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: Bench Memos - National Review Online

Bernanke's Balance Sheet -- By: The Editors

By The Editors

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The Obama administration has two approaches to former Bush administration officials: Threaten them with prosecution (CIA interrogators, Justice Department lawyers) or reappoint them to office (the secretary of defense). Ben Bernanke, once known as ?Helicopter Ben? but destined to go down in history as ?Bailout Ben,? has been reappointed as chairman of the Federal Reserve, though there are critics, left and right, who might have dreamed in secret of the other approach.

Bernanke?s reappointment invites a fresh assessment of his management of the recent financial crises, including the much-criticized bank bailouts, and the chairman comes off surprisingly well. The unprecedented federal intervention into the financial industry organized by Mr. Bernanke was bitter but necessary medicine. Distasteful as these measures were, our choice was not between the bailouts and an ideal free-market approach, but between a problematic federal intervention and an even worse federal intervention, one more shaped by congressional Democrats than by the Fed; not Ben Bernanke vs. Milton Friedman, but Ben Bernanke vs. Nancy Pelosi. And the results, as they stand today, suggest that the approach adopted by Mr. Bernanke and Pres. George W. Bush represented the better choice.

A number of the troubled banks and financial institutions have returned to profitability (albeit sometimes diminished profitability) and repaid the funds they received under the Troubled Asset Relief Program. The markets have stabilized, and many economists expect the United States to return to growth in the last quarter of this year. While the credit markets remain tight and touchy, the worst of the debilitating sclerosis has passed. At this time, it appears likely that the government will recoup much of its investment in the nation?s financial firms, and in some cases it has earned dividends on that money. True, a large economic shock -- in the form of a rapidly deteriorating dollar or a rapid rise in interest rates to head it off, for example -- could shake up that balance sheet. And the problems of massive taxpayer exposure to fluctuations in the financial markets, combined with the corrosive moral hazard that persists wherever political power and private profit intersect, argue for winding down Washington?s involvement in the financial sector as quickly as is prudent; doing so should be high on Mr. Bernanke?s agenda. TARP is intended to be temporary; the shorter its life, the happier our memory of it will be.

If we narrow our universe of contemplation down to the likely real-world outcomes of the financial crisis, Mr. Bernanke?s performance must be judged to have been quite good. This recession has been painful -- particularly for those who have found themselves out of work and for those who have seen their retirement nest-eggs fried -- but it easily might have been much worse.

And it may yet be worse -- that?s Mr. Bernanke?s present challenge. Massive federal spending, massive amounts of new government debt, and the threat of a massive and permanent expansion of the government?s role in the economy mix into a dangerous brew. Among the main threats are a spike in interest rates that could undo much of the good Bernanke has done in thawing credit markets, rising consumer-price inflation, and the deterioration of the dollar vis-à-vis other currencies or against important commodities, such as oil. A run on the dollar by foreign central banks and other international institutions, which remain nervous about the state of their dollar-denominated investments, is a significant threat and an extraordinarily dangerous one. Mr. Bernanke earned the sobriquet ?Helicopter Ben? for positing that, if the need to fight deflation became sufficiently severe, the Fed could simply drop $100 bills out of helicopters. But mopping up is harder, and deflation is not the only threat on the horizon. Having been a member of the Fed board that kept money too loose for too long, thereby contributing to the current crisis, Mr. Bernanke?s credibility on inflation is not equal to his credibility on deflation.

Mr. Bernanke is a scholar of the Great Depression, and some of his admirers credit him with having helped to prevent a comparable catastrophe. That is probably hyperbole, and at any rate this crisis has not yet run to the end of its course. The character of the next major economic challenge remains unknown, as must be Mr. Bernanke?s ability to respond to it. And while President Obama deserves praise for Mr. Bernanke?s reappointment, it is worth noting that his naming of Denis M. Hughes, New York State?s AFL-CIO president and a former union lobbyist, to serve as chairman of the Federal Reserve Bank of New York suggests that the president has his own ambitions for the Fed, ones that are not necessarily to be celebrated. Mr. Bernanke has earned a measure of confidence, but the challenges before him are indeed sobering. We congratulate him on his reappointment and do not envy him.

Full post as published by Bench Memos - National Review Online on August 26, 2009 (boomark / email).