Crisis tests Bernanke; most see him up to task

CHICAGO (Reuters) - The future job prospects of Federal Reserve Chairman Ben Bernanke could hang in the balance as the U.S. central bank wrestles with the biggest global financial market crisis in decades.

Chairman of the Federal Reserve Ben Bernanke speaks at the National Community Reinvestment Coalition luncheon in Washington March 14, 2008. REUTERS/Kevin Lamarque

A renowned scholar of the economic causes of financial crises, Bernanke, the soft-spoken former Princeton economics professor, now has a chance to make history of his own.

“This is like a 1980s savings and loan situation with three more zeros on the end of it,” said Doug Roberts, chief investment strategist with Channel Capital Research, referring to large-scale mortgage-related losses on Wall Street books.

A straw poll of Fed watchers suggested many think Bernanke is doing a good job cleaning up a mess years in the making, from the bursting of a housing bubble that took a half a decade to build to a related implosion in subprime mortgage lending.

Bernanke’s four-year term as chairman expires in January 2010. His future could depend as much on the outcome of the November U.S. presidential election as on the Fed’s success in staving off or cutting short a recession.

The Fed, under Bernanke’s guidance, has pulled out the stops in the past couple weeks to push liquidity into shaky credit markets. It has also cut benchmark lending rates from 5.25 percent to 3.0 percent since mid-September, with another big rate cut on tap at a policy meeting on Tuesday.

A number of prominent economists, including National Bureau of Economic Research President Martin Feldstein, think the Fed was too slow to respond to the global credit crisis that erupted in August last year and has been swirling ever since.

Republican presidential candidate John McCain, referring to the Fed’s aggressive interest rate cuts in January, said in February he “would have liked to have seen those rate cuts earlier.” However, his top economic adviser said on Monday the Arizona Senator had “complete confidence” in Bernanke.


Ethan Harris, economist at Lehman Brothers, said in a research note that Bernanke has taken a criticism from those who think the Fed has cut rates too much, and those that think they’ve eased too little.

But Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ, gave Bernanke “very high marks” for the credit-market rescue efforts now under way.

“He has done a good job at marshaling the forces and attacking the problems. If there’s any finger-pointing, you could point them at the person who left the Fed in February of 2006,” Rupkey said, referring to former Fed Chairman Alan Greenspan.

Others commended Bernanke’s creative approach and innovation solutions to a liquidity crisis that has undercut the impact of traditional monetary policy tools.

“The Fed has been trying to distinguish between macroeconomic risks (for which it lowers the federal funds rate) and liquidity concerns in financial markets,” said Thomas Lam, senior Treasury economist at United Overseas Bank Group in Singapore.

Thus, the birth of the Term Auction Facility, Term Securities Lending Facility, Primary Dealer Credit Facility and term repurchase agreements -- a new set of policy tools that should allow the Fed, over time, to make headway.

“The moves Bernanke has made with these TAFs are the biggest innovation at the Fed in 30 to 40 years,” said Roberts.

Analysts said Bernanke has been guided by his historical knowledge, especially of the Great Depression of the 1930s.

“The Bernanke Fed’s actions to date are entirely consistent with the view that in the face of the credit crunch ... keeping the monetary spigots wide open and the banking system as liquid as possible offers the best chance of addressing systemic risk,” said Ray Attrill, analyst at 4CAST Ltd.

The Fed’s steps should gain traction over time, said economists at Deutsche Bank.

“We have heard many investors say that the Fed’s rate cut actions are not working and that other measures need to be taken ... When the economy bottoms out and investors believe that the financial crisis is not spreading, there will be some light at the end of the tunnel,” they said.

If anything, Bernanke could take a higher public profile during these days of crisis, according to Rupkey.

“People see the Fed chairman as the nation’s chief economist, but it seems like the White House and (Treasury Secretary Henry) Paulson are taking the lead,” he said.