THE US is weathering the worst financial crisis since the Great Depression, thanks in some measure to the skill and judgment of Ben Bernanke. As chairman of the Federal Reserve, America’s central bank, he has helped pull the US economy back from the brink of depression and prevented a collapse of the global financial system. President Barack Obama has acknowledged that and nominated Mr Bernanke to a second term as Fed chairman.
Wisely, Mr Obama has opted for continuity rather than change as the US economy shows early signs of recovery. To take any other decision would have created uncertainty about the future direction of US economic policy, upset financial markets and unsettled foreign investors such as China on whom America greatly relies to finance its soaring budget deficit.
Mr Bernanke, who was appointed by George W Bush, is a former Princeton University economics professor and acknowledged expert on the Great Depression. His expertise in this and other specialist areas of economics has proved important. Certainly, no Fed chairman has been intellectually better equipped to face the challenges presented by the worst economic downturn since the 1930s. The academic expert on the causes of the Great Depression became, as Mr Obama said, “part of a team responsible for preventing another”.
One lesson Mr Bernanke has learned from economic history is that where policy-makers respond slowly and inadequately to financial crises – as in the 1930s – delay can mean the fiscal costs are often greater, and the economic consequences much worse. As Fed chairman, he moved quickly and successfully to prevent a recession becoming a depression by tackling deflation. The Fed cut interest rates close to zero last December and engaged in quantitative easing – printing money by buying government bonds. It loaned to companies previously ineligible for central bank credit and rescued some big firms that were in difficulty.
While these initiatives have helped to stabilise markets, they have also left Mr Bernanke open to criticism. His detractors charge that he has put taxpayers’ money at risk and claim the Fed’s efforts to boost demand will have serious inflationary consequences in the longer term. Having pumped so much money into the economy, the challenge facing Mr Bernanke in his second term is how to manage and time the Fed’s exit strategy: too quickly and he chokes off economic recovery; too slowly, and he causes inflation to rise.