Bernanke's Monetary Policy: Why a Little Inflation is Good

In the November 12, 2010 TIME magazine article "Bernanke's Bum Rap: What's Wrong with a Little Inflation?," Michael Grunwald provides a defense for Fed Chairman Ben Bernanke's monetary policy.

Ben Bernanke teaches at Jacksonville University

Ben Bernanke, the Chairman of the Board of Governors of the Federal Reserve System, came to Jacksonville University on November 5, 2010 to be a guest lecturer in the Money and Banking course. He spent most of the time answering questions from students. The 45-minute video of the class is available from C-SPAN.

Lax Oversight Caused Crisis, Bernanke Says

In the January 4, 2010 New York Times article "Lax Oversight Caused Crisis, Bernanke Says," Catherine Rampell reports that the Federal Reserve chairman blames regulatory failure for the economic decline of recent years:

ATLANTA — Regulatory failure, not low interest rates, was responsible for the housing bubble and subsequent financial crisis of the last decade, Ben S. Bernanke, the Federal Reserve chairman, said in a speech on Sunday.

Mr. Bernanke’s remarks, perhaps his strongest language yet assessing the roots of the financial crisis, came as he awaited confirmation for a second term as Fed chairman and as he sought greater regulatory authority from Congress.

“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,” Mr. Bernanke said in remarks to the American Economic Association.

Mr. Bernanke, addressing accusations that the Fed contributed to the financial crisis, argued in his speech that the interest rates set by the central bank from 2002 to 2006 were appropriately low. He was a member of the board of governors of the Federal Reserve system for most of that period.

“When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment,” Mr. Bernanke said.

Some lawmakers and economists have argued that the Fed kept interest rates too low in the aftermath of the 2001 recession, making loans cheap and feeding reckless lending by banks.

“I strongly disapprove of some of the past deeds of the Federal Reserve while Ben Bernanke was a member and its chairman, and I lack confidence in what little planning for the future he has articulated,” Richard Shelby of Alabama, the Senate Banking Committee’s top-ranking Republican, said in December during a committee vote on Mr. Bernanke’s reconfirmation.

The Senate Banking Committee approved Mr. Bernanke’s renomination last month. He is expected to be reconfirmed by the full Senate before his current term expires on Jan. 31, despite some vocal opposition.

Even if confirmed, however, Mr. Bernanke is likely to face further political challenges over financial regulatory reform and the governance of the Fed.

The House passed a provision to audit the Fed as part of a larger financial reform package last month. Representative Ron Paul, Republican of Texas, has been carrying the banner for such an audit for decades.

The debate over what caused the financial crisis comes as the economy shows signs of recovery and as Congress considers a wide-ranging overhaul of financial regulation.

In a separate talk on Sunday at the conference, Donald L. Kohn, the Fed’s vice chairman, listed several measures the central bank was likely to take to shed the problematic assets it took from banks during the financial crisis. He said “the appropriate use and sequencing of these tools is under active discussion” by regulators.

But, as members of the rate-setting Federal Open Market Committee said last month, he noted that the fragile economic recovery and weak job market would “warrant exceptionally low” interest rates “for an extended period.”

Mr. Bernanke, in his talk, echoed his previous calls for Congress to grant the Fed greater oversight powers over the financial system, like the ability to help monitor and regulate against “systemic risk.”

The implication is that the Fed believes that regulation and supervision, rather than tighter monetary policies, should be used to address asset bubbles in the future.

Mr. Bernanke has pointed to the Fed’s extraordinary efforts to stem the crisis, including the creation of new lending vehicles to banks and a reduction of bank-to-bank interest rates to virtually zero, as evidence that the Fed has a firm grasp of what the economy needs. The Fed’s handling of the crisis has been widely praised by economists.

The Treasury and other government agencies already have supervisory power over parts of the financial system, but so, too, does the Federal Reserve.

In his talk on Sunday, Mr. Bernanke acknowledged as much, rattling off a list of regulatory efforts the bank made to address nontraditional mortgages and poor underwriting practices.

But, he said, “these efforts came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble.”

Fed Chairman Bernanke argues for increased regulation of financial markets

In the January 3, 2010 article "Fed: Regulation 1st defense against speculation," Associated Press economics writer Jeannine Aversa reports that Federal Reserve Chairman Ben Bernanke argues increased regulation of financial markets is necessary to avoid future economic crises:

WASHINGTON – Stronger regulation is the best way to prevent financial speculation from getting out of hand and throwing the economy in a new crisis, Federal Reserve Chairman Ben Bernanke said Sunday.

