Bernanke Did the Best He Could

So today we learn we'll be getting seconds on Ben Bernanke. I'm inclined to think that's a good thing. As more than one economist has pointed out, if you were going to pick the one guy most qualified to see us through the financial crisis, you'd probably pick Ben Bernanke.

So why wasn't it closer to perfect? Why did Goldman Sachs end up with gigantic profits, while we ended up with the bill? Why did he rescue Bear Stearns and leave Lehman to twist in the wind? Why didn't he know that money markets would lock up? Why didn't we do what either left or right wanted: let the bastards fail, or take them over?

Well, in part because policy is never perfect. Crises are sui generis, and information is limited. Bernanke bailed out Bear Stearns to prevent contagion, and let Lehman fail to prevent moral hazard, and only during the fallout from Lehman did he learn that contagion was the bigger risk. He had a choice between becoming the fiery avenging angel of justice, or keeping the system from collapsing. In the long run, no doubt there will be bad results from this, and many will wish that he had not done it. But in the long run, the possibility of bread lines and 25% unemployment will seem comfortably far off.

But mostly, because central banking has always been a bit of a muddle. Hard and fast rules are intellectually appealing, but they have so far always failed in practice. Put yourself in Ben Bernanke's place and imagine that there was a 10% chance that either nationalization or letting banks fail would spark a panic violent enough to push us back into another Great Depression. Would you be willing to try the experiment for the sake of principle? Or would you be inclined to worry about the long term problems later?

As it says in To Kill a Mockingbird, Bernanke did the best he could with what he had. It was not perfect. But looking around at the mostly employed people on the streets, I'm glad he was there.