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'The Villain' Ben Bernanke – From Buffett Author Roger Lowenstein

March 21, 2012 | About:
CanadianValue

CanadianValue

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There is nothing interesting about a television talking head saying that Ben Bernanke is doing a good job. Or that the economy will probably be okay.

What the financial networks need are more controversial and charismatic commentators like Jim Rogers and Marc Faber.

And politicians aren’t going to say anything nice about someone who was involved in bailing out the evil banks that created the housing bubble.

On the other hand Buffett has been very supportive of the efforts that Bernanke and Paulson made through the financial panic in 2008. Here is Buffett author Roger Lowenstein with a close look at “The Villain:”

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.

Link to remainder of the article:

http://www.theatlantic.com/magazine/archive/2012/04/the-villain/8901/

About the author:

CanadianValue
http://valueinvestorcanada.blogspot.com/

Rating: 3.4/5 (7 votes)

Comments

The Science of Hitting
The Science of Hitting premium member - 2 years ago
Fantastic article; take the time to read it - you won't be disappointed IMO...

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