But he didn't rule out higher interest rates to stop new speculative investment bubbles from forming.

The Fed chief's remarks were his most extensive on the subject since the housing market's tumble led to the gravest financial crisis since World War II — and perhaps the worst in modern history, in his view.

Critics blame the Fed for feeding that speculative boom in housing by holding interest rates too low for too long after the 2001 recession.

But Bernanke, in a speech to the American Economic Association's annual meeting in Atlanta, defended the central bank's actions. Extra-low rates were needed to get the economy and job creation back to full throttle after the Sept. 11 attacks and accounting scandals that rocked Wall Street, he said.

Bernanke said the direct links were weak between super-low interest rates and the rapid rise in house prices that occurred at roughly the same time. The stance of interest rates during that period "does not appear to have been inappropriate," he said.

Still, the enormous economic damage from the housing bust — the longest and deepest recession since the 1930s and double-digit unemployment — shows how important it is to guard against a repeat, Bernanke said.

"All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs," he said.

"However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool," he added.

Speculative excesses are not easy to pinpoint in their early stages, he said, and using higher interest rates to combat them can hurt the economy.

For instance, rate increases in 2003 and 2004 to constrain the housing bubble could have "seriously weakened" the economy just when a recovery from the 2001 recession was starting, he said.

To help the country emerge from that recession, the Fed under then-Chairman Alan Greenspan cut its key bank lending rate from 6.5 percent in late 2000 to 1 percent in June 2003. It held rates at what was then a record low for a year. It's this action that critics blame for feeding the housing speculation.

Bernanke, however, said the expansion of complex mortgage products and the belief that housing prices would keep rising were the keys to inflating the housing bubble. As a result, lenders made home loans to people to finance houses they couldn't afford.

The Fed in 2005 did crack down on dubious mortgage practices and the type of mortgages blamed for the crisis. Bernanke acknowledged that these efforts "came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble."

Still, Bernanke said the lesson learned from the crisis isn't that regulation is ineffective but that regulation "must be better and smarter."

However, the Fed's regulatory lapses and its failure to spot problems leading up to the crisis have spurred efforts in Congress to rein in the Fed's powers and subject it to more oversight. Bernanke, who has been tapped by President Barack Obama to a second term as Fed chief, faces a contentious confirmation in the Senate.

During a brief question-and-answer session after his speech, Bernanke didn't talk about current economic conditions or the future course of interest rates.

When the Fed meets later this month, it is expected to keep its key bank lending rate at a record low, near zero. The big question is whether the Fed will provide clues at that time about when it will need to start raising rates to prevent inflation from taking off.

Some analysts worry that the Fed, which has held rates at record lows since December 2008, could be fueling a new speculative period and potentially a future economic crisis.

Looking back, Bernanke suggested the Fed might have underestimated the full force of the recession, which struck in December 2007. "It turns out the recession was worse than we thought at the time," he said.

After four straight losing quarters, the economy finally grew from July through September last year. Much of that growth, though, came from government-supported spending on homes and cars. There's concern about how vigorous the recovery will be once government supports are removed later this year.

Ben Bernanke - TIME magazine's Person of the Year - 2009

In the December 16, 2009 TIME article "Ben Bernanke," Michael Grunwald describes the man who the magazine named Person of the Year for 2009:

A bald man with a gray beard and tired eyes is sitting in his oversize Washington office, talking about the economy. He doesn't have a commanding presence. He isn't a mesmerizing speaker. He has none of the look-at-me swagger or listen-to-me charisma so common among men with oversize Washington offices. His arguments aren't partisan or ideological; they're methodical, grounded in data and the latest academic literature. When he doesn't know something, he doesn't bluster or bluff. He's professorial, which makes sense, because he spent most of his career as a professor.

He is not, in other words, a typical Beltway power broker. He's shy. He doesn't do the D.C. dinner-party circuit; he prefers to eat at home with his wife, who still makes him do the dishes and take out the trash. Then they do crosswords or read. Because Ben Bernanke is a nerd.

He just happens to be the most powerful nerd on the planet.

Bernanke is the 56-year-old chairman of the Federal Reserve, the central bank of the U.S., the most important and least understood force shaping the American — and global — economy. Those green bills featuring dead Presidents are labeled federal reserve note for a reason: the Fed controls the money supply. It is an independent government agency that conducts monetary policy, which means it sets short-term interest rates — which means it has immense influence over inflation, unemployment, the strength of the dollar and the strength of your wallet. And ever since global credit markets began imploding, its mild-mannered chairman has dramatically expanded those powers and reinvented the Fed.

