The Atlantic Monthly
The U.S. Federal Reserve was founded 99 years ago, as a bulwark to the banking system and an antidote to its frequent runs and panics. Strictly speaking, it was America’s third attempt at a central bank. The first, organized by Congress in 1791, was allowed to expire after 20 years, leaving the young republic with only a patchwork system of weaker state banks. During the War of 1812, Congress realized its error (in the absence of a central bank, inflation had run rampant), and in 1816, it chartered a second bank, again for 20 years. The Second Bank of the United States was, in the main, a success. Its notes were circulated as currency, and it astutely managed their supply so as to keep the economy humming. Alas, President Andrew Jackson, a fierce opponent of both paper money and national banks, campaigned in 1832 against renewal of the charter, and indirectly against the bank’s brilliant but impetuous head, Nicholas Biddle. Resentment against financiers was running high, and the election became a referendum on the genteel Philadelphia banker versus the rough-hewn war hero—and a referendum on the bank itself. Jackson won, and the Second Bank was, per his promise, destroyed. The U.S. economy promptly plunged into a severe depression. Biddle died not long after, in semi-disgrace, but the battle between bankers and populists never went away.
None of the invective heaped, of late, on Ben Bernanke would have come as a surprise to Biddle, and one doubts whether the Fed would fare much better with the electorate today than the Second Bank did in the 19th century. Bernanke himself certainly would not win a popularity contest. In 2010, four years after his appointment by President George W. Bush as Fed chief, he was approved for a second term by a Senate vote of 70 to 30—the slimmest margin for a Fed chief ever. (In 2000, Alan Greenspan won a fourth term by a vote of 89 to 4.) Bernanke’s troubles with politicians were a direct result of his sagging poll numbers, and since his reappointment these numbers have only gotten worse. In a Bloomberg poll last September, only 29 percent of respondents expressed a favorable opinion of Bernanke; 35 percent had an unfavorable view. In October, just 40 percent of those surveyed by Gallup said they had confidence in Bernanke’s ideas for creating jobs; even congressional leaders inspired greater faith.
Over the past four and a half years, Bernanke, 58, has presided over the most sustained period of crisis of any civilian official in recent history, with the fate of millions of unemployed and underemployed Americans hanging in the balance. Only recently has the economy begun to show signs that the recovery is gaining steam. Since August 2007, Bernanke has deployed the Fed as the lender of last resort to the banking system and worked overtime to furnish an “elastic currency”—that is, to keep enough money in circulation for the economy to function. These were the very tasks that the founders of the Fed envisioned. Bernanke has performed them by tripling the size of the Fed’s balance sheet—to an eye-popping $2.9 trillion—and by inventing a welter of new programs to lend to banks and other private-sector institutions. For most of the Fed’s history, popular opinion—being generally opposed to depressions—has favored such efforts, but today the public’s disgust with government, and with banks, has cast a shadow of suspicion upon Bernanke. Ron Paul touched a chord when he asked, in November 2010, how the Fed could create $600 billion “with the stroke of a pen.” So did Michele Bachmann, grilling Bernanke at a congressional hearing a few months after the crash, when she queried, “Do you believe there are any limits on the authority that the Federal Reserve has taken since March 2008?”
Bernanke’s unconventional programs have been implemented in two phases. During the financial crisis of 2007–09, he bailed out a handful of large banks and devised a series of innovative lending operations to disperse credit to banks, small businesses, and consumers (virtually all of these loans have been repaid at a profit to taxpayers). He also lowered short-term interest rates to nearly zero and made private banks run a gantlet of stress tests to ensure some minimal level of solvency going forward. Although fierce anger against the bailouts persists, there is little argument that this first stage was a success. However untidily the rescue was managed, the financial crisis is over.
In the second stage, Bernanke has sought to revive a weak economy by maintaining short-term interest rates at close to zero, and by purchasing, in vast quantities, long-term Treasury bonds and mortgage-backed securities. This second phase has been, if anything, more controversial than the first. Its success is much harder to measure (we have no way of knowing whether the economy’s improvement would have been less robust, and how much so, without Bernanke’s efforts). And it has exposed Bernanke to charges of meddling too deeply in the private sector, of disrupting the economy’s natural rhythms long past the point when such intervention is necessary. In particular, critics note that the Fed has stuffed the banking system with $1.5 trillion in excess reserves—money for which the banks have no present use, loan demand being modest, but which could one day spark an epidemic of inflation.
