WASHINGTON
Ben Bernanke has to steer the Fed beyond the financial crisis, amid questions about whether he could have prevented it.
Ben Bernanke with President Obama in Martha's Vineyard, Mass., in August, when nominated for a second term. He was confirmed in a 70-to 30 vote.
NINE days ago, Ben S. Bernanke, the Federal Reserve chairman, caught a Friday-night flight from here so he could address 1,100 graduates at the University of South Carolina the next morning about “The Economics of Happiness.” After the speech, he took a call in his hotel room from Jean-Claude Trichet, head of the European Central Bank, and the next day pledged billions of dollars to help Europe stave off a financial crisis — a flashback to the huge lending programs the Fed put together in 2008 to forestall economic collapse at home.
Mr. Bernanke, 56, hasn’t had much time to reflect on whether history’s verdict on his extraordinary actions of recent years will be harsh or forgiving. Nor has he had time to read the spate of new books about how he and two Treasury secretaries, Henry M. Paulson Jr. and Timothy F. Geithner, navigated a maelstrom that left millions of Americans jobless, homeless or broke.
Nominated last August to a second four-year term by President Obama, Mr. Bernanke nearly saw his career in public service scuttled by widespread discontent about lax regulation of Wall Street and historic federal bailouts that rescued well-heeled bankers from their own mistakes. After a raucous debate in January, the Senate confirmed Mr. Bernanke by a vote of 70 to 30 — the lowest vote of support for any Fed chief since the central bank’s creation in 1913.
Today, early in his fifth year as chairman, Mr. Bernanke faces challenges far different from any that his predecessor, Alan Greenspan, confronted in his 18-year tenure. As the nation’s all-powerful arbiter of interest rates, which directly affect banks’ willingness to lend the funds that fuel the economy, Mr. Bernanke has held the benchmark short-term rate at nearly zero since December 2008, aiming to shore up faltering financial institutions.
He has to figure out not only when to start raising rates — weighing high unemployment against the fear of inflation — but also how to begin shrinking the Fed’s balance sheet, which has more than doubled, to $2.3 trillion, since the crisis started.
Despite the Fed’s now-notorious failure to rein in years of pell-mell, subprime mortgage lending, the Senate is considering entrusting the Fed with added regulatory powers: oversight of the largest financial institutions, including nonbanks like insurers, and an enhanced duty to monitor the kind of risky behavior that brought the American economy to the precipice.
Just last week, the Fed fought off proposals that would have subjected its monetary policy decisions to routine audits and transferred oversight of thousands of Fed-regulated state-chartered banks to the Federal Deposit Insurance Corporation. But it is also likely to be forced to disclose much more about how, exactly, it went about rescuing the financial sector in the last few years — a matter of heated debate in Congress and the courts.
“Responsible people in Congress have recognized that you can’t have a strong economy without a solid independent central bank that has appropriate regulatory roles,” Mr. Bernanke said in an interview. “I continue to count on good sense and wisdom to trump short-term political advantage.”
He’s also aware that new mandates might just set up the Fed for future rounds of criticism. “We have to manage expectations,” he says. “There is no possibility of eliminating financial crises, even severe ones, but that does not mean there isn’t a meaningful opportunity to reduce the risks and reduce the effects, which is what this is all about.”
A POST-CRISIS conventional wisdom has arisen around Mr. Bernanke, who as a scholar produced ground-breaking research exploring the intersection of macroeconomics and finance.
Some see his failure to anticipate the nature and severity of the financial crisis — and his role in helping Mr. Greenspan keep interest rates at a level that might have fed housing speculation — as unforgivable lapses. Others say there was no one better equipped, once the crisis began, to respond with the force, resolve and imagination he deployed to prevent an economic apocalypse.
The two views are not mutually exclusive, as Mr. Bernanke concedes.
“Some people have asked, ‘Why didn’t the Fed stop this from happening?’ ” he says. “Well, like other regulators, there were some things we could have done, at least with hindsight. But we had neither the mandate nor the tools to be the financial system’s supercop. We had well-defined responsibilities that excluded many of the areas that turned out to be problems.”
Mr. Bernanke says the regulatory apparatus that grew out of the Depression, oriented around commercial banks, didn’t adapt to the dizzying pace of financial innovation and interconnected, fast-moving markets.
In fact, markets can now move so fast that regulators sometimes seem winded just trying to catch up. When the stock market plunged 1,000 points on May 6 before reversing direction almost as quickly, regulators were at a loss to explain why. They still are.
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