Professor Bernanke of Princeton was a leading scholar of the Great Depression. He knew how the passive Fed of the 1930s helped create the calamity — through its stubborn refusal to expand the money supply and its tragic lack of imagination and experimentation. Chairman Bernanke of Washington was determined not to be the Fed chairman who presided over Depression 2.0. So when turbulence in U.S. housing markets metastasized into the worst global financial crisis in more than 75 years, he conjured up trillions of new dollars and blasted them into the economy; engineered massive public rescues of failing private companies; ratcheted down interest rates to zero; lent to mutual funds, hedge funds, foreign banks, investment banks, manufacturers, insurers and other borrowers who had never dreamed of receiving Fed cash; jump-started stalled credit markets in everything from car loans to corporate paper; revolutionized housing finance with a breathtaking shopping spree for mortgage bonds; blew up the Fed's balance sheet to three times its previous size; and generally transformed the staid arena of central banking into a stage for desperate improvisation. He didn't just reshape U.S. monetary policy; he led an effort to save the world economy.

No wonder his eyes look tired.

The last Fed chair, Alan Greenspan, inspired an odd cult of personality. Bernanke hoped to return the Fed to dull obscurity. But his aggressive steps to avert doomsday — and his unusually close partnerships with Bush and Obama Treasury Secretaries Henry Paulson and Timothy Geithner — have exposed him and his institution to criticism from all directions. He's Bailout Ben, the patron saint of Wall Street greedheads, or King Ben, the unelected czar of a fourth branch of government. He's soft on inflation, bombarding the country with easy money, or soft on unemployment, ignoring Main Street's cries for even more aggressive action. Bleeding-heart liberals and tea-party reactionaries alike are trying to block his appointment for a second four-year term. Libertarian Congressman Ron Paul is peddling a best seller titled End the Fed. And Congress is considering bills that could strip the Fed of some of its power and independence.

So here he is inside his marble fortress, a technocrat in an ink-stained shirt and an off-the-rack suit, explaining what he's done, where we are and what might happen next.

He knows that the economy is awful, that 10% unemployment is much too high, that Wall Street bankers are greedy ingrates, that Main Street still hurts. Banks are handing out sweet bonuses again but still aren't doing much lending. Technically, the recession is over, but growth has been anemic and heavily reliant on government programs like Cash for Clunkers, not to mention cheap Fed money. "I understand why people are frustrated. I'm frustrated too," Bernanke says. "I'm not one of those people who look at this as some kind of video game. I come from Main Street, from a small town that's really depressed. This is all very real to me."

But Bernanke also knows the economy would be much, much worse if the Fed had not taken such extreme measures to stop the panic. There's a vast difference between 10% and 25% unemployment, between anemic and negative growth. He wishes Americans understood that he helped save the irresponsible giants of Wall Street only to protect ordinary folks on Main Street. He knows better than anyone how financial crises spiral into global disasters, how the grass gets crushed when elephants fall. "We came very, very close to a depression ... The markets were in anaphylactic shock," he told Time during one of three extended interviews. "I'm not happy with where we are, but it's a lot better than where we could be."

Bernanke also has thoughts about the economy's future — and we'll get to them soon. First, though, we should explain why his face is on the cover of this issue. The overriding story of 2009 was the economy — the lousiness of it, and the fact that it wasn't far lousier. It was a year of escalating layoffs, bankruptcies and foreclosures, the "new frugality" and the "new normal." It was also a year of green shoots, a rebounding Dow and a fragile sense that the worst is over. Even the big political stories of 2009 — the struggles of the Democrats; the tea-party takeover of the Republicans; the stimulus; the deficit; GM and Chrysler; the backlash over bailouts and bonuses; the furious debates over health care, energy and financial regulation; the constant drumbeat of jobs, jobs, jobs — were, at heart, stories about the economy. And it's Bernanke's economy.

In 2009, Bernanke hurled unprecedented amounts of money into the banking system in unprecedented ways, while starting to lay the groundwork for the Fed's eventual return to normality. He helped oversee the financial stress tests that finally calmed the markets, while launching a groundbreaking public relations campaign to demystify the Fed. Now that Obama has decided to keep him in his job, he has become a lightning rod in an intense national debate over the Fed as it approaches its second century.

But the main reason Ben Shalom Bernanke is TIME's Person of the Year for 2009 is that he is the most important player guiding the world's most important economy. His creative leadership helped ensure that 2009 was a period of weak recovery rather than catastrophic depression, and he still wields unrivaled power over our money, our jobs, our savings and our national future. The decisions he has made, and those he has yet to make, will shape the path of our prosperity, the direction of our politics and our relationship to the world.

