American presidents rarely gamble with the Federal Reserve Board, America’s central bank, and Barack Obama is no exception. So despite a strong Democratic claim to the job of chairman by Obama’s top economic adviser Lawrence Summers — scion of one of America’s most famous economic dynasties — “Helicopter” Ben Bernanke has been nominated to a second term in the most powerful job in global finance.
Obama clearly figured that changing jockeys in the middle of the big race would not be smart. Only a year has passed since the start of the “Great Panic”, when Lehman Brothers collapsed into bankruptcy (September 13-14, 2008).
Full stability has not yet returned to the financial and economy system. So, as in Britain last year, when, despite havering at Number 10, Mervyn King was reappointed to the Bank of England, Bernanke has been left in place.
But it would be wrong to assume that the return of the bearded Bernanke, son of a Jewish pharmacist from North Carolina, has universally been applauded. Leading economists remain critical of his tenure at the Federal Reserve, arguing that like his predecessor, Alan Greenspan, he was oblivious to the risk of an asset price bubble — the unsustainable boom in mortgage finance — until the market collapsed.
Moreover, they believe that when the crisis did hit he was slow to respond, despite his renowned expertise on the Great Depression of the 1930s. He is regarded with some suspicion among the Democrats who control the US Congress. They believe that Bernanke exceeded his powers and became too close to the politicians — especially the Republicans then in the White House and Treasury — in the final months of 2008 and seemed more concerned about saving Wall Street than the taxpayers’ interests.
More recently, there have been concerns that the unelected Fed is seeking to usurp regulatory powers from the democratically elected Congress.
There is no doubt that Bernanke stretched the powers of the Federal Reserve to the limit. Mervyn King in Britain was always reluctant to intervene, fearing rewarding the financial system for its mistakes.
In contrast, Bernanke behaved like a man possessed. What is extraordinary about this is that Bernanke is a Republican and his party traditionally has been associated with non-intervention in the marketplace and fiscal and monetary rectitude.
The Fed chairman’s response to the “Great Panic” of a year ago was almost the opposite. Bernanke exploited the remit of the central bank to the full to rescue broker-dealer Bear Stearns and the giant credit insurer American International.
He also made credit available to non-financial companies by lending direct, effectively bypassing the financial system. The Princeton academic was determined not to repeat the perceived mistakes of the 1930s when the Fed sat on its hands.
This has created hostility from left to right. On the left, a searing portrayal of the investment bank Goldman Sachs as a “giant vampire squid” in Rolling Stone magazine proffered the conspiracy theory that somehow the Fed and Bernanke was in thrall to the investment bank. Bush Treasury Secretary Hank Paulson, who worked with Bernanke on the financial bailouts, was a former Goldman Sachs insider. Stephen Friedman, chairman of the New York Federal Reserve, the operational arm of the Fed, during most of the crisis was a former Goldman insider. So was Robert Rubin at Citigroup, a large recipient of US government aid, and many of the other key figures.
The presence of so many Goldman top brass at the highest level almost certainly had more to do with their skill set rather than any preordained plot. Nevertheless, the fact that Goldmans received a multi-billion dollar payout from AIG (after the insurer was rescued) and was allowed to become a bank holding company, thus preserving its safety, looked to critics as being too cosy.
Another attack on Bernanke came from economist Stephen Roach of Morgan Stanley, a bank itself in receipt of rescue funds, who accuses him of being “steeped in the Greenspan credo that markets know better than regulators”.
On the right, Bernanke has been attacked for market activism. Professor John Taylor of Stanford University argued that the Fed had no business to be involved in the business of credit allocation. His bail-outs were seen as “quasi-fiscal” policy, the response of Congress and the Treasury, not the central bank.
Bernanke can expect questions on much of this and more when he faces his second set of nomination hearings on Capitol Hill. But he may have timing on his side. In the second quarter of the year, American output fell by 1 per cent, after a 6.4 per cent contraction in the first three months of the year.
If the improvement continues, in the next couple of quarters he could yet be hailed as the genius who saved capitalism from its worst excesses. Capitol Hill legislators may complain that procedures have been bypassed. But there will be no resentment if Bernanke ensures their re-election.