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After two years at helm, Bernanke mettle tested by crisis
2008-01-28
Just two years on the job at the helm of the Federal Reserve, Ben Bernanke faces a test of his mettle with the threat of recession and wildly volatile financial markets complicating his task. Bernanke, 54, who took over as Fed chairman from Alan Greenspan in February 2006, confronts what some say is the nation's worst economic crisis in decades, possibly since the Great Depression. Bernanke "has done a great job given the cards he has been dealt," said Scott Brown, chief economist at Raymond James & Associates. The US central bank's mission of containing inflation and maximizing employment is being tested by the economic and market swoon. "Greenspan had falling energy prices through most of his tenure, while Bernanke hasn't been that lucky," said Brown. John Lonski, chief economist at Moody's Investors Service, said Bernanke faces a complex task both in terms of policy and communication with financial markets. "This is the first crisis he's had to deal with, and he's learning," Lonski said. "Bernanke's great, but he appears to have been a little bit slow at recognizing the breadth of the difficulties of troubles in the subprime mortgage market." The crisis in the subprime sector, where loans are given to people with poor credit, roiled financial markets in August and has led to a global credit crunch. Bernanke, a former Princeton University economist and one of the leading scholars of the Great Depression, is in some ways still haunted by his moniker "Helicopter Ben," stemming from comments he made as a Fed official in 2002 when he mentioned the possibility of dropping money from helicopters to avert deflation. Some say Bernanke has been too quick to react to financial markets, potentially setting a bad precedent. Joel Naroff of Naroff Economic Advisors said, "Unfortunately, Mr. Bernanke seems to act strongly only when pushed to the wall." Naroff said Bernanke stumbled twice in the past five months -- first in August when downplaying the extent of the subprime problem only to subsequently announce a discount rate cut because of deteriorating credit conditions, and later by using a go-slow posture on rates before the emergency cut on January 22. Michelle Meyer, economist at Lehman Brothers, gave Bernanke a mixed review. "In terms of policy, Bernanke has done a good job," she said. Meyer said the Fed's emergency rate cut last Tuesday of 0.75 percentage points, a bold move that was the largest reduction in over two decades, was "a good thing" and was "quite successful at helping the markets." But she said Bernanke Fed has fallen short in communicating with markets, leading to some uncertainty. "He has done a great job at communicating his view, but the different opinions expressed by (other Fed) officials was in many ways confusing." While Bernanke appears to trying to be more democratic and transparent, Meyer said this leads to mixed messages that can be difficult for markets to handle. Lonski said that by trying to be more open and transparent, Bernanke may be hurting himself. "I don't know if it really pays to have a central bank chief speak all that frequently to the public," he said. Lonski said the comments "can be open to so much interpretation that sometimes it may have the effect of reducing policy flexibility." Paul Ferley, economist at RBC Financial Group, said Bernanke is "caught up in a tough situation" in view of the precedents set in past crises in recent decades. Some blamed Greenspan in 1991 for failing to act quickly enough to stave off recession; in contrast critics say the Fed may have done too much during the 1998 financial crisis. "In other financial crises the Fed has pumped in too much liquidity where the stresses proved to be short-lived, and that has prompted the Fed to be more guarded," said Ferley, who noted that data as late as the third quarter suggested the US economy was showing resilience. "This crisis is proving more long-lived than the ones in the past, and that may have prompted some initial hesitancy. It's a tough environment for the Fed to make a call," he said.
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