Carlos Lozada -- Reviewing Ben Bernanke at the Fed

Sunday, December 13, 2009

With the Senate banking committee set to vote this week on the confirmation of Ben Bernanke to a second term as chairman of the Federal Reserve, the central banker's record in battling the financial crisis is center stage. Critics suggest he's not doing enough to combat unemployment or that his support of misbehaving financial institutions only sows the seeds for future crises. "You are the definition of a moral hazard," Sen. Jim Bunning (R-Ky.) scolded Bernanke earlier this month. Supporters contend that, well, things could be worse without him.

In a recent paper, Brookings Institution economist Douglas J. Elliott dispassionately weighs the case for and against the chairman.

There's plenty to go on the negative side of the ledger. First, Bernanke was chairman as the housing bubble reached its most inflated point; he neither took action to unwind it nor developed emergency plans in case it burst. Second, as a regulator, the Fed failed to recognize the trouble brewing on banks' balance sheets. Third, the central bank did not adequately protect consumers from products -- including subprime mortgages -- that proved excessively risky. Fourth, the Fed's role in the bailouts of Bear Sterns and AIG have raised many questions. And finally, Bernanke's Fed and other regulatory agencies have at times focused on their own institutional powers, with turf battles trumping the public interest.

On the plus side? Well, there is the small matter of "saving the world," as Elliott puts it. Despite early missteps, Bernanke "clearly led with his vision of how to respond" once the crisis got serious. Elliott also hails the chairman's unique expertise on the Great Depression -- including how best to avoid a second one -- and reasons that only the guy who launched a massive rescue of the economy would know how and when to remove the supports the Fed has provided. Don't switch horses in mid-stream, he cautions.

Ultimately, Elliott believes Bernanke should be reappointed, even if the mistakes he cites are more than enough to merit the flogging the chairman is enduring at the hands of Congress.

-- Carlos Lozada

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