Why is Bernanke important?
Bernanke was responsible for guiding monetary policy for the U.S. economy as the chairman of the Federal Reserve. This was particularly important during the last decade when fiscal policy became constrained by national debt. Bernanke served as the country’s leading economist and spokesperson for the Fed. His words influenced the stock market and the value of the dollar. During his tenure as chairman of the Fed, Ben Bernanke was the most significant person in the United States and thus in the global economy.
What does the Federal Reserve Chairman do?
Although the Federal Open Market Committee sets and implements monetary policy, the Fed chairman traditionally plays a proactive leadership role. The Fed chair 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. This allows the Fed to take a long-term view and not respond to short-term political pressures. The Fed’s tools, such as the interest rate, act slowly over six months. The U.S. economy is like a large ship; it needs gradual steering.
Bernanke and the 2008 Crisis
Under Bernanke’s leadership, the Fed used its tools very innovatively. Previous chairmen only used the interest rate. They raised it to curb inflation or lowered it to prevent recession. Between September 2007 and December 2008, Bernanke decisively cut the rate 10 times, from 5.25% to 0%. But this was not enough to restore liquidity to the banks that had collapsed due to toxic mortgages. These loans were repackaged and sold as mortgage-backed securities that were so complex that no one understood who had the bad debt.
As a result, banks stopped lending to each other the necessary funds to meet the Federal Reserve’s reserve requirements. In response, Bernanke reduced the requirements, lowered the discount rate, and finally offered credit himself through the discount window.
When that wasn’t enough, Bernanke created the Term Auction Facility in December 2007. This facility provided billions of dollars to banks, taking on bad debts as collateral. The facility was intended to be temporary until the banks could reduce their bad debts and start lending to each other again. When that did not happen, the facility grew to reach a total of $3.8 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 of dollars in dollar swap lines. These are agreements to keep dollars available for trading with other central banks for overnight and short-term lending. This was crucial because banks were sitting on cash reserves. They were afraid to lend to each other because they did not want to get stuck with derivatives tied to toxic mortgages.
In April 2008, the Fed held its first emergency weekend meeting in 30 years to secure bad loans for Bear Stearns until it was bought by JPMorgan. This prevented a default on $10 trillion of Bear Stearns’ holdings and calmed the banking community for a few months. In the second quarter of 2008, the economy was growing. Many believed that the disaster had been averted.
In September 2008, the world’s largest insurance company, AIG, announced that it was going bankrupt. AIG had insured trillions of dollars worth of mortgages worldwide. If it collapsed, it would disrupt every bank, hedge fund, and pension fund holding mortgage-backed securities as an asset. The Fed, led by Bernanke, agreed to bail out AIG.
Criticism
Many lawmakers and economists criticized “Helicopter Ben” for injecting countless trillions into the economy, which could lead to inflation and an expansion of debt. They also criticized him for failing to predict the recession in a timely manner. He was criticized for concealing the identities of the banks that received TAF loans. Former Congressman Ron Paul and others called for an audit of the Fed to reveal the names of these banks. For these reasons, some lawmakers opposed his reappointment as Fed chairman for a second term in January 2010. He was easily reinstated by President Obama.
Bernanke
After the Federal Reserve
Bernanke joined the Brookings Institution 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.
Early Career
Bernanke earned a Bachelor’s degree in Economics from Harvard University in 1975 and received a Ph.D. in Economics from the Massachusetts Institute of Technology in 1979. He worked at the Stanford Graduate School of Business until 1985 when he became a professor in the Department of Economics at Princeton University. He became chair there in 1996. In 2002, Bernanke joined the Board of Governors of the Federal Reserve and became chair in 2006. He was the chair of the President’s Council of Economic Advisers in 2005.
In 2009, he was named “Person of the Year by Time Magazine”.
Source: https://www.thebalancemoney.com/federal-reserve-chairman-ben-bernanke-3306152
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