Ber­nanke de­pres­sion guru seeks Roo­sevelt well-be­ing

The Pak Banker - - Front Page -


Ben S. Ber­nanke ar­gued for 15 years that the Fed­eral Re­serve should an­nounce a nu­mer­i­cal in­fla­tion tar­get. When he fi­nally got his way in Jan­uary, the vic­tory al­lowed the cen­tral bank to el­e­vate its other man­date: full em­ploy­ment.

By adopt­ing a 2 per­cent in­fla­tion goal, the Fed chair­man sought to ce­ment the cen­tral bank’s hard-earned cred­i­bil­ity for keep­ing prices low af­ter a 30-year fight against in­fla­tion. Ber­nanke cal­cu­lated that do­ing so would an­chor ex­pec­ta­tions for price changes, giv­ing pol­icy mak­ers greater free­dom to un­leash new stim­u­lus tar­geted at cre­at­ing jobs. So far, the move has worked: The Fed em­barked on a third round of quan­ti­ta­tive eas­ing in Septem­ber with­out un­hing­ing in­fla­tion ex­pec­ta­tions.

Ber­nanke’s shift to em­pha­siz­ing em­ploy­ment goals is one of the hall­marks in a gru­el­ing two-term chair­man­ship that spanned the worst fi­nan­cial cri­sis and re­ces­sion since the Great De­pres­sion and a slow la­bor-mar­ket re­cov­ery that pinned job­less­ness above 8 per­cent for 43 months. The pres­i­den­tial cam­paign has put the Fed in tran­si­tion as Repub­li­can can­di­date Mitt Rom­ney said he’d re­place Ber­nanke, though for­mer col­leagues doubt he will stay on, no mat­ter who wins.

Ber­nanke has ex­plic­itly re­turned the U.S. cen­tral bank to the broader, more bal­anced goal that Franklin Roo­sevelt de­scribed in 1937 as seek­ing “the great­est at­tain­able mea­sure of eco­nomic well-be­ing, the largest de­gree of eco­nomic se­cu­rity and sta­bil­ity” when the then-pres­i­dent in­au­gu­rated the Fed’s Beaux Arts-in­spired Wash­ing­ton head­quar­ters.

“This is a Fed­eral Re­serve that helped save the world,” said Fred­eric Mishkin, a Fed gover­nor from 2006 to 2008 and now a pro­fes­sor of bank­ing and fi­nan­cial in­sti­tu­tions at Columbia Busi­ness School in New York. “Were there risks to do­ing so? Ab­so­lutely. But some­times you have to take a tough stance, not know­ing ex­actly what the right thing to do is.”

Some Fed chair­men are de­fined by crises and how they failed or met the chal­lenge. Paul Vol­cker is re­mem­bered for his bat­tle against in­fla­tion dur­ing his 1979 to 1987 ten­ure, when he al­lowed the fed­eral funds ef­fec­tive rate to rise as high as 22 per­cent to tame an­nual price ac­cel­er­a­tion ap­proach­ing 15 per­cent. Ber­nanke’s in­creased em­pha­sis on job cre­ation is a prod­uct of his era and its eco­nomic weak­ness, ac­cord­ing to Fed­eral Re­serve Bank of New York Pres­i­dent Wil­liam C. Dud­ley.

The 58-year-old Fed chair­man, who once wrote that an un­der­stand­ing of the Great De­pres­sion would be the “Holy Grail of macro­eco­nomics,” served as a gover­nor from 2002 to 2005 when the cen­tral bank ne­glected to take ac­tion to slow the hous­ing bub­ble. He be­came chair­man in 2006 and in March 2007 told the Joint Eco­nomic Com­mit­tee of Congress that “the im­pact on the broader econ­omy and fi­nan­cial mar­kets of the prob­lems in the subprime mar­ket seems likely to be con­tained.”

The 18-month re­ces­sion be­gan in De­cem­ber 2007, and in March 2008 Ber­nanke used the Fed’s bal­ance sheet to buy up high-risk se­cu­ri­ties from Bear Stearns Cos. to save the firm from col­lapse, es­tab­lish­ing the cen­tral bank’s role as the na­tion’s main res­cue agent. He shunned or­tho­doxy as the hous­ing- fi­nance bub­ble be­gan to de­flate and pushed the Fed to “the very edge of its law­ful and im­plied pow­ers,” Vol­cker said in a 2008 speech. Ber­nanke gave out more than $2 tril­lion in emer­gency aid through six loan pro­grams, cur­rency swaps with other cen­tral banks and the res­cues of Bear Stearns and Amer­i­can In­ter­na­tional Group Inc. (AIG)

“It’s a lit­tle bit of an ac­ci­dent in his­tory that this guy who did all of this work on the Great De­pres­sion got the chance to take the wheel,” Dud­ley said dur­ing an in­ter­view in his New York of­fice.

The force with which Ber­nanke has at­tacked job­less­ness has dis­tin­guished him, Dud­ley said. By ex­pand­ing the cen­tral bank’s bal­ance sheet to a record of al­most $3 tril­lion through as­set- pur­chase pro­grams and keep­ing the fed­eral funds rate near zero for an un­prece­dented four years, Ber­nanke has es­tab­lished him­self as his­tory’s most bold and ex­per­i­men­tal Fed chair­man in try­ing to spur growth.

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