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Bernanke wrapping up a tumultuous tenure at the Fed

By Kevin G. Hall
McClatchy Washington Bureau

WASHINGTON When Ben Bernanke prepared to lead the Federal Reserve in January 2006, the former Princeton University professor and economic historian confided to colleagues that he hoped he’d be one of the least remembered chairmen of the Federal Reserve.

Eight years later, he’s leaving the post likely to be the most remembered.

Bernanke ends his second four-year term as Fed chairman on Friday. Two years into the job, the financial system unraveled in a near collapse in summer 2008.

Already the nation’s leading expert on the Great Depression, Bernanke was determined not to repeat the Fed’s passive response of the 1930s. Instead, he attacked the crisis with aggressive moves designed to keep the economy moving forward at all costs.

“He kept us out of Great Depression II,” said Dean Croushore, an economics professor at the University of Richmond and co-author of a textbook with Bernanke. “What the Fed did at that time (in the 1930s) was follow standard practice in the face of this massive shock to the economy. ... I think Ben’s greatest contribution is ... that he was creative, that he thought about the impact of the shock across many dimensions.”

In his memoir, “Decision Points,” former President George W. Bush recalled how Bernanke convinced him that bold steps were needed to arrest an unfolding financial crisis of epic proportions.

“The market had ceased to function. And as Ben had explained, the consequences of inaction would be catastrophic,” Bush wrote. “As unfair as it was to use the American people’s money to prevent a collapse for which they weren’t responsible, it would be even more unfair to do nothing and leave them to suffer the consequences.”

Notwithstanding the bold moves, the financial crisis caught Bernanke and the rest of the economic profession by surprise, no doubt something that’ll remain part of his legacy, too. Bernanke later admitted that he regretted thinking that the housing crisis was an isolated, contained event.

During his confirmation process in 2005, there wasn’t talk of a looming housing crisis or that Wall Street banks had taken on boneheaded amounts of risk. The closest issue to controversy was whether Bernanke’s committing to a published inflation target of 2 percent would threaten the Fed’s credibility.

“Before he took the job, I think Ben was really looking to continue the (Alan) Greenspan years. Things looked like they were in pretty good shape,” said Croushore, who maintains a friendship with Bernanke. “He wanted to be one of the least remembered Fed chairs in history. I think the opposite happened and events thrust him into the spotlight where he did not want to be. Talk about being out of your comfort zone.”

In March 2008, Bernanke helped broker an unprecedented fire sale of investment bank Bear Stearns to JP Morgan Chase. Months later, attempts to do the same with Lehman Brothers failed, and crisis ensued with a vengeance.

The Fed used powers few knew it had to rescue global insurance giant American International Group. It used those powers to provide short-term financing to a number of U.S. corporations to keep the so-called commercial paper markets afloat. And investment banks changed their legal status to holding companies in order to get Fed life support.

When the panic finally calmed, the Fed on three separate occasions turned to quantitative easing. That practice, never tried before, involved purchasing government and housing bonds to drive investors out of safe returns and into risk-taking such as stocks, which supported economic activity.

The efforts swelled the Fed’s holdings to above $3 trillion, and in December, Bernanke announced that as of this month, the Fed would taper back on what had been $85 billion in monthly bond purchases.

Critics contend that the purchases distort the value of stocks and bonds and may lead to a persistently high rate of inflation as the Fed gradually ends its economic support. That could dent Bernanke’s legacy.

“We don’t know and won’t know whether this unconventional policy has created a serious risk until we see how it plays out,” said Martin Feldstein, a prominent conservative economist and Harvard University professor who was on the short list for the Fed chairmanship in 2005.

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