Obama’s top economic adviser Lawrence Summers, nephew of the great economist Paul Samuelson. Mr Summers, who likes to dominate policy-making, would bring a different approach to the Fed, but like his two predecessors, he could help make up a minyan.