Ben \'Do the Right Thing?\'

¶ … Ben 'do the right thing?' Why Fed Chairman Ben Bernanke's monetary policy was correct in the wake of the credit crisis -- but he should not have been chosen Time Magazine's person of the year

Difficult economic circumstances bring forth passionate opinions. Recently, Time Magazine lauded Federal Reserve Chairman Ben Bernanke with the coveted title of Person of the Year, a move that created a great deal of controversy amongst economists, politicians, and the public. Time credits Bernanke with pulling the American economy back from the brink of recession. The news magazine stated that the most critical of Bernanke's actions was the freeing up of the panicked frozen credit market through government intervention. After the failure of the investment banking firm Lehman Brothers, investors refused to extend even the temporary, overnight courtesy loans that banks and firms require for daily functioning. So, in an unprecedented move, the Fed assumed this role.

Time vehemently denied that only the wealthy reaped the benefits of the Bernanke recovery. The Fed's actions also facilitated household, small business and credit card loans, "Bernanke took heat for substituting public for private credit, but it worked, because most of those private markets are functioning again. The emergency programs are all scheduled to wind down by June, and more than 80% of the loans have already been repaid, quietly returning billions of dollars in profits to taxpayers" (Grunwald 2009, p.5). The fact that many of the loans to large corporations have been paid back because of the desire of such firms to escape government oversight goes unmentioned by Time.

Time expressed its gratefulness for having a man with the unique experience and vantage-point of Bernanke: while a professor of economics at Princeton, Bernanke's specialty was the Great Depression. At first, Bernanke merely tried reducing the interest rate to nearly zero, but when that failed to work he pursued a far more aggressive strategy, unlike the Fed of the 1920s and 1930s. This is why "it's Bernanke's economy," proclaimed Time (Grunwald 2009, p.1). Although admitting Bernanke offered Keynesian critique of the Hoover Administration's tight money policy during the early days of the Depression, Time cites monetary rather than fiscal policy as the most effective tool to combat the effects of a recession (in contrast to Keynes, who believed that government spending was more critical than monetary policy in overcoming consumer fears). Bernanke, in his writings on the Great Depression emphasized the need for a flexible monetary policy to circumvent a recession (Grunwald 2009, p.3). And Time agrees: More so than any government program, writes Time, Bernanke's monetary policy spared the economy from ruin.

Criticism of Time's decision was swift. The first and most obvious criticism is that, when reviewing Bernanke's financial policy from October 7, 2009 at the beginning of the crisis until the beginning of 2010, Bernanke's initial overtures to help the economy recover seem anemic. Bernanke himself "concedes that he failed to anticipate how fragile such an overleveraged and interconnected system could be, how fear about a $1 trillion subprime mess could paralyze a $60 trillion global economy, how overnight-lending markets that got banks and corporations through the day could seize up overnight" (Grunwald 2009, p.4). While his defenders say that he could not have predicted the crisis, others point to the fact that the collapse of the housing market was forecast several years previously by many economists. Although it is unfair to blame Bernanke for the follies of bargain-basement interest rates during Alan Greenspan's years as Fed Chairman and Greenspan's fixation upon deregulation at all costs, his lack of damage control until the crisis hit seems questionable.

The blame for the financial debacle does not rest on Bernanke's shoulders alone but nor do the policies that Time says fostered the recovery. Time gives Bernanke primary credit for the government-facilitated private takeover of Bear Stearns, the public takeovers of Fannie Mae and Freddie Mac, the Bank of America merger with Merrill Lynch, and the bailout of the notorious insurance firm that secured bad mortgage debt, AIG. Despite the fact that it also required heroic efforts on the part of Congress and the President, Time even gives credit to Bernanke for the $700 billion Troubled Asset Relief Program (TARP) (Grunwald 2009, p.4).

Many, if not most of these decisions were profoundly unpopular and cost both the Obama and Bush Administration as well as Congress a great deal of political collateral. The relatively isolated Bernanke did not have to suffer such a risk in the court of public opinion, and even today critics of these policies ask: what of moral hazard? Supporters of the TARP and other aggressive government measures would counter that worshipping at the altar of moral hazard, caused the fall of Lehman Brothers and the freezing up of the microcredit market in the first place. But once the expectation of bailouts are created, one bailout tends to lead to another -- the bailout of Bear Stearns caused Lehman Brothers to assume it would be 'bailed out.'

Bernanke has often been the responder to crises, rather than an avoider or a hands-on manager acting alone. It was Treasury Secretary Hank Paulson who made the decision not to bail out Lehman but to bail out Bear Stearns, and the executive branch that orchestrated the TARP program. And Bernanke's current position seems fragile: "Ben Bernanke's term as Chairman of the Federal reserve ends in January. He has been nominated by the president for reappointment, but reappointment must be approved by the Senate" (Thoma 2009). Conservative critics are dismayed by Bernanke's orchestration of financial incentives to encourage spending, and say that historically low interest rates have continued for too long: "We see little in the chairman's policy history or guideposts to suggest he will be willing to endure the criticism that will come with tightening money amid a lackluster recovery, if that is what is required to protect the dollar or prevent an inflation outbreak," sniffed the Wall Street Journal in a recent editorial (Thoma 2009). However, liberals state that Bernanke's attempt to balance worries about inflation with worries about double-digit employment fail to take into account the pain of the American consumer. Liberals note that when the financial sector was doing poorly, protests about moral hazard and aid to major investment banks was muted. Now that it is ordinary Americans who are suffering in the 'jobless' recovery while worries about inflation affecting the banking sector have resumed. Bernanke, balancing the demands of both ideological camps, has pleased neither.