Right after Ben Bernanke was named Time's Person of the Year for 2009, he was up for confirmation hearings for a new four-year term as Chairman of the Federal Reserve. The confirmation hearings were contentious. Many didn't want Bernanke to serve another term. Some blamed him for the Wall Street meltdown in the fall of 2008. Some blamed him for not seeing the Great Recession coming. Some even went so far as to think he was in on the whole thing with the investment bankers on Wall Street.
Perhaps some of the controversy surrounding Ben Bernanke comes from a lack of understanding concerning what the Federal Reserve actually does and what it is supposed to do. Somewhere, in the confusion of the financial regulatory mishaps of the past two years, we had to charge someone with being asleep at the switch. The collapse of our biggest financial institutions was so dramatic and, seemingly, sudden that we find it hard to believe that the powers that be didn't see it coming, particularly the Chairman of the Federal Reserve.
How Time Chooses Their Person of the Year
Even those that gave Bernanke the benefit of the doubt or those who credited him with saving the country from a true depression thought him a strange choice as Time's Person of the Year. After all, others were in the running. Others who might have been more deserving given the controversy surrounding Bernanke. But, Time magazine has a long and storied history of not just naming the "good guys" as their people of the year. After all, Joseph Stalin, a cruel Russian dictator, and the Ayatollah Khomeini, who overthrew the Shah of Iran in a bloody revolution, have been part of that group. That is not to say Bernanke is not one of the good guys. But, Time names all types. Their goal is to name a person or persons who, in their opinion, has had the most impact, positive or negative, during the year.
The Structure and Functions of the Federal Reserve
The Federal Reserve (Fed) has been a particularly visible body for some 30 years now with its hand on the wheel of monetary policy. It controls our interest rates, our money supply, our credit markets, and serves as a financial regulator of some, but not all, banks. But, even though the Federal Reserve has been more visible in recent years, it was created long ago by the Federal Reserve Act of 1913. Before that time, there had been some severe financial crisis's and bank panics in the U.S. and the Federal Reserve was created to insure the stability of the banking system.
The Federal Reserve Act of 1913 created the Fed as an independent body operating within the U.S. government. The Fed has been accused of secrecy when, in reality, it doesn't have to disclose its actions to the President or the Congress. It is part of the system of financial checks and balances within our federal government. It is supposed to be a non-political body to the extent possible with the governors of the Fed serving long and staggered terms that cross Presidential terms. Congress does have oversight authority with regard to the Fed.
One of the key functions of the Fed is to make sure that the banks in our financial system are liquid. The Fed has the legitimate power to act as a lender of last resort. In other words, the Fed has the power to extend credit to financial institutions in case of emergency. Not only does it have the power to take this action, it actually has responsibility since it is charged with maintaining the stability and integrity of our financial system.
Some seem to think that Bernanke took it upon himself to infuse the large banks and bank holding companies with money to keep them from collapsing in the fall of 2008. In actuality, it was his responsibility to take some sort of action to maintain the liquidity of our financial system.
Why is Ben Bernanke so Controversial?
Another one of the responsibilities of the Fed is to prevent asset bubbles. One of the factors that precipitated the recession was the bubble in the housing market which led to inflated housing values. You can go back to 2000 and find the dot.com technology bubble. At that time, Alan Greenspan was the Chairman of the Fed and he was not able to prevent that collapse either. The Fed has not been very effective at the task of preventing asset bubbles. Very shortly before the collapse of the banks on Wall Street in 2008, Bernanke made the statement that the sub-prime lending crisis could be contained and that the underlying fundamentals of the economy were strong. He was proven wrong in short order.
The Lack of Financial Regulation
If blame is to be placed somewhere for the Great Recession, perhaps it should be placed at the feet of the easing of financial regulation rather than on an individual person. The Glass-Steagall Act, which required that the functions of commercial banks and investment banks be separated, was repealed in 1999. Simply put, banks that accepted customer deposits and made loans could then also sell stocks and conduct all the functions of underwriting. Many think that this led to increased risk-taking and speculation by commercial banks. If the fact that many of the "too big to fail" banks engaged in investing in exotic financial instruments rather than in solid, low risk investments, perhaps this is true.
The Key Questions
The key questions concerning Ben Bernanke are simply why didn't he see the dangers in the sub-prime lending crisis and in the housing bubble? Even the average American citizen knew housing prices were too high and that banks lending 125% of home equity seemed dangerous.
When the confirmation of Ben Bernanke gets to the floor of the Senate, he may get confirmed but with more "no" votes than any Federal Reserve Chairman in the past. Instead of placing the blame where it lies, on the big banks who decided to gamble instead of protecting the public's money, many Senators seem determined to place the blame on Bernanke who simply did his job as the economy melted down before his eyes.