Michael Bordo, a monetary historian at Rutgers, told me that in this second phase, “Bernanke has moved into areas that were quite different from what the framers had in mind. One of the risks the Fed is facing is of overreach.” Similar criticisms have been sounded, with notably less restraint, on the presidential campaign trail. Texas Governor Rick Perry said in August that Bernanke, who steered the economy out of its worst slump since the Great Depression, was “almost treacherous—or treasonous in my opinion.” He also declared, famously, “If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas.” Most of the other GOP candidates struggled to find a way to attack Bernanke without sounding like they were, just yet, rounding up a lynching party. Newt Gingrich called Bernanke “the most inflationary, dangerous” Fed chairman “in history”—a remarkable statement given that during Bernanke’s tenure, inflation as measured by the Consumer Price Index has averaged 2.4 percent, lower than that under any other Fed chief since the Vietnam War. Mitt Romney, who had previously praised Bernanke for doing a good job, promised in September that if elected he would replace him, as did Herman Cain (Bernanke’s term expires in 2014). Ron Paul, a proponent of returning to the gold standard, in November called the Fed, which has been off the gold standard since 1971, “immoral.” In January, partly on the strength of his enmity toward the Fed, Paul finished a close third in the Iowa caucuses and second in the New Hampshire primary. “If the Fed had to be rechartered now, God help us,” Alan Blinder, a Princeton scholar who was the Fed vice chairman in the 1990s, told me.
Though Bernanke is a Republican, Republicans in Congress have conducted a sustained war against him, threatening to audit the Fed’s interest-rate moves; accusing Bernanke of cover-ups; refusing to fill two vacancies on the Fed’s board of seven governors, the body that Bernanke chairs; and protesting his policy briefs on mortgage reform. Last September, when Bernanke was planning to launch his latest stratagem for spurring the economy, known as Operation Twist, the Republican House and Senate leadership publicly called on Bernanke to desist—a rare attempt by Congress to meddle directly in monetary policy. Bernanke defied them.
Anti-Fed populism is in no way limited to the red states. Driving near my home in suburban Boston—not exactly Tea Party territory—I saw a car sporting a Celtic-green bumper sticker bearing the title of Ron Paul’s best-selling book End the Fed . More substantively, Bernanke has found himself in the crosshairs of a debate between the left and the right over whether he is doing too much or too little to stimulate the economy. All this, while the debt troubles in Europe have threatened to compound America’s problems and snuff out the recovery before it takes hold.
At the core of the debate are concerns about the risks and costs of inflation, on the one hand, and worries about the pace and fragility of the recovery, on the other. In November 2010, when the Fed embarked on a second stage of “quantitative easing”—which entailed purchasing $600 billion in long-term Treasury bonds—Kevin Warsh, Bernanke’s fellow Fed governor and a close colleague, wrote a Wall Street Journal op-ed questioning the operation and suggesting that Bernanke may have overstepped. (A few months later, Warsh resigned.) Even foreign central bankers—normally a diplomatic lot—piled on, attacking Bernanke for allegedly weakening the dollar and hurting their exports; the German finance minister called the Fed chairman’s policy “clueless.” Then the strategy was condemned in a widely circulated open letter to Bernanke signed by 23 Republican-leaning financial experts. The letter, which demanded an immediate halt to the program, stated, “We disagree with the view that inflation needs to be pushed higher.”
At the time, inflation was trending down toward 1 percent, worryingly close to the negative territory known as deflation. One reason the Great Depression lasted so long is that prices kept falling, year after year. A primary aim of Bernanke’s new program was to ward off deflation, which it did. But this success has not been nearly enough to satisfy Bernanke’s critics on the left—who have been pushing the Fed chief to initiate (within some limits) the very inflation that those on the right fear.
