In 1931, Montagu Norman, the governor of the Bank of England, collapsed from the emotional strain of trying to combat the Great Depression: the pressure endured by central bankers during crises is intense. But when you ask colleagues to describe Bernanke, they inevitably start by citing his preternatural calm. He was so composed during the financial crisis that Donald Kohn, then his vice chairman, wondered if Bernanke was making a conscious effort to check his emotions. He “is absolutely amazing under pressure,” according to Olivier Blanchard, the chief economist at the International Monetary Fund.
The chairman’s manner is perfectly suited to the seminar halls where he has spent half his life: careful, deliberate, soft-spoken. Fed staffers frequently cite his humility and willingness to hear all views. This has its downside. Bernanke has been an ineffective lobbyist for agendas beyond the Fed’s purview, such as long-term deficit reduction or mortgage reform. Nor has he exploited the natural leadership role of the Fed chairman on the world stage, for instance during the crisis in Europe. When Alan Greenspan showed up at international meetings, he got star treatment. Bernanke, says one former White House official, is just “another guy at the table.” This is pretty much who Bernanke is. He reasons; he doesn’t thunder.
But his restrained manner belies a forcefulness and a willingness to take political heat. Early in 2008, the Fed was mulling a small interest-rate cut to ease the escalating mortgage crisis; cutting rates was controversial because hawkish economists, of whom there were many, feared inflation. Bernanke decided to cut rates by three-quarters of a point—a very big move. As he told a colleague, he was going to be pilloried for whatever he did, so there was no sense holding back. Months later, when he was trying to persuade a reluctant Congress to pass the Troubled Asset Relief Program, which Bernanke said was necessary to arrest a steep recession that would otherwise cripple Main Street, some members of Congress told him they didn’t see any evidence of a downturn in their districts. The chairman calmly replied, “You will.”
Bernanke rarely socializes with Washington luminaries; he is close to Geithner, whom he sees for breakfast or lunch nearly every week, but theirs is a business relationship. Very occasionally, Bernanke goes to a Nationals game or escorts his wife, Anna, a schoolteacher, to the Kennedy Center. In four years, his only vacations have been trips to see his elderly parents and other family members in North Carolina. He works every day (including this past Thanksgiving, when he was orchestrating the swap loans to Europe) and spends weekend mornings at the office.
Mankiw says there is a bizarre disconnect between the chairman’s reputation among experts, who mostly respect him, and the public’s disapproval. Professional colleagues speak of his courage and resourcefulness. Larry Summers, formerly President Obama’s economic adviser, who is known for his caustic tongue, told me that among Washington insiders, “I don’t think anyone dislikes him.” Even some of his critics, on closer inspection, are not so critical. Kevin Hassett, a conservative economist who helped organize the November 2010 open letter against quantitative easing, told me that while he disagrees with Bernanke about that easing program, overall, “I don’t see how anyone could do a better job.” Sounding embarrassed about the attacks by some Republicans, Hassett added, “I don’t see how you can hate him.”
Ben Shalom Bernanke was raised a druggist’s son in Dillon, South Carolina, a city (today) of 6,800. He studied the Depression as a graduate student at MIT, and as a young academic earned his reputation by expanding on Milton Friedman’s classic monetary history. According to Friedman, the Fed’s failure in the 1930s was a matter of not printing enough money. Bernanke deduced that the real failure was letting the banking system implode. “What Bernanke discovered was that it wasn’t the quantity of money, it was that the banks stopped lending,” says Stanley Fischer, formerly Bernanke’s thesis adviser at MIT and currently the governor of the Bank of Israel. “More than the decline in money, it was the collapse of credit.” The implication was that regulating banks in good times—and, if need be, rescuing them in bad—was of prime importance, something Bernanke would remember in the 2007–09 crisis.