The Man from Main Street

Before George W. Bush brought him to Washington, Bernanke's only political experience was on his local school board. His friends didn't even know he was a Republican. His only leadership experience was chairing Princeton's economics department; he liked to joke that his major decisions involved what type of bagels to order for faculty meetings. Even after he took over the Fed, he never expected all this drama — which is to say he utterly failed to foresee the global financial implosion. But when credit markets disintegrated, he had the ideal background to respond. "It's like a novel," marvels Fed governor Daniel Tarullo. "It was the right man in the right place at the right time." It was as if his entire life had been preparation for this crisis.

Ben Bernanke was the smartest kid in Dillon, S.C., a small farming town on the Little Pee Dee River, which smelled like tobacco. His mother Edna was a teacher; his father Phil was a pharmacist. Ben inherited their love of learning. "He always wanted me to read to him," Edna recalls. "Then one day he said, Hey, I can read myself!'" He skipped first grade. He won the state spelling bee in sixth grade, though he botched edelweiss at the nationals in Washington, presumably because The Sound of Music hadn't made it to Dillon. In high school, he taught himself calculus.

It was the Depression that lured the family to Dillon. Phil's father Jonas Bernanke, an Austro-Hungarian army officer in World War I, had been struggling in the drugstore business in New York City after the stock-market crash of 1929. Credit was tight. Customers were broke. So when he saw an ad for a pharmacy for sale in Dillon, he decided to make a new start in the South. The Jay Bee Drug Co., named for his initials, became a local fixture, an old-fashioned family business on, yes, Main Street.

Today Bernanke tends to romanticize Dillon, emphasizing his Main Street middle-class roots. He says his summer jobs working construction at a hospital and waiting tables at the South of the Border tourist trap helped him appreciate working-class values. But as a kid, he couldn't wait to get out. "Me and Dillon," he sighs. "It's a funny psychodrama." The Bernankes were outsiders, an observant Jewish family in a tight-knit Christian community where social life revolved around church, running one of the few businesses that would extend credit to blacks. Dillon's schools were segregated until Bernanke's senior year, inspiring him to write a Remember the Titans–style novel about an integrated football team when he was a teenager. Once, his house was egged after he ate dinner with a black friend named Kenneth Manning at the local Shoney's.

Really, though, Bernanke wanted out of Dillon not because it was hostile but because it was confining. "It was a provincial Southern town, and anybody with any sense could see that Ben was unbelievably bright," says his old friend Manning, another restless intellect, who attended college and graduate school at Harvard and is now a professor at MIT. As a boy, Ben wrote poetry about a humble but clever snail who outwits a stuck-up rabbit. ("You shouldn't be so proud of speed. It's a very bad habit!") In a culture where the quarterback was king, Bernanke was an awkward geek who played alto sax in the marching band. It was Manning who showed the way out, telling him about Harvard, pestering him to apply. "I didn't want him to waste all that talent," Manning says.

At Harvard, Bernanke discovered that he could no longer get straight A's without studying; self-taught calculus was not ideal preparation for advanced mathematics. He ditched three majors — math, physics and English — before settling on economics. But he quickly became an academic star, eventually graduating summa cum laude and pursuing his doctorate at MIT. "He was substantially the same guy he is today — very quiet, very serious, very, very capable," recalls his MIT adviser, Stanley Fischer, who is now Israel's central banker. "He didn't try to do fancy or complex work just to show off. He wanted to answer real questions." Bernanke went on to teach at Stanford, then received tenure at Princeton when he was only 31, but he was never the kind of smart guy who needed to remind everyone how smart he was. "He came across as modest and unassuming then, and he still does," says Mervyn King, who had an office next to Bernanke's when they were young professors and is now Britain's central banker. "He's always been a scholar's scholar."

Bernanke's life as a scholar was fairly typical. He married a fellow bookworm, Anna, a teacher who is now planning a school for underprivileged kids in Maryland. They have two children, a son in medical school and a daughter who just finished college. Bernanke got sucked into academic politics, chairing his fractious department for six long years. Aside from his bagel-related responsibilities, he helped launch a center for finance studies, recruited top-notch economists and dissuaded them from bludgeoning one another. Anna even persuaded him to serve two terms on the school board, where he helped stop angry antitax activists from stripping funding for education. What was interesting about Bernanke's life as a scholar — especially considering what came next — was his scholarship.

