Federal Reserve Chairman Ben Bernanke
The Great Depression Expert Who Prevented the Second Great Depression
Ben Shalom Bernanke was Chairman of the Board of Governors of the Federal Reserve System from February 1, 2006, to January 31, 2014. He replaced Alan Greenspan. Congress appointed Bernanke for his knowledge of how monetary policy contributed to the Great Depression and his belief in inflation targeting.
Bernanke created many innovative Fed tools to prevent a global depression in the early stages of the banking crisis. He led the Fed in taking on new roles, such as bailing out Bear Stearns and insurance giant American International Group Inc. The Fed loaned $540 billion to money market funds to stop a global panic.
Bernanke also led the push to expand open market operations when lowering interest rates alone wasn't enough to end the 2008 financial crisis. He was responsible for Operation Twist and the other phases of quantitative easing.
Bernanke's successor was former Federal Reserve Vice-Chair Janet Yellen. On February 3, 2014, Bernanke became a Distinguished Fellow in Residence in the Economic Studies Program at the Brookings Institute. He is affiliated with the Hutchins Center on Fiscal and Monetary Policy to analyze and educate the public on fiscal and monetary policy.
Why Bernanke Is Important to the U.S. Economy
As Fed chair, Bernanke was responsible for guiding monetary policy for the U.S. economy. That was more critical through the last decade, as fiscal policy became hamstrung by the national debt. As the spokesperson for the Fed, Bernanke was the country's premier economic expert. His words swayed the stock market and the value of the dollar. During his tenure as Fed Chair, Ben Bernanke was arguably the most important person in the United States and, therefore, the global economy.
What the Federal Reserve Chairman Does
Although the Federal Open Market Committee sets and executes monetary policy, the Chairman has traditionally taken an active leadership role. The Chairman is appointed by the President and confirmed by the Senate and is expected to be more independent than an elected official who answers to voters. That allows the Fed to take a long-term view and not react to short-term political pressure. 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.
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. They raised it to stem inflation or lowering it to prevent a recession. Between September 2007 and 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 in mortgage-backed securities that were so complicated that no one understood who had bad debt.
As a result, banks stopped lending each other the funds needed to meet the Fed's reserve requirement. In response, 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 total of $3 trillion by the end of the program.
Bernanke worked with central bankers around the world to restore liquidity when credit markets froze. He added billions 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.
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. That prevented a default on $10 trillion in Bear Stearns' holdings, and the banking community relaxed for a few months. By the second quarter of 2008, the economy was growing. Many thought the disaster was averted.
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. The Fed, under Bernanke's leadership, agreed to bail out AIG.
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 criticized for hiding the identities of banks who received up to $2 trillion in TAF loans. Former Representative Ron Paul, R-TX, and others called for a Fed audit to reveal the names of these banks. For these reasons, some legislators opposed his reappointment as Federal Reserve Chairman for a second term in January 2010. President Obama easily reappointed him.
Bernanke After the Fed
Bernanke joined the Brookings Institute as a Distinguished Fellow in Residence on February 3, 2014. He advises the Hutchins Center on Fiscal and Monetary Policy to better educate the public on fiscal and monetary policy. He will also suggest ways to improve the effectiveness of those policies.
Bernanke wrote a book about his tenure as Chairman entitled, “The Courage to Act.”
Bernanke received a B.A. in economics from Harvard University in 1975 and a Ph.D. in economics from the Massachusetts Institute of Technology in 1979. He taught at Stanford Business School until 1985 when he became a professor at the Economics Department at Princeton University. He became chair there in 1996. In 2002, Bernanke joined the Federal Reserve Board of Governors and became chair in 2006. He was chair of the president's Council of Economic Advisers in 2005.
In 2009, he was named the “Time Magazine Person of the Year.”
Brookings. "Ben S. Bernanke." Accessed Oct. 25, 2020.
Board of Governors of the Federal Reserve System. "Board Members." Accessed Oct. 25, 2020.
Board of Governors of the Federal Reserve System. "Open Market Operations." Accessed Oct. 25, 2020.
Levy Economics Institute. "$29 Trillion: A Detailed Look at the Fed's Bailout by Funding Facility and Recipient," Page 9. Accessed Oct. 25, 2020.
Federal Reserve Bank of San Francisco. "Dollar Illiquidity and Central Bank Swap Arrangements During the Global Financial Crisis," Page 4. Accessed Oct. 25, 2020.
Board of Governors of the Federal Reserve System. "Press Release." Accessed Oct. 25, 2020.
The Washington and Lee Law Review. "The AIG Bailout," Page 943. Accessed Oct. 25, 2020.
Federal Reserve History. "Ben S. Bernanke." Accessed Oct. 25, 2020.
Time. "Person of the Year 2009." Accessed Oct. 25, 2020.