Who Is Ben Bernanke?:
Why Is Bernanke Important to the U.S. Economy?:
What Is the Role of the Federal Reserve Chairman?:
Although it is the Board of the Federal Reserve that sets policy, the Chairman has traditionally taken a strong leadership role. Since the Chairman is appointed for four-year terms, he is expected to be more independent than an elected official, who answers to voters. This allows the Fed to take a long-term view, and not react to short-term political pressure. That's because the Fed's tools, such as the
Fed funds rate, act slowly over six months. The U.S. economy is like a large ship - it needs gradual direction.
Stop-go monetary policy causes uncertainty, which was a major reason for the 1970s
stagflation.
Bernanke and the 2008 Financial Crisis:
Under Bernanke, the Federal Reserve made very creative use of its tools. Prior Chairmen used only the Fed funds rate -- raising it to stem inflation or lowering it to prevent recession. Between September 2007-December 2008, Bernanke decisively lowered the rate 10 times, from 5.25% to 0%. But this wasn't enough to restore
liquidity to banks panicked by defaulting
subprime mortgages. These loans had been repackaged and sold them in
mortgage-backed securities that were so complicated that no one really understood who had the bad debt.
Bernanke Gets Creative as Crisis Deepens:
As a result, banks stopped short-term lending, which was routinely done as a way to meet the Fed's
reserve requirement. In response, the Bernanke relaxed the requirements, lowered the
discount rate, and finally provided credit itself through the
discount window.
When this wasn't enough, Bernanke created the Term Auction Facility in December 2007. The TAF lent billions to banks, taking on bad debt as collateral. The TAF was meant to be temporary, until the banks marked down the bad debt and started lending to each other again. When this didn't happen, the TAF grew larger, reaching a peak of $1 trillion by June 2008.
Bear Stearns Bailout Wasn't Enough:
In April 2008, the Fed held its first emergency weekend meeting in 30 years to guarantee Bear Stearns' bad loans so JP Morgan would buy it. This prevented default on $10 trillion in Bear Stearns' holdings, and the banking community relaxed for a few months. By Q2 2008, the economy was growing, and many thought disaster was averted.
Fed Takes Over AIG:
In September 2008, the world's largest insurance company,
AIG, announced it was going bankrupt. AIG insured trillions of dollars of mortgages throughout the world. If it fell, it would have disrupted every bank, hedge fund and pension fund that had mortgage-backed
securities as an asset. Bernanke said that AIG's bailout made him angrier than anything else in the recession. AIG took risks with unregulated products, like
credit default swaps, while using cash from people's insurance policies.
Bernanke Worked with Central Bankers:
Bernanke worked with central bankers around the world to restore liquidity when credit markets froze. He added
$180 billion in dollar credit
swap lines.These are agreements to keep a supply of dollars available to trade to other central banks for overnight and short-term lending. It was necessary because panicked banks were hoarding cash. They were afraid to lend to each other because they didn't want to get stuck with
derivatives based on sub-prime mortgages.
Bernanke Has Been Criticized:
Many legislators and economists criticized "Helicopter Ben" for injecting untold trillions into the economy, potentially
triggering inflation, and expanding the debt. Others fault him for
not predicting the recession in time. He was accused of hiding the identities of banks who received up to $2 trillion in TAF loans. Representative
Ron Paul (R:TX) and others have called for a
Fed audit to reveal the names of these banks. For these reasons, many legislators opposed his reappointment as Federal Reserve Chairman.
Bernanke's Early Career:
Bernanke received a B.A. in economics from Harvard University in 1975, and a Ph.D in economics from MIT in 1979. See Bernanke's MIT
2006 Commencement Address for his chronicle of the evolution of economics.
He taught at Stanford Business School until 1985, when he became a professor at the Economics Department at Princeton University, becoming chair in 1996. In 2002, he joined the Federal Reserve Board of Governors and become chair in 2006. He was Chair of the President's Council of Economic Advisers in 2005.
In 2009, he was named Time Magazine Person of the Year.
(Article updated January 17, 2012)