The Depression Buff

Bernanke says his first spark of interest in the Great Depression came as a boy listening to his mother's parents on their porch in Charlotte, N.C., where his grandfather was a kosher butcher. Their family had survived pogroms in Lithuania, but the story that captivated Bernanke involved a town full of shoe factories that closed during the Depression, leaving the community so poor that its children went barefoot. "I kept asking, Why didn't they just open the factories and make the kids shoes?'" he recalls. He would devote his career to questions like that.

Bernanke calls the Depression "the holy grail of macroeconomics," the ultimate intellectual challenge. To understand geology, he says, study earthquakes; to understand the economy, study the Depression. "I don't know why there aren't more Depression buffs," he wrote in a book of essays about the period. "The Depression was an incredibly dramatic episode — an era of stock-market crashes, breadlines, bank runs and wild currency speculation, with the storm clouds of war gathering ominously in the background... For my money, few periods are so replete with human interest."

The first thing any Depression scholar comes to understand is that nothing — not hyperinflation, megadeficits or irked Chinese creditors — is as bad as a full-on Depression. A collapse in the "aggregate demand" for goods and services that makes an economy hum can be irreversible. Businesses fail, so workers lose jobs, so consumer spending declines, so more businesses fail. Depression scholars — including Bernanke — tend to see the Hoover Administration's approach of balancing budgets and tightening belts during the downturn as a tragic mistake. They embrace the Keynesian view that aggressive government action backed by government money is needed to reverse death spirals by restoring confidence and reviving demand. Get people money, and they can buy shoes for their barefoot kids, so shoe factories can reopen and rehire, which gets more people money. "People saw the Depression as a necessary thing — a chance to squeeze out the excesses, get back to Puritan morality," Bernanke says. "That just made things worse." In contrast, the Roosevelt Administration's New Deal stimulus and try-everything attitude made real, albeit uneven, progress against the downturn.

But Bernanke's main academic focus was the central role of monetary policy and the Fed in creating the catastrophe. So let's take a moment for a quick Fed primer. The Fed's central function is its dual mandate to steer the economy toward stable prices and maximum employment through monetary policy. To rev up a weak economy, it can lower interest rates by buying Treasury bonds or other safe securities, essentially printing money and dumping it into the banking system with a mouse click. Loose money can encourage banks to lend and firms to hire. This tends to make people happy but can increase inflation risks and weaken the dollar, which can make markets nervous and destroy the value of savings. Loose money can also provide the fuel for financial explosions by incentivizing wild risk-taking. Conversely, to apply brakes to an overheated economy and guard against inflation and asset bubbles, the Fed can raise interest rates by selling securities and contracting the money supply — as the saying goes, taking away the punch bowl as the party starts.

The Fed is also the nation's lender of last resort during financial panics, the original rationale for its creation in 1913. Traditional banks serve a vital economic function, providing safe places to park savings, then lending out the deposits so that borrowers can buy homes, start businesses and put the money to work. But banks are inherently vulnerable to breakdowns in confidence: when nervous depositors rush to withdraw their cash, even a solvent bank can run low on ready funds, which only intensifies the panic. After J.P. Morgan had to organize a private cash infusion to quell a 1907 panic, financiers persuaded Congress to create a central bank that could lend emergency money to stop runs, so that illiquid but otherwise healthy institutions wouldn't have to shut their doors.

Unfortunately, the Fed's leaders didn't comply after the Great Crash in 1929. Instead of lending freely, they let one-third of the nation's banks fail. Instead of lowering interest rates and expanding the money supply to spur the economy, they raised rates and tightened money, obsessing over inflation and the dollar's strength when they should have worried about deflation and runaway unemployment. Bernanke was deeply influenced by economist Milton Friedman's critiques of the Fed, and after joining its board in 2002, he apologized on its behalf at Friedman's 90th birthday party: "Regarding the Depression: You're right. We did it. But thanks to you, we won't do it again."

Bernanke's research added key nuances to the blame-the-Fed thesis. He showed that the Depression was caused not just by insufficient money sloshing around the system but also by clogged credit channels that prevented that money from flowing toward potentially productive borrowers when too many banks failed. He also outlined a "financial accelerator" effect in which disrupted financial markets increase the cost of credit, which intensifies downturns, which further increases the cost of credit. And he frequently explored the self-fulfilling nature of economic uncertainty, showing how it dissuades employers from hiring, consumers from spending and lenders from lending. The economy, after all, is a confidence game. That's why financial analysts use psychological phrases like "jittery markets" and "economic anxiety." It's no accident that the word credit comes from the Latin word for belief.

