Federal Reserve Chairman Ben Bernanke has taken a lot of heat recently.
Critics have attacked him for easing monetary policy too slowly in the face of a looming financial and economic disaster.
Others complain that the Fed has eased too much, bailing out fat cats on Wall Street when financial markets and the economy could and should have worked out their own problems.
But a strong case can be made that Bernanke represents a creative and steadying force in keeping financial markets and the economy from suffering a catastrophic meltdown.
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"Clearly they [the Fed] have gotten some stability,” Keith Hembre, a former Fed researcher and chief economist at FAF Advisors in Minneapolis, tells Bloomberg.
"You have to stand back and say, for the time being, it looks to be a pretty successful combination of moves that have worked.”
When the Fed, under Bernanke’s direction, started injecting liquidity into the banking system in August, the financial and economic situation looked a lot less dire. It appeared then that the problem consisted simply of a housing slump and falling demand for subprime mortgage-backed bonds.
When it became clear that the entire credit market and economy were at risk, Bernanke took stronger steps.
He began with interest rate cuts in September. Remember, it was only August that things first seemed shaky to even the most prescient market watchers.
The Fed has since sliced three full points off the federal funds rate in six months, an unusual speed for rate reductions of that magnitude.
Bernanke then ran from credit market to credit market as they seized up, pouring on measured doses of liquidity. These moves culminated recently with the bailout of investment bank Bear Stearns and the decision to let securities firms borrow from the Fed’s discount window, a privilege normally granted only to commercial banks.
David Jones, a veteran Wall Street economist, thinks opening the discount window to investment banks was "an act of genius.”
"That turned out to be the only thing to convince the markets that the Fed was ready to backstop them completely,” Jones tells MoneyNews.
"It can create infinite emergency liquidity and pump it directly into illiquid assets through the discount window.”
To further boost ailing financial firms, Bernanke’s Fed has allowed them to use their most risky securities as collateral for loans from the Fed.
Some critics, like investment guru Jim Rogers, maintain that the Fed has overreacted.
"Bernanke gives more money to Bear Stearns, so its executives can keep driving around in their Maseratis,” Rogers griped to Bloomberg. "Who gave him the authority to destroy the dollar, to destroy the American economy?”
It’s hard to know exactly what would have happened if the Fed allowed Bear Stearns to go under. But given that Bear was a major player in clearing trades and was a counterparty in large transactions with other financial institutions, the result could have been catastrophic.
As the Fed began its bailout of Bear Stearns, veteran bank analyst Richard Bove of Punk, Ziegel noted that Bear "has the potential of bringing down the whole market.”
Bove told the Associated Press, "this is the crescendo of the crisis.”
So, perhaps, Bernanke deserves more praise than criticism.
"There are things the Fed, mostly under Greenspan, could have done before the crisis,” Jeff Frankel, a Harvard economist who served in the Clinton administration, tells MoneyNews.
"But what Bernanke has done, though unprecedented, certainly isn’t a sign of panic, as some have claimed. It’s a reflection of his confidence and calmness.”
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