Bernanke Acted in the Nation's Interest

Federal Reserve critics are upset over revelations that the Fed approved loans to foreign entities as part of its effort to combat the financial crisis.

Some have even suggested Fed Chairman Ben Bernanke resign over the loans to foreign banks and other parties. But there is no good reason for Chairman Bernanke to step down right now and many good reasons for him to stay.

It's true that the recent revelations, in addition to other Fed activities over the last three years, have given the central bank a black eye to some. As my American Enterprise Institute colleague and former Fed official Vincent Reinhart put it recently, "The caricature of the Fed is that it was shoveling money to big New York banks and a bunch of foreigners, and that is not conducive to its long-run reputation."

No doubt, Fed officials should work to ensure a sterling reputation. Public confidence is important to the Fed being able to do its job well. If nothing else, the Fed will perform poorly if buffeted by undue political pressure.

So ensuring that the Fed has the confidence of the American people and their elected representatives is a must. But some perspective is in order here.

For starters, no one asserts that the Fed has done anything illegal or improper. While lending to foreign firms may strike some as distasteful, it is permitted under the Fed's powers. The Federal Reserve has very broad discretion to act as it sees fit under its dual mandate of ensuring stable prices and maximizing employment.

What's more, while Chairman Bernanke (and his predecessor at the Federal Reserve Alan Greenspan) can be faulted for not anticipating the severity of the global financial crisis, he deserves some credit for responding to the downturn in a responsible and defensible manner.

While a good case can be made that the Fed did not react swiftly enough when conditions began to deteriorate, once it was painfully apparent how severe the crisis was, the Fed took concrete action to stem the panic.

And while its most recent round of aggressive action - its second so-called "quantitative easing," or QE II - was widely criticized at the time, it is clear that it helped stabilize markets when European financial sector took a turn for the worse in 2010.

It's important to remember that, for better or worse, the U.S. dollar is the world's reserve currency. The United States benefits greatly from this state of affairs; however it also places special responsibilities and obligations of the Federal Reserve and complicates its policymaking.

The Federal Reserve is often called the "lender of last resort." But what does it mean to be lender of last resort when the U.S. currency is the world's reserve currency and when a global financial panic erupts? At a bare minimum it means the Fed cannot simply ignore what is happening with global banks and other foreign entities. While this may make many Americans uneasy, it is not a fact that is easily wished away at a moment's notice.

Given its enormous influence over the American economy, it is hardly surprising that the Federal Reserve inspires such passionate political feelings. But the financial crisis that began in the United States was a result of years of misguided federal housing policy. Chairman Bernanke responded as best he could given the financial turmoil that resulted from the collapse of the housing bubble.

Chairman Bernanke is not perfect. But he deserves some credit for helping stabilize the financial sector at a time of unprecedented global financial instability.

Nick Schulz is a the Editor and Chief of The American.

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About the Author

 

Nick
Schulz

  • Nick Schulz was the DeWitt Wallace Fellow at AEI and editor-in-chief of American.com, AEI's online magazine focusing on business, economics, and public affairs. He writes the “Economics 2.0” column for Forbes.com where he analyzes technology, innovation, entrepreneurship, and economic growth. He is the co-author with Arnold Kling of From Poverty to Prosperity: Intangible Assets, Hidden Liabilities, and the Lasting Triumph Over Scarcity. He has been published widely in newspapers and magazines around the country, including The Washington Post, The Wall Street Journal, the Los Angeles Times, USA Today, and Slate.


  • Phone: 202-862-5911
    Email: nick.schulz@aei.org

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