"Ben understood more clearly than anyone how a crisis of confidence can create a domino effect," says Liaquat Ahamed, author of Lords of Finance, a vivid history of the misguided central bankers who produced the Depression. It's one of Bernanke's favorite books, except that he wishes he had written it himself; he was working on a similar history for Princeton University Press before he was summoned to Washington in 2002.

His working title was The Age of Delusion.

"Once He Got It, He Really Got It"

Bernanke became a Fed governor at the height of the Age of Greenspan, shortly after Bob Woodward's biography hailing the "Maestro" but before John McCain's quip that if Greenspan died, he should be propped up at the Fed like the corpse in Weekend at Bernie's. Bernanke quickly emerged as a staunch defender of the Greenspan Fed and its loose monetary policies. He suggested that raising interest rates to deflate the dotcom bubble before it popped would have been like using a sledgehammer to perform brain surgery. He delivered a call to arms against deflation, proposing ways the Fed could keep juicing the economy even if rates fell to zero. When he took over the Fed in 2006, after an uneventful eight-month White House stint leading Bush's Council of Economic Advisers, he said his top priority would be continuing Greenspan's policies. "Ben and I have never had a serious disagreement," Greenspan says.

In fact, Bernanke did make subtle changes, pushing for more transparency and clarity, speaking last instead of first at rate-setting meetings to avoid imposing his views. And while Greenspan had been laissez-faire about the Fed's oversight responsibilities, Bernanke pushed through long-overdue subprime-lending reforms in 2007. Still, Bernanke was as clueless as Greenspan about the coming storm. He dismissed warnings of a housing bubble. He insisted that economic fundamentals remained strong. In March 2007, he assured Congress that "the problems in the subprime market seem likely to be contained." The day before the global crisis erupted with a run on a French bank, the Fed was still saying its primary concern was inflation. "Bernanke had no idea what was going on," a foreign central banker tells Time. "Once he got it, he really got it, and he acted swiftly and decisively. But wow! It took a while."

Bernanke concedes that he failed to anticipate how fragile such an overleveraged and interconnected system could be, how fear about a $1 trillion subprime mess could paralyze a $60 trillion global economy, how overnight-lending markets that got banks and corporations through the day could seize up overnight. He didn't share Greenspan's ideological faith that markets always know best, but he was surprised how spectacularly financial firms misjudged risk in their own portfolios, how collateralized debt obligations, credit-default swaps and other exotic financial weapons of mass destruction blew up in their faces. "None of us appreciated what a jury-rigged thing the financial system had become," he says. And while the Fed clearly blew its supervision of bank holding companies like Citigroup, it wasn't responsible for investment banks like Bear Stearns and Lehman Brothers, the housing enterprises Fannie Mae and Freddie Mac or the other untraditional financial contraptions whose troubles drove the crisis. The Fed was not in charge of monitoring risks to the entire system either. No one was. "Of course there were things we could have done better," he says, "but this was a perfect storm."

Once Bernanke realized a disaster was unfolding, he made a conscious effort to project calm, even when he was working seven days a week and all hours of the night, even when the Wall Street types around him were screaming and cursing like stressed-out sailors. "He decided he wouldn't be a deer in the headlights and wouldn't let the world blow up," recalls Columbia University economist Frederic Mishkin, who was on the Fed board at the time. He also made a conscious decision to avoid the mistakes made by the bankers of the 1930s — not only their stingy refusals to supply cash but also their inflexible inside-the-box thinking. He hung their picture on his office wall. He held "blue sky" brainstorming sessions to solicit unorthodox ideas. An obscure legal provision gave the Fed broad latitude in "unusual and exigent circumstances," and he did whatever it took. "In exceptional circumstances," says European Central Bank president Jean-Claude Trichet, "he has done exceptional things."

"A War of Necessity"

Today the second-guessers are running wild. Why didn't the Fed stop bailed-out companies from handing out lucrative dividends and bonuses? Why pay off AIG's creditors in full? Why save Bear Stearns but not Lehman Brothers? "It's the price of success: people start to think you're omnipotent," Bernanke says. "We say we didn't have the authority, and it's Oh, you're the Fed. You could've come up with something.'"

