x Abu Dhabi, UAEWednesday 26 July 2017

Some central bankers cannot buy an even break

Say you are the head of a large central bank. With a Keynesian flourish, you rescue the global economy from a second Great Depression, however belatedly you saw it coming.

Say you are the head of a large central bank. With a Keynesian flourish, you rescue the global economy from a second Great Depression, however belatedly you saw it coming, by pushing interest rates down to zero and keeping them there. You work closely with your colleagues overseas to sustain a fragile recovery on two continents. You purchase more than US$1 trillion (Dh3.67tn) in unwanted financial assets to keep the economy from tanking again. You ensure enough liquidity in the overnight credit markets for companies to make their payrolls and other commitments and, oh yes, you are named Time magazine's Man of the Year.

Yet still there are people out there who want to run Ben Bernanke out of his corner office. From the political right, the Federal Reserve chairman is being attacked for buying short-term economic stability with a sea of debt at the expense of long-term inflation and a possible crippling of the dollar. From the left, he is harangued for coddling Wall Street while not doing enough to promote job growth.

There is no end in sight for the former Princeton University economist. With his reappointment all but certain to be approved by Congress and with the fortunes of Wall Street and Main Street shamefully divergent, America's soft-spoken central banker can now look forward to another four years of being used as a populist pinata. This column, too, has been tough on Mr Bernanke. After all, it was not until August 2007, despite cascading housing sales, rising foreclosure rates and the growing radioactivity of the bundled-asset market, that he recognised the global credit crunch for what it was.

Together with the US Treasury secretary Timothy Geithner he perplexed and outraged Wall Street by bailing out the egregiously mismanaged American International Group and the investment bank Bear Stearns while allowing the relatively stable Lehman Brothers to fail. Global credit markets swooned as a result. Having arrested the economy's tailspin through a blur of expansionist monetary policy, Mr Bernanke then lined up behind a White House proposal to broaden the new powers he had acquired in his emergency role as lender of last resort.

In particular, the plan would have allowed the Fed to pre-emptively act against what it defined as unacceptable risk by, among other things, forcing highly geared banks to increase their capital reserves or unwind debt altogether. Such authority, it was argued, would force lenders into managing their balance sheets more conservatively and prompt some of the larger banks to shrink themselves. Wall Street bucked back. Why, bankers and investors argued, should Washington meddle with a sound and simple Fed charter, to conduct monetary policy, supervise and regulate the nation's banks and settle international payments, that had been ably carried out since it was established in 1913? What matters one or two major economic meltdowns every century or so?

Then, just when Wall Street was getting used to the idea of a super-regulator, Congress managed to pull off the impossible by making the Fed look like the lesser of two evils. Last week, the House of Representatives passed a bill that would submit Fed functions, including its decisions on interest rates, emergency lending, dealings with other central banks and major market interventions, to routine public audits.

Mr Bernanke and his allies say this would compromise the bank's independence and politicise its policy decisions. A Senate version would strip the Fed of its supervisory and regulatory roles which, bank experts opine, would greatly erode its ability to successfully manage an economic crisis. Such is the way of Washington. Following the September 11 attacks, rather than simply shake up the national security agencies that defeated Nazi Germany and Imperial Japan in a mere four years, it created a massive new bureaucracy called the Department of Homeland Security, which to this day no one really understands or seems to care about.

Similarly, in response to the inevitable bursting of an extended asset bubble, legislators are seeking to emasculate one of the world's most respected and independent central banks and appropriate its authority. The campaign is led in part by a Texas politician named Ron Paul, a failed presidential candidate who wants to re-establish the gold standard, do away with paper money and abolish the US national pension fund. The title of his bestselling book says it all: End the Fed.

The Second World War metaphor is illustrative in another way. As with the war, which enveloped Washington when it was half asleep and deep in denial, the global credit collapse caught the world's most powerful banker scandalously unaware. But like his wartime predecessors, Mr Bernanke pivoted on a dime and pulled off an admirable bit of triage. As Time put it, Mr Bernanke ensured that this year was "a period of weak recovery rather than catastrophic depression".

That is as good a reason as any for being named Man of the Year and it certainly makes for a strong case against Congress manhandling the Fed. Why fix something that, if slow to function, does not appear to be broken? @Email:sglain@thenational.ae