Time Magazine’s naming Ben Bernanke “Man of the Year” is a little bit like celebrating an arsonist for his heroics in putting out a fire that he set. Bernanke has done creative and bold work in staving off a fianancial free fall. But he would also be on any list of the 10 people most responsible for creating the free fall.
Bernanke served as Tonto to Alan Greenspan’s Lone Ranger. He then succeeded Greenspan as head of the Federal Reserve. In that position, he got it wrong big time. He ignored the dangers of the housing bubble. He testified that the banks were well capitalized. He argued that unregulated derivatives posed no danger becuase all the participants were sophisticates who knew the risks. When the housing bubble popped, he argued that it would have little effect beyond the subprime market. When the recession had already started, he argued the economy was still strong. Even after Bear Stearns went belly up, he made no provisions for staving off the continuing crisis.
To stave off the free fall, Bernanke acted boldly to invest various ways to funnel literally trillions to private banks, brokerages, insurance companies and foreign banks and central banks, often in return for dubious collateral at best. All this was done in secrecy without a vote of Congress. It may have been heroic, but now Bernanke argues that it must remain secret, opposing an independent audit of the Federal Reserve. He says this would constitute a “takeover of monetary policy,” and sacrifice the independence of the Fed. But, as former Federal Reserve Chair Paul Volker says, intevening in specific markets or bolstering specific companies is not a proper role for a central bank. It can only be justified in emergency. The calamity that Bernanke helped create was a dire emergency. But even if what Bernanke did was heroic, it cannot remain secret in a constitutional Republic.