The Fed has become the new Trilateral Commission; no conspiracy theory is too far-fetched. There's a vivid example on YouTube, a video titled "Florida Congressman Alan Grayson Laughs in Ben Bernanke's Face — Priceless!" The rabble-rousing Democrat, wearing a shiny tie festooned with dollar bills, grills Bernanke (and mispronounces his name) about $553 billion worth of currency swaps the Fed made with foreign central banks that ran low on dollars during the credit crunch. This was textbook central banking: pumping liquidity into markets during a panic. The swaps were safe, interest-bearing loans and didn't cost taxpayers a dime. But Grayson seems to think he's uncovered a nefarious handout to shadowy foreigners. The laughter comes after he sneers that the dollar rose 20% during these swaps and asks if that's a coincidence. Bernanke pauses, then replies, "Yes."

Ha-ha. Bernanke is right. The dollar strengthened because panicky investors were desperate for safe assets; that's why the swaps were so desperately needed. Unfortunately, YouTube doesn't provide Fed-to-English subtitles.

Bernanke has tried harder than any previous Fed chairman to explain his actions to the public, holding town-hall meetings, writing Op-Eds, even granting a few interviews. He has testified before Congress 13 times this year, and unlike the intentionally incomprehensible Greenspan, he has tried to be clear. But this is confusing stuff, and the Fed's by-any-means-necessary approach to the crisis has made it a juicy target. "We were the most aggressive central bank in the history of the world," says Fed governor and Bernanke confidant Kevin Warsh. The Fed used its magic money to shovel out more than $1.6 trillion worth of unconventional loans and is now buying over $1.7 trillion worth of unconventional assets. Here are some of the ways it has broken new ground:

The Zero Option. There was nothing unusual about lowering interest rates to boost a shaky economy, but in December 2008, Bernanke became the first Fed chairman to drop rates as low as they could go. "People always talk about central banks taking away the punch bowl, but when demand was falling so rapidly, Ben had to put the punch bowl on the table and say, Let's party!'" explains King, the governor of the Bank of England. A year later, rates remain near zero, for maximum monetary stimulus, and the Fed's rate-setting committee has signaled they will stay there for the foreseeable future.

Worldwide Outreach. Bernanke's pragmatic, plainspoken, data-driven approach has been a hit with his fellow central bankers, which has helped his efforts to forge a new global approach to global finance. "In our world, what counts are the fundamentals, and there's no show-off with him," Trichet says. Bernanke is in constant contact with Trichet, King and other key foreign players, and at one point he coordinated a six-nation rate cut to try to calm gyrating markets — another first.

The New Credit Channels. Bernanke has taken his research to heart, providing not just more money but targeted money, thawing out frozen credit markets and debuting seven blue-sky lending programs. When investors stopped buying the corporate paper that firms sell in overnight markets to meet their payroll, the Fed stepped in to buy it. When financing for securities backed by car loans, student loans, credit cards and mortgages dried up, the Fed opened new spigots to keep those markets open as well. This is one way the Fed's aid to Wall Street directly assisted Main Street, helping finance an estimated 3.3 million household loans, 100 million credit cards and 480,000 small-business loans. Bernanke took heat for substituting public for private credit, but it worked, because most of those private markets are functioning again. The emergency programs are all scheduled to wind down by June, and more than 80% of the loans have already been repaid, quietly returning billions of dollars in profits to taxpayers.

The Buying Binge. Bernanke wasn't kidding in 2002 when he claimed the Fed would still have ammunition to stimulate the economy if interest rates ever hit zero. This year he's gone on an astonishing shopping spree with conjured money, including a $1.25 trillion foray into mortgage-backed securities that represents an unprecedented intervention into a specific economic sector. The Fed has not only injected more liquidity into the economy but has directed it at the battered housing market, helping slash mortgage rates to their lowest levels since the 1940s. (The Bernankes recently refinanced their Capitol Hill townhouse after their adjustable-rate mortgage exploded, switching to a 30-year fixed rate of about 5%.) The Fed plans to stop buying next spring, but it's not clear when it will start thinning its bloated balance sheet. (Watch the video "Why TIME Chose Ben Bernanke.")

The Rescue Missions. Bernanke has received the most attention — and flak — for his work with Paulson and Geithner to save financial giants from modern-day runs. The Fed financed a private takeover of Bear Stearns, assisted public takeovers of Fannie and Freddie, helped Bank of America swallow Merrill Lynch, tried unsuccessfully to prevent the globe-rattling demise of Lehman Brothers and engineered the epically distasteful bailout of the notorious AIG. Bernanke also helped lead the charge for the $700 billion Troubled Asset Relief Program (TARP), touting it as the only alternative to megadisaster.