At Princeton, Bernanke became the country’s preeminent monetary scholar. He first joined the Fed, as a governor, in 2002, and even then, the Depression remained, for him, a very live precedent. Months into his term as a governor, he gave a speech at the National Economists Club on the potential for a 1930s-style collapse. The particular problem of the ’30s was deflation: goods were worth less each year—or, alternatively, dollars were worth more. In a mirror image of inflation, no one would spend, because lower prices were forever just around the corner, and no one would borrow, because they would have to repay their debts with more valuable currency. The central bank cut interest rates to try to induce borrowing and spending, but then it was bereft of tried-and-true methods of stimulating the economy. Production and employment kept spiraling downward; Keynes called this a “liquidity trap.”
In 2002, in his talk to the National Economists Club, when the economy was bottoming out from the dot-com crash, Bernanke discussed the potential for a renewed cycle of deflation and severe recession. Although deflation should be avoided altogether, he said, if it took hold, the Federal Reserve would not be powerless to combat it. He described potential remedies, such as buying long-term bonds and government-agency mortgage-backed securities. And if all else failed, the Fed could still stimulate spending, he argued, by resorting to Milton Friedman’s famous “helicopter drop.” (Friedman facetiously suggested dropping bills from the sky, which the Fed could achieve in actuality, Bernanke said, by printing the money to pay for a tax cut.) Bernanke returned to this theme in two speeches in 2003. Plainly, deflation and crashes were on his mind.
But while Bernanke recognized the danger in theory, he did not anticipate the looming crash in home prices. Indeed, he argued that central banks, including the Fed, had tamed the extremes of the economic cycle. In 2005, in a speech in St. Louis, he cogently explained how capital from China and other countries was flowing into the U.S. mortgage market and spurring higher prices in residential real estate. He did not express concern. The following year, as the housing bubble reached its peak, he became Fed chairman.
In 2007, as the subprime-mortgage crisis leached into the financial markets, Bernanke’s training failed him. As a scholar, he had studied how bank failures worsened the Depression; as the Fed chair, he didn’t scrutinize the banks closely enough—that is, he overlooked the fact that dicey mortgage-backed securities made up a sizable portion of the assets of the biggest banks. “Risk was concentrated in key financial intermediaries,” he told me. “It led to panics and runs. That’s what made it all so bad.” Speaking of government officials collectively, he added, “Everyone failed to appreciate that our sophisticated, hypermodern, highly hedged, derivatives-based financial system—how ultimately fragile it really was.”
There was, I think, another reason for his blindness: Bernanke had an academic’s faith in the market’s essential rightness. He was so skeptical of the notion of mass-market folly that in his scholarly writings, he referred to bubbles in quotation marks. He was not, like Greenspan, ideologically opposed to government intervention, but he was dubious that anyone could identify, in real time, when markets were off course.
These criticisms aside, if one is assigning blame, it is important to note that the bubble inflated almost entirely on Greenspan’s watch. The time to avoid a crash was when mortgages were getting written, or when banks could still sell off assets without sparking a panic; by the time Bernanke arrived, a crisis was probably inevitable. In any case, by 2008, Bernanke was confronting the very type of banking meltdown he had spent his academic life studying. No one was better suited to the job; indeed, the Fed adopted the remedies Bernanke had outlined in his 2002 address nearly point for point.
In our meetings, Bernanke defended the bank bailouts as necessary, but he expressed supreme distaste for them—“That must never happen again,” he cut in when I mentioned AIG, the insurance giant whose reckless behavior he has often criticized. Under the Federal Reserve Act, the Fed is authorized to make loans under “unusual and exigent circumstances” as long as the loans are “secured to the satisfaction of the Federal Reserve banks,” meaning, as long as the Fed does not expect to suffer any losses. A fair argument can be made that in the depths of the crisis, some of the Fed’s emergency loans violated this dictum. The very solvency of institutions such as AIG and Bank of America was in doubt. But then, the solvency of a bank could itself depend on the willingness of the Fed to intervene. Brian Madigan, a former senior official at the Fed, made just that argument after the crisis, and also wrote that Bagehot’s principles “need to be interpreted and applied in the real world.” One senses that he was speaking for the chairman. With the financial system on the brink of collapse, bailouts were deemed to be the lesser of two evils.