Critics of Federal Reserve Chairman Ben Bernanke’s performance in his first term blame him for failing to recognize the threat of the looming subprime lending crisis; his supporters laud the aggressive policies he enacted in response to the crisis.
I fault him for both.
Before the crisis, Bernanke helped Fannie Mae and Freddie Mac executives cover up their scheme to hide trillions of dollars in junk mortgages and give themselves enormous bonuses. In the process, he failed to address the growing housing bubble that precipitated the financial crisis.
His solution was worse. Having learned the wrong lesson from the Great Depression—that the government prolonged it by not intervening more, rather than intervening too much—Bernanke radically expanded government’s power and “reinvented the Fed,” as Time magazine put it mildly in their recent cover story on Bernanke.
Time glowingly continued: “[H]e conjured up trillions of new dollars and blasted them into the economy; engineered massive public rescues of failing private companies… lent to mutual funds, hedge funds, foreign banks, investment banks, manufacturers, insurers and other borrowers who had never dreamed of receiving Fed cash… revolutionized housing finance with a breathtaking shopping spree for mortgage bonds; blew up the Fed’s balance sheet to three times its previous size; and generally transformed the staid arena of central banking into a stage for desperate improvisation.”
“Conjured up,” “blasted,” “engineered,” “revolutionized,” “breathtaking,” “shopping spree,” “blew up,” “desperate improvisation”—somehow these don’t sound like particularly reassuring terms for investors in the world’s largest financial system. read more »