Paul Krugman, the New York Times columnist and Nobel-laureate economist, has been scathingly critical of Bernanke for, supposedly, restraining his naturally dovish instincts. (In Fed parlance, “hawks” want to tighten policy to prevent inflation; “doves” want to loosen it to increase demand.) Krugman, on his blog, has rebuked the Fed under Bernanke—the most activist Fed chief in history—for exhibiting “shameful” passivity, and has categorized his stewardship of the Fed as “Profiles in Fed Cowardice.” It’s worth noting that Krugman’s academic career got a boost when Bernanke, over the objection of some faculty members, hired him at Princeton, where Bernanke was the chair of the economics department. Apparently, Bernanke’s courage has since deserted him; Bernanke “wimps out,” Krugman announced in an April 2011 blog post. The columnist has written that Bernanke surely agrees with his policy ideas, but has been “intimidated” by “inflationistas.”
The blasting of Bernanke from both extremes is, to put it mildly, unprecedented. Then again, the stakes have seldom been so high. With Congress paralyzed on fiscal issues, Bernanke has more influence than anyone else over the economy. As Lawrence Katz, a prominent economist at Harvard, told me, “He is sort of the only game in town.”
I met with Bernanke on the Tuesday after Thanksgiving—a day after he had completed a program of unconventional “swap” loans to Europe, when the Continent seemed on the verge of collapse—and again in December. I had first met him in 2007, before the financial crisis, and gathered at the time that he paid more attention to critiques from fellow academics than from the press. But because his policy depends on communicating his goals to the public, popular criticism has come to threaten his effectiveness—or so Bernanke fears. In our recent meetings, he was more assertive than I remembered, a trifle defiant. When I saw him in November, he was conservatively dressed in a dark suit brightened by a purple tie. He ushered me into his office, next door to the Fed’s chandeliered boardroom, and toward a dark-leather couch and chairs by a walnut coffee table. His office looked not a trace different from four years earlier; the same photograph of the original Federal Reserve Board was framed above his neatly ordered desk, as though he hadn’t had time to look up since. The crisis did not seem to have aged him, although the criticism he has endured was clearly weighing on him. Soon after my visit, he released a letter he had written to Senate leaders refuting, point by point, a spate of articles that had characterized a Fed lending program as “secret” (the names of the borrowers were secret, but not the existence of the program or its size), and that had reported the total of Fed loans and bailouts as $7.7 trillion, a wild exaggeration.
Bernanke is bothered by attacks that seem to be little more than smears; conversely, he is buoyed when strangers stop him in airports to offer an encouraging word. Rising to his own defense, he told me, “I would argue that everything we have done has been in the interest of the American public and, broadly, of the global economy. A lot of people get that.” (Privately, Bernanke and Timothy Geithner, the treasury secretary, have shared mutual wonder that the financial rescue, which they consider a success, has been so widely panned. Geithner told me that recently, when he informed Bernanke that yet another officeholder had asked for each of their resignations, Bernanke wryly quipped, “Well, that’s a step up from being accused of treason.”)
As we began to discuss his policies, the Fed chief urged me to pick up a copy of Lombard Street , a seminal book on central banking written by Walter Bagehot, the 19th-century British essayist. “It’s beautiful,” Bernanke said of the book—obviously appreciating that Bagehot had urged central bankers to take vigorous action to forestall panics. (The Bank of England, Bagehot writes, should “lend in times of internal panic as freely and readily, as plain principles of banking require.”) Segueing to the reaction to his own crisis measures, Bernanke told me, “Some people don’t understand—fulfilling the responsibility as lender of last resort is what the Fed was created to do. This is what central banks have been doing for 300 years.”
Bernanke has a sense of history uncommon among public officials. He insists that overall, his efforts have hewed to the Fed’s mission— to furnish an elastic currency appears in the preamble to the Federal Reserve Act of 1913—and that his improvisations have been forced on him by the extraordinary, and perilous, position of the U.S. economy. He has gone to unprecedented lengths—press conferences, town-hall meetings, appearances on 60 Minutes —to communicate those ideas to the public. According to Greg Mankiw, formerly President George W. Bush’s top economist and now an adviser to Mitt Romney, Bernanke earnestly believes in the democratic process; he thinks disclosure will lead to a more responsible electorate. Perhaps this is why the public vitriol so disturbs him. Bernanke himself eschews hyperbole (he chooses his words with meticulous care) and refrains from personalizing policy differences. In December, he felt compelled to release a letter to Senate leaders in which he distinguished Federal Reserve loans, which have not cost the taxpayers anything or added to the federal deficit, from “government spending”—a simple point, perhaps, but one that is often confused in the public discourse.
click here to read the rest