Bernanke’s series of lectures to university students, now available as a book, acts as a primer on the Federal Reserve and 2008 financial crisis.
Bernanke does so by laying out in the early lectures the nuts and bolts of how the Fed works. Namely, in addition to its power to raise or lower short-term interest rates to help the economy, central banks act as the lender of last resort in cases of financial panic.
If markets are disrupted and solvent banks suddenly lack access to funds, central banks are there to make short-term loans and provide liquidity to help stabilize the financial system.
As Bernanke notes in his fourth lecture, “One of the points that we can now draw, having looked at the history, is that rather than being some ad hoc and unprecedented set of actions, that the Fed’s response was very much in keeping with the historic role of central banks, which is to provide lender of last resort facilities in order to calm a panic.”
The government’s rescue of the financial industry will likely always elicit the public’s anger — and rightfully so. The Wall Street bailouts and the fact that certain entities were deemed “too big to fail” pose fundamental questions about the nature of American capitalism.
But Bernanke makes a strong case that however distasteful the Fed’s and Treasury Department’s activities were, they were necessary to prevent a second Great Depression.
That’s not to say his defense of the government’s response is completely convincing. Asked by a student during a question-and-answer session (a surprisingly delightful part of the book) how authorities decided to draw the line between bailing out a bank and allowing its failure, he comes up short.
Bernanke says Lehman Brothers probably was “too big to fail” in that its collapse rattled the global financial system but that the Fed and Treasury were powerless to save it because of legal constraints. That argument seems wanting, considering the government was essentially making up the rules as it went along.
With immense power to shape the economy, the Fed has long been an easy political punching bag. But since the crisis, a deeper hostility has emerged, largely on the political right and driven by the populist tea party movement.
If the Wall Street bailouts helped ignite the anti-Fed flame, Bernanke’s efforts to pull the economy out of recession through unorthodox monetary stimulus threw gasoline on the fire (even as those on the left accused him of timidity in the face of mass unemployment).
In short order, attacks on the Fed were coming not just from former Rep. Ron Paul, R-Texas, and the political fringe but from the mainstream of the Republican Party.
Texas Gov. Rick Perry memorably likened Bernanke’s quantitative-easing program to treason and suggested that the chairman would be treated “pretty ugly down in Texas.”
GOP presidential nominee Mitt Romney pledged not to renominate Bernanke — a registered Republican first appointed by President George W. Bush.
Last summer, the House passed a bill to “audit” the Fed’s monetary policies, a longtime goal of Paul’s. While it was a seemingly modest proposal, Bernanke and others warn it would seriously undermine the central bank’s prized independence and is intended to bully the Fed into ending its support for the economy.