Defending Ben

Plenty of commentators have criticised Time's selection of Ben Bernanke as Person of the Year. On reflection, lauding him as a hero because the US had a recession rather than depression might not seem so crazy.

Salon.com
If you had watched angry senators, from arch-conservative Republican Jim DeMint to arch-liberal Independent Bernie Sanders, grill Federal Reserve Chairman Ben Bernanke during his confirmation hearing earlier this month, you would be excused for raising your eyebrows at the news that Time magazine would declare him 2009's Person of the Year. Republican Senator Jim Bunning looked Bernanke straight in the eye and called him the "definition of moral hazard"! Here's a man who by his own admission failed to anticipate how bad the financial crisis would become – and who ends up saluted as the hero who saved the global economy. Tea-partiers and progressives are both undoubtedly having fits.

But Michael Grunwald's looooooong profile of Bernanke does a pretty decent job of defending and explaining Time's choice. Whether you nod your head or snort in disagreement depends on one question, above all else: Do you believe that Bernanke's aggressive actions as Fed chairman prevented a second Great Depression?

If the answer is yes, then it is a no-brainer. Of course he should be Person of the Year. Heck, give him person of the decade, or 21st century. There is much unhappiness in both conservative and liberal quarters about the state of the economy, about unemployment, deficits, compromises on healthcare and regulatory reform, bailouts and foreclosures and all the rest. But nothing we are looking at right now is anywhere near as bad as another full-fledged depression would be.

As Bernanke told Time, "the markets were in anaphylactic shock" (and I'm betting he's the first winner of the Person of the Year award who is comfortable with using the word "anaphylactic" to describe an economy in a state of severe allergic reaction to the point of near paralysis and death). A year ago at this time, anyone who understood the depth of seriousness of what was happening had a hard time not feeling the kind of fear that makes it hard to sleep at night. 2009 could have become one of the worst years, economically speaking, in U.S. history.

So Bernanke, who, as everyone knows by now, made his bones as an academic scholar by studying the Great Depression, went into overdrive:

From Time:

...[H]e conjured up trillions of new dollars and blasted them into the economy; engineered massive public rescues of failing private companies; ratcheted down interest rates to zero; lent to mutual funds, hedge funds, foreign banks, investment banks, manufacturers, insurers and other borrowers who had never dreamed of receiving Fed cash; jump-started stalled credit markets in everything from car loans to corporate paper; revolutionized housing finance with a breathtaking shopping spree for mortgage bonds; blew up the Fed's balance sheet to three times its previous size; and generally transformed the staid arena of central banking into a stage for desperate improvisation. He didn't just reshape US monetary policy; he led an effort to save the world economy.

And guess what? We didn't plummet headlong into a depression. At least not yet, we haven't.

But of course we don't know, and we will never know, what would have happened if Bernanke had sat tight. And of course there were many things that could have been done a lot better, particularly the bailout of AIG, and the failure to push through real regulatory reform immediately, when it might have had a chance to succeed. And then there's the long Greenspan-Bernanke legacy of light supervision and easy money, which created some of the basic conditions for the financial crisis in the first place. All that explains why Bernanke is not being regarded as a hero in Congress, and why popular dissatisfaction with the Fed is sky high. With unemployment over 10 per cent, we're looking for someone to blame. Bernanke, the most powerful person in the world when it comes to executing economic policy, is an obvious choice. And there is a growing chorus on the left that accuses Bernanke of becoming complacent now that the worst is past, and not being aggressive enough on the unemployment front.

Still. As Grunwald writes, "It's no consolation to the one in six Americans who are underemployed, the one in seven homeowners with a delinquent mortgage or the one in eight families on food stamps, but there would be far more joblessness, foreclosures and hunger were it not for Ben Bernanke."

I think most economists, whether conservative or liberal, would agree with this assumption. It's a tough call to make, lauding someone as a hero because of something that didn't happen, but upon reflection, it doesn't seem all that crazy.