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Wednesday, December 9, 2009

Ben S Bernanke: Wins a Second Chance as Fed Chairman

Bernanke, the man who “approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic free fall,” has been nominated by Barack Obama for a second four-year term as Chairman of the Federal Reserve.

Thus, Obama silenced the market debate on the fate of Bernanke and the uncertainty thereof within the administration and in financial markets that had been brewing for quite sometime. Of course, there is nothing radical about it. Perceiving the Fed chairmanship as “a non- or not-very-partisan technocratic position of immense power and freedom of action,” all of the past four Presidents had reappointed the Fed Chairman from the opposite party. Nonetheless, with his announcement, “As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another ... that’s exactly what he has helped to achieve,” the President could indeed send across a strong message that has tremendous political connotation—“The worst is over.”

The decision was, of course, widely hailed by the Wall Street and politicians as well. But some, including economists of repute, have questioned his reappointment on many counts: one, Bernanke, believing in the philosophy that Central Banks are well-placed to clean up the mess once asset bubbles burst rather than preempt them, allowed loose monetary policies prevail over longer periods that indeed fueled the financial frenzy in the first place; two, instead of arresting the irrational consumerism displayed by ordinary Americans via borrowed capital, he threw the blame on ‘global saving glut’ and the savers of capital from Asia; and three, like his predecessor, he too, believing that markets know better than regulators, abrogated regulating the irresponsible penchant of banks for extreme leverage, derivatives explosion and aggressive mortgage lending that had all cumulatively thrown the financial markets out of control; four, his rescuing the American International Group Inc. through a Fed-orchestrated program and his role in pushing Bank of America Corp. to complete its takeover of Merrill Lynch & Co.; and five, his misreading about the likely impact of Lehman’s failure on the markets and letting it go bankrupt that ultimately triggered the global meltdown.

That said, one could as well dismiss them—as his supporters wish for—merely as comments made on hindsight, though there is an element of truth in the allegation that he misread the market, if not lax in monitoring shadow banks, as it becomes evident from one of his statements made in 2007: “The dispersion of risk more broadly across the financial system, thus far, increased the resilience of the system and the economy to shocks.”
But post-Lehman, Bernanke became active in leading the world in its fight against the financial collapse. It is, perhaps, his years of research into ‘economics of depression’ that gave him enough courage to experiment with unconventional monetary-policy measures such as reducing the Fed interest rates to near zero, greatly expanding the size of the Fed’s balance sheet by purchasing longer-term securities and through targeted lending programs, and proposing to pay interest on bank’s balances with Fed to inject the much-needed liquidity into market—when financial institutions are shuddering to lend monies to even fellow-bankers in the fear of not knowing who is holding what toxic assets—to weather the financial crisis. As Paul Krugman too felt rightly, all this makes one wonder “how anyone could have done more to stem the crisis.” And thus, he “earned the right to a second term.”

In all these uncommon pursuits, he sourced his strength, as he made it known in one of his pleas before the Congress for $700 bn Troubled Asset Relief Program: “I’m a college professor. I never worked on Wall Street … My interest is solely for the strength and the recovery of the US economy.” And it is this steadfast commitment with which he had guided the Fed through two very tumultuous years, except for that one mistake of letting Lehman fail, if it could be so labeled, and his deep knowledge of the Great Depression of 1929 and its financial consequences that makes him best suited for the Fed chair now.

Nevertheless, once confirmed by the Senate as Chairman, Bernanke will face two major challenges: one, to steer the US economy out of recession and once ensured,  that the recovery is sustainable, and to tighten the monetary policies to ensure price stability coupled with maximum employment; and two, he must work for obtaining the right powers to ensure financial stability by regulating systemic risk—which squarely rests on how capital is leveraged throughout the financial system—through Fed’s monetary policies, while,  of course, safeguarding its own independency.

Evidently, this act of swelling and shrinking of the Fed’s balance sheet, particularly in the context of mounting government debt, is going to be politically pretty challenging. Yet, he should not succumb to pressures from the White House, if any, while executing the ‘exit strategy’—raising interest rates even when full employment is still to be accomplished. And of course, it is the least that one can expect from an academician who boldly proclaimed: “I was not going to be the Federal Reserve chairman who presided over the second Great Depression.


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