Bernanke, a Hero to His Own, Can’t Shake Critics

Ben S. Bernanke, chairman of the Federal Reserve, no longer looks sleep-deprived.


He still works seven days a week, but earlier this month he took two days off — for the first time in two years — to attend his son’s wedding. And he often gets home for dinner and even out to baseball games every few weeks.

As central bankers and economists from around the world gather on Thursday for the Fed’s annual retreat in Jackson Hole, Wyo., most are likely to welcome Mr. Bernanke as a conquering hero. In Washington and on Wall Street, it would be a surprise if President Obama did not nominate Mr. Bernanke for a second term, even though he is a Republican and was appointed by President George W. Bush.

But the White House has remained silent. And despite Mr. Bernanke’s credibility in financial circles, both he and the Fed as an institution have come under political fire from lawmakers in both parties over the handling of particular bailouts and the scope of the Fed’s power.

He has been frustrated that many in Congress do not give the Fed what he believes is enough credit for what it has accomplished. Indeed, Mr. Bernanke has met privately with hundreds of lawmakers in recent months to explain the Fed’s strategy.

Fellow economists, however, are heaping praise on Mr. Bernanke for his bold actions and steady hand in pulling the economy out of its worst crisis since the 1930s. Tossing out the Fed’s standard playbook, Mr. Bernanke orchestrated a long list of colossal rescue programs: Wall Street bailouts, shotgun weddings, emergency loan programs, vast amounts of newly printed money and the lowest interest rates in American history.

Even one of his harshest critics now praises him.

“He realized that the great recession could turn into the Great Depression 2.0, and he was very aggressive about taking the actions that needed to be taken,” said Nouriel Roubini, chairman of Roubini Global Economics, who had long criticized Fed officials for ignoring the dangers of the housing bubble.

But Mr. Bernanke is hardly breathing easy. Unemployment is still at 9.4 percent, and the central bank’s own forecasts assume that it will remain that high through the end of next year. Even if all goes according to plan, Fed officials said, Mr. Bernanke’s current popularity could sink if the recovery proves slower than many people expect.

While the White House keeps mum about Mr. Bernanke’s future, the leading Democratic candidates to replace him include Lawrence H. Summers, director of the National Economic Council; Janet L. Yellen, president of the Federal Reserve Bank of San Francisco; Alan S. Blinder, a Princeton economist and former Fed vice chairman; and Roger Ferguson, another former Fed vice chairman.

Mr. Bernanke faces two major challenges. On the economic front, the Fed has to decide when and how it will reverse all its emergency measures and raise interest rates back to normal without either stalling the economy or igniting inflation.

On the political front, Mr. Bernanke is trying to defend the Fed’s power and independence as the White House and Congress debate plans to overhaul the system of financial regulation.

Democrats like Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, contend that the Fed was too cozy with banks and Wall Street firms as the mortgage crisis was building. House Republicans, and some Democrats, complain that the Fed already has too much power.

“Why does the Fed deserve more authority when institutionally it seemed to have failed to prevent the current crisis?” asked Senator Dodd last month.

The political battle over President Obama’s plan to overhaul financial regulation has put Mr. Bernanke in an awkward position.

Fed officials support the administration’s proposals to put them in charge of systemic risk like the growth of reckless mortgage lending or the misuse of financial derivatives. But they chafe at the plan to shift the Fed’s consumer-protection functions, which protect people from deceptive and unfair lending practices, to a new agency.

Mr. Bernanke has avoided publicly criticizing the White House’s call for an independent consumer regulatory agency. While acknowledging that the Federal Reserve did nothing to stop mortgage practices during the housing bubble, Mr. Bernanke has argued that the Fed has since written tough new protections for both mortgage borrowers and credit card customers.

“We think the Fed can play a constructive role in protecting consumers,” he told the House Financial Services Committee last month.

Mr. Bernanke and other Fed officials now concede they failed to anticipate the full danger posed by the explosion of subprime mortgage lending. As recently as the spring of 2007, Mr. Bernanke still contended that the problems of the housing market were largely “contained” to subprime mortgages. When panic over mortgage-backed securities began spreading through the broader credit markets in late July 2007, Fed officials initially refused to cut interest rates.

By December 2007, Mr. Bernanke became increasingly convinced that the economy itself was in trouble but policy makers were unable to reach agreement and decided not to reduce interest rates.

At a meeting on Jan. 21, 2008, the Fed slashed the benchmark federal funds rate by 0.75 percent, to 3.5 percent, the biggest one-time reduction in decades. Nine days later, officials cut the rate again, down to 3 percent.

As the credit crisis deepened, Mr. Bernanke urged Fed officials to devise proposals that had never been tried before. They responded with a kaleidoscope of emergency loan programs to a wide array of industries.

“He has had tremendous courage throughout this episode,” said Frederic S. Mishkin, a professor at Columbia University’s business school and a former Fed governor.


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Amid the chaos, Fed and Treasury officials made numerous mistakes. Their original idea for the $700 billion to buy up bad mortgage assets held by banks has yet to get off the ground.

But economists say Mr. Bernanke’s most important accomplishment was to create staggering amounts of money out of thin air.

All told, the Federal Reserve has expanded its balance sheet to $1.9 trillion today, from about $900 billion a year ago. Analysts now caution that Mr. Bernanke’s job is only half complete. He will eventually have to reel all that money back. He has already laid out elements of the Fed’s “exit strategy,” but Fed officials have been careful to say it is still too early to pull back any time soon.