More than Obama, more than Geithner, more than anyone, it is the once-maligned Federal Reserve chairman who has saved us from the second Great Depression.
Illustration by André Carrilho
I’ll just come right out and say it: Ben Bernanke will go down as the greatest Federal Reserve chairman in history. The soft-spoken academic who has toiled in the shadows of his legendarily self-promoting predecessor, Alan Greenspan, will be known as the man who averted the Great Depression Two, a sequel that could have eliminated the United States as a world financial superpower and reduced us to this century’s Britain. Make no mistake about the parentage of this success story. President Obama pushed through a stimulus plan that will ultimately help the economy later this year, and Treasury Secretary Tim Geithner chose to adopt Bernanke’s strategy of allowing banks to raise money themselves rather than bowing to calls from politicians and pundits to have taxpayers bail them out even more than they already had. But it was the 55-year-old former Princeton professor who spent his teaching career studying how the Great Depression could have been prevented who deserves the bulk of the credit.
I wasn’t always a fan. For a year after he took the helm from Greenspan in 2006 until the middle of 2008, as it became increasingly clear that the housing market’s crash and the subprime fiasco were getting out of hand, Bernanke simply toed the official line of George W. Bush: The fundamentals are sound. He was slow to cut interest rates, his primary tool to stave off recession, and he handled the Fed as if it were a Princeton debating society, polling the members endlessly and deferring to the inflation hawks. His unwillingness to challenge those who were calling for rate increases to fight inflation in what remains the closest we’ve come to a deflationary spiral since the mid-fifties froze the Fed at a time when the worst of the crisis could have been avoided. Bernanke can’t be absolved for his lack of decisive action in that moment. He assured people in the spring of 2008 that there was no financial chaos worth worrying about. He looked at an economic canvas that resembled a kindergartner’s finger painting and saw a Van Gogh. (At least that was a more accurate critique than that of then–Treasury Secretary Hank Paulson, who thought we were looking at the Mona Lisa.)
But the downfall of Lehman Brothers, a collapse Bernanke and then–New York Fed chief Tim Geithner acceded to when Paulson decided that someone had to pay for the moral hazard, changed everything. Suddenly, as credit froze and production and stocks plummeted as fast as they had between 1929 and 1932, Bernanke broke ranks with the complacency crowd and the inflationistas and relied on the lessons he’d learned back at Princeton to quickly take interest rates to an unheard-of zero percent. He turned on the Fed’s printing presses, forcing dollars into the banking system, and began to buy $500 billion in mortgage bonds to force rates down to stop runaway foreclosures and keep people in their homes. That was the most aggressive policy change in the Fed’s history, something that amounted to nothing short of an economic putsch that bridged the interregnum between presidents and continues to this day.
And we needed it. Just at the time Bernanke seized financial power, the new president took aim at Wall Street, somehow separating it from Main Street, as if the “people” didn’t own stocks and only the rich were being hurt by the massive declines in the stock and bond markets. His famous comment about banks and bankers—“There will be time for them to make profits, and there will be time for them to get bonuses. Now is not that time”—uttered offhandedly soon after his inauguration, caused a stock-market sell-off of what had seemed to be unimaginable proportions even in the horrific bear market that began in 2007. Suddenly, at the point when capitalism was teetering, perhaps far worse than we realize today, the president and his Treasury secretary seemed to be on the verge of nationalizing the banking system to teach those malefactors of wealth a lesson about what life is like outside New York City. The president seemed to be oblivious to the fact that the public was “all in”—that any amount of tax relief would never make up for the tens of thousands of dollars being lost in 401(k)s and 529s and IRAs, in part because of the president’s desire to overtax and demonize Wall Street. By early March, it seemed that if you didn’t work for a federal, state, or local union, or the UAW, Obama branded you a public enemy and would soon force you to wear a dollar sign on your coat when you went outside.
That’s when Bernanke decided to take matters into his own hands in a way that lifetime followers of the famously secretive Fed still can’t believe. He went on 60 Minutes. We may not have known it at the time (unless you’re a financial type, his appearance wasn’t exactly riveting), but when we look back at the beginning of the new bull market of 2009, the one that has taken prices up 30 percent from their bottom, we will discover that Monday morning, March 16, the day after Bernanke sat down and talked to us straight about the jam we were in, was a seminal day.
First, he admitted that we verged on a second Great Depression. I think he knew that we were actually in one, a garden-variety version, but we won’t know that until his memoirs are published. But, he told Scott Pelley, he had a plan and it would work and the nation’s economy would be stabilized by year’s end. It was his clear, simple, no-gobbledygook sentences, spoken calmly and confidently at the camera, that saved the day. Such plainspokenness shocked those of us used to the deliberately opaque statements of Greenspan, a smart tactic for the former chief because it made his tenure so inscrutable, a horrid tactic for the country because Greenspan could and did get away with anything, including helping to create the housing and stock-market bubbles.
Bernanke then proceeded to eviscerate the laissez-faire economics of the previous administration and its endless faith in the markets that produced the fiasco that was Lehman Brothers. At the same time, he made it clear to Obama that the new president was using the wrong road map when castigating Wall Street, because Wall Street leads directly to Main Street. For emphasis, he made it personal: “I came from Main Street. That’s my background. I’ve never been on Wall Street, and I care about Wall Street for one reason and one reason only—because what happens on Wall Street matters to Main Street,” something he said he knew because his father couldn’t get credit for his small business in Dillon, South Carolina, without the help of the big bankers whom Obama was castigating.
In the interview, he gave a stern warning to the hedge-fund managers and other investors who were driving down financial stocks, and everything else along with them, telling Americans that our large national banks, including Citigroup, Wells Fargo, and Bank of America, all of which seemed to be slated for nationalization, “are not going to fail.” He said he was working on a stress test that would make it clear to the public that it would be safe to invest in banks again, and that we’d see the results soon enough.
Finally, he gave us hope. He said he saw “green shoots” of recovery, a phrase that has taken hold in the mainstream and created a sense of optimism about the economy’s emerging from dormancy.
The performance, and Bernanke’s impressive follow-through, marked a turning point. Banks have easily been able to raise the $74 billion that Bernanke and Treasury Secretary Geithner required them to raise in the now incredibly successful stress-test exercise. Mortgage rates have come down dramatically, helping vanquish the housing gluts in Florida, Arizona, and California. In California, which accounts for a huge portion of the housing calamity, we’ve seen two straight months of housing-price appreciation and dramatic increases in turnover, as foreclosed homes get sold by the hundreds of thousands and banks’ balance sheets improve dramatically. Bernanke’s seemingly Panglossian attempt to call a bottom in the U.S. economy by the end of the year is now held to be pretty conventional wisdom, the real explanation why the stock market’s been red-hot.
The moment of crisis has passed, the parallels to the Great Depression are gone, all because Bernanke learned the lessons of history and refused to let it repeat itself. Bernanke once seemed Lilliputian compared to Greenspan. Now their statures have been reversed."