Ben Bernanke ………PPhoto by: Dan Winters for TIME
On January 28, 2010, in an often delayed vote due to wrangling (what else), the United States Senate re-nominated Ben Bernanke to a second term as Chairman of the Federal Reserve Board by a 70–30 vote. In our view, the nation’s banking system passed an important test with far-reaching implications. The Senate’s vote was much more than just the confirmation of Ben Bernanke for another four years. It was a crucial test of the central bank’s independence from politics and short-term political pressures. Thankfully, enough Senators (70 of them) had the good sense and sound judgment to preserve our independent Federal Reserve System. And, notably, it was a bipartisan vote — a very rare event in today’s Congress.
A Bit of History
Today’s Federal Reserve System was born in 1913 when Congress passed the Federal Reserve Act. As the years passed, several important laws were enacted that greatly affected the operations of the Fed. These included:
The Glass-Steagall Act (1933)
The Banking Act of 1935
The Federal Reserve Reform Act of 1977
The Full employment and Balanced Growth Act (1978), and recently
The Emergency Economic Stabilization Act (2008)
(For more history on the Fed and details of the above laws, see Wikipedia, History of the Federal Reserve System.)
Today, the purpose of the Fed can be summarized by saying that, it’s mandate is to establish a monetary policy that maintains long-term economic growth, minimizes inflation, and promotes price stability.
That is not an easy task, given today’s $14 trillion economy! It should be obvious that these objectives can conflict with one another from time-to-time, more so in today’s high-tech, rapidly changing world.
Regarding the Confirmation
Mr. Bernanke was confirmed for a new, four-year term by an apparently comfortable margin — 70 yea’s vs. 30 nay’s. Like many investment professionals around the world, we are both pleased and relieved.
Before the vote, however, a number of senators had voiced sharp criticisms of the Chairman and had cast doubt on his re-nomination. Many of the critics were reacting to the public’s general anger about large bank bailouts, high unemployment, and large bonuses paid to top bank officers. Sensing the public’s mood (mostly justified), some senators were making a political statement on the confirmation issue. Are they looking ahead to next November’s election, you ask? Could they be trying to foster their own short-term agendas at the expense of the longer-term good of the nation? Yea and Yea, we say.
Bernanke’s critics contend that:
a) He fiddled while our markets burned.
b) He failed to see the housing bubble and it’s consequences.
c) He and the Fed did not rein in the banks soon enough.
d) Their missteps contributed to the recession.
Our retort is that, yes, the Fed made some mistakes — but so did many other financial and regulatory authorities. We’ll quickly tick off a few:
a) Congress itself erred by vigorously fostering a policy of home ownership for the masses even though many could not afford it.
b) Many state bank regulators and some federal bank regulators were clearly looking the other way and/or asleep at their desks.
c) Alert and greedy investment bankers pounced on the opportunity to package thousands upon thousands of mortgages (many of dubious quality) and then sold billions of dollars worth of mortgage-backed bonds into world markets. Where were the regulators?
d) Unscrupulous mortgage brokers ran around their neighborhoods signing up anyone walking and breathing into bad mortgages to satisfy the demand from Wall Street investment bankers. Where was the adult supervision here?
So … there was plenty of blame to go around as revealed by many analysts and recent authors. But, the past is past. It’s time to move on and, hopefully, remember the mistakes of the past.
Our belief is that Ben Bernanke, in concert with others, did an admirable job of restoring confidence to the financial markets at a time of chaos and great stress. He prevented a serious recession from turning into a second Great Depression. We are confident that a good man has been reinstated to a very important position. We believe he will, indeed, remember the recent past and chart a proper course for the very challenging economic and monetary decisions that lie ahead.
Note to readers:
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Editor: Stan G.
