Bernanke Will Get His Second Term

Several Senators cuffed Fed Chairman Ben Bernanke around during hearings today. Chris Dodd, who runs the Senate Banking Committee in whose presence Bernanke appeared, gave the world assurances that the Fed chief would be reappointed for a second term.

The unkindest comment about Mr. Bernanke’s tenure was made by Senator Jim Bunning of Kentucky, a Republican. He said “From monetary policy to regulation, consumer protection, transparency and independence, your time as Fed chairman has been a failure.” Mr. Bunning is a member of the Baseball Hall of Fame, but is not known as an expert in monetary policy or financial regulation. It will not matter in the end. Bernanke is still a heroic figure among most of the important people in Washington.

Memory is convenient. A year ago, Mr. Bernanke and Secretary of the Treasury at the time, former Goldman Sachs chief Hank Paulson, were wresting with the prospects that several of the nation’s largest banks might go under and that the global credit markets would stop to operating. The prevailing theory is that such a series of events would have driven the economy into a period like The Great Depression. One alternative would have been that the federal government could have nationalized the banking system. Bernanke and Paulson elected for a partial nationalization which was accomplished by opening the emergency Fed funds window as wide as it would go and forcing TARP money on the largest financial firms in the country whether they needed it or not. Goldman Sachs probably could have gotten by without the capital. Citigroup almost certainly could not have.

Paulson and Bernanke have been accused of a number of misdeeds. The most well-known is that they allegedly forced Bank of America CEO Ken Lewis to close a transaction to buy Merrill Lynch by threatening the job security of Lewis and his entire board of directors. All’s well that ends well. Bank of America cannot find a new chief executive so Lewis still has his job. The firm announced that it would pay back its entire $45 billion TARP obligation which means that taxpayers made money on the cash that they put into Bank of America. It might even be argued that B of A saved both Countrywide and Merrill Lynch by taking them over. That is, at least, the opinion of experts who say that the two companies were too weak to survive.

Bernanke and Paulson may have broken a number of little laws and may have overstepped the roles that the charters of the Treasury Department and Federal Reserve set for them. The banking system and economy did not collapse, but came close. There is clearly no way to tell what would have happen if Bernanke and Paulson were not there, but they were and a catastrophe was averted. Bernanke even admitted in his testimony today that he made some missteps, but stuck firmly and modestly to the claim that he had saved the American economy.

Bernanke will be forever criticized for running the Federal Reserve in a way that allowed the credit crisis to happen. Some of his critics would argue that the entire financial regulatory community was lax in investigating and overseeing the risky actions of America’s big banks. This is tantamount to saying that regulators could have detected the problems with mortgage-back securities. The credit ratings agencies and risk management committees of bank boards of directors missed those risks as well. Someone should be blamed for the disaster, but that someone turns out to be almost everyone. The trouble that caused the mortgage-backed securities crisis might be called systemic. The financial services industry had decided that MBS were a better mouse trap and they were until people stopped paying their home loans at unexpectedly high rates.

The last and most enduring and devastating part of the recession is unemployment. Economists probably have a way to tie that back to mortgage-backed securities. There may have been a domino effect. Bernanke stood in among the dominos and made certain that they did not all fall. The crisis could have been much worse, he says. It was not. He gets the credit and because the financial world was damaged but preserved on his watch, he deserves it.

Douglas A. McIntyre