Until the middle of last week, there were signs that the credit crisis was easing: some banks were lending to each other again, the interest rates that they charge each other have come down, and no major financial institution has failed since the passage of the bailout bill. "It was a very important step," Bernanke told me last week, referring to the bailout. "It greatly diminished the threat of a global financial meltdown. But, as Hank Paulson said publicly, 'you don't get much credit for averting a disaster.' "
--"Anatomy of a Meltdown," The New Yorker (12.1.08)
Ben Bernanke is a most unlikely historic figure in the middle of this historic financial crisis. He has a quiet, conservative disposition. He has a pragmatic, resilient orientation to problem solving, and a consultative approach to decision making. And however you may assess what he has done so far--and we are not yet near the other side of this crisis--he may well be the best Federal Reserve leader we could have hoped for during this critical time.
I certainly felt we had no choice but to trust him in managing the meltdown of some our most important financial institutions and the financial network essential to the functioning of our market economy. And I felt reasonably comfortable doing so--based on those characterisitics noted, to be sure, but also on his first-rate intellect, his extensive, expert background in the economics of financial markets and market failures, and his prior experience as a governor of the Federal Reserve Board. He also benefited from the extensive practical experience and support of Treasury Secretary Henry Paulson. (Although Paulson--Goldman, Sach's prior CEO--had arguably once been a responsible, complicit party in managing the culture and climate that spawned and developed the mortgage crisis and resulting financial failures. He certainly understood the background of the problem.)
A The New Yorker article, "Anatomy of a Meltdown," by John Cassidy, provides a succinct but useful biography of Bernanke, and then a comprehensive and balanced chronology of Bernanke's and the Fed's thinking and decisions during this singularly challenging crisis played out in unchartered territory. If he wasn't first to the line in recognizing the threat and scope of the problem, if his first instincts and choices for bold, creative solutions may not have been the best or the ones he would ultimately decide on and pursue, he was open minded, resilient and strong in pursuit of the best answers. And he showed resolve in carrying them out. That is, he showed strong leadership in the most challenging of circumstances. That, at least, is my view, my take on it.
Looking back on this period, Bernanke told me, "I and others were mistaken early on in saying that the subprime crisis would be contained. The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict."
...Paul Krugman, the Times columnist, a former colleague of Bernanke's at Princeton, and the winner of this year's Nobel Prize in Economics, said, "I don't think any other central banker in the world would have done as much by way of expanding credit, putting the Fed into unconventional assets, and so on. Now, you might say that it all hasn't been enough. But I guess I think that's more a reflection of the limits to the Fed's power than of Bernanke getting it wrong. And things could have been much worse."
Of course, there are many among his critics who would also assert that the right course was to let these financial institutions fail, and that somehow the financial system would muddle through, then right itself in time, without serious risk of a 1930's-era depression. Others were narrowly concerned with the example being set and "moral hazard." I don't subscribe to those opinions; I think there was far more risk in failing to act. I find common ground with Bernanke's explanation of his thinking at the time:
There is now wide agreement that Bernanke and his colleagues made the correct decision about Bear Stearns. If they had allowed the firm to file for bankruptcy, the financial panic that developed this fall would almost certainly have begun six months earlier. Instead, the markets settled for a while. "I think we did the right thing to try to preserve financial stability," Bernanke said. "That's our job. Yes, it's moral-hazard-inducing, but the right way to address this question is not to let institutions fail and have a financial meltdown. When the economy has recovered, or is on the way to recovery, that's the time to say, 'How can we fix the system so it doesn't happen again?' You want to put the fire out first and then worry about the fire code."
But Bernanke understands that these are times of great danger, great risk in whatever choices are made, and of highly charged emotions. Many critical and hurtful things have been said and will be said. But Bernanke, undaunted, continues to pursue bold solutions: recently cutting the Fed funds rate to zero (actually, 0-25 basis points), setting out plans to make large purchases of
agency debt and mortgage-backed securities, and considering the potential benefits to the mortgage markets of buying long-term Treasury securities. As I quoted Henry Paulson earlier, even if he is successful, "you don't get much credit for averting a disaster." To provide an assuring, strengthening reference point and inspiration, Bernanke keeps this Civil-War era quotation from Abraham Lincoln on his desk:If I were to try to read, much less answer, all the attacks made on me, this shop might as well be closed for any other business. I do the very best I know how—the very best I can; and I mean to keep doing so until the end. If the end brings me out all right, what is said against me won't amount to anything. If the end brings me out wrong, ten angels swearing I was right will make no difference."
http://www.newyorker.com/reporting/2008/12/01/081201fa_fact_cassidy?currentPage=all
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