None of this was pretty, and reasonable people can disagree about the judgment calls. The Fed is supposed to lend only against safe collateral; the Bear and AIG deals clearly crossed the Rubicon into risk. Letting Lehman fail nearly croaked the global economy. Saving AIG — an insurance company! — the next day seemed strangely inconsistent. Maybe the Fed could have devised a way to restrict bonuses at rescued firms while giving creditors haircuts. Maybe TARP could have required bailed-out banks to lend more. Certainly, all the interventions created moral hazard, sending a perverse message that "too big to fail" financial firms will be rescued no matter how badly they screw up, encouraging Wall Street traders to start gorging on risk again.

But that's what happens in panics when leaders actually try to preserve the financial system. The central bankers of the 1930s avoided moral hazard but betrayed the world. Bank runs are even scarier now that they don't require an actual run on an actual bank. Billions of dollars can be withdrawn with a keystroke, and all sorts of nonbank players are now dangerously intertwined with financial markets. Bernanke had to act, and it's not clear how the Fed could have saved Lehman without a buyer or administered haircuts to AIG's creditors without a bankruptcy judge. In June, Bernanke was savaged on Capitol Hill for supposedly pressuring Bank of America to buy Merrill; by December, Bank of America was healthy enough to repay its $45 billion in TARP aid. In fact, all but one of the 19 financial behemoths subjected to stress tests have received decent bills of health, and taxpayers are on track to profit from TARP's wildly unpopular bank bailouts. Bernanke says major financial crises generally cost nations 5% to 20% of their national output. This panic seems likely to cost the U.S. a fraction of 1%. "How much would you pay to avoid a second Depression?" he asks. "I mean, this is a pretty good return on investment."

Now that the fire is out, it's easy to attack the firefighters for getting the furniture wet or holding their hoses improperly. "The fire metaphor doesn't even do it. The Fed is more like the Pentagon," says Geithner. "It defends the freedom and security of Americans from existential threats ... This wasn't a war of choice. It was a war of necessity." And they won.

"There Aren't Easy Solutions"

But it's hard to tell in places like Dillon, where unemployment is now over 17%. Bernanke's childhood home went into foreclosure; his junior high is so dilapidated that Obama repeatedly cited it as a symbol of hard times after a 2008 campaign visit. A Dillon student was an honored guest at his first speech to Congress, but recently moved away after her mother lost her job as a welder.

Bernanke declared in September that the recession was ending, but he says it might feel like a recession for quite a while. Unemployment is a so-called lagging indicator, partly because beat-up businesses tend to be gun-shy about hiring after a downturn and partly because it takes modest growth just to absorb new workers and keep the jobless rate constant. The Fed is forecasting slightly stronger growth for the next few years, but it still expects 7% unemployment as late as 2012. "I shudder to think what the world would be like if Ben hadn't been running the Fed," former Secretary Paulson says. "It's just hard to explain that yes, we're in deep doo-doo, but we would have been in much deeper doo-doo."

Is there anything to be done? The Fed can't lower interest rates below zero, but liberals like New York Times columnist Paul Krugman — a Nobel-winning economist who was recruited to the Princeton faculty by Bernanke — are clamoring for even more action to rev the economy. At the same time, inflation hawks in the blogosphere, Congress and even the Fed's rate-setting committee are warning of new asset bubbles, soaring consumer prices and a collapse of the dollar if Bernanke doesn't reverse course and start tightening the money supply soon.

So here he is again, chatting in his grand office with the Rauschenberg on the wall and the economic ur-texts on the shelves. He chooses his words carefully. He knows they move markets. He's also awaiting confirmation by the Senate; socialist Bernie Sanders and ultraconservative Jim DeMint are both holding it up, so he doesn't want to make waves. But while he doesn't put it quite this bluntly, he implicitly makes a case for doing nothing, for waiting to see how the recovery plays out. He suggests that pumping more money into banks that are already flush with reserves could be like pushing on a string, increasing liquidity but not lending. For now, the Fed is merely instructing its supervisors to lend more. The days of whatever it takes are apparently over. "The additional steps aren't as obvious or clear as the ones we've already taken," Bernanke says. "It's an enormous problem. There aren't easy solutions."

Is he saying it's up to Congress to keep jamming on the accelerator with another fiscal stimulus? Well, no. Bernanke supported the $787 billion stimulus last winter, but when asked about a second, he repeatedly refused to bite, saying only that no matter what Congress does, it needs to produce a credible plan to reduce long-term deficits. Basically, he'd like us to make do with the money we've got — no additional borrowing or printing. What he wants Congress to do is reform the system so that big firms can be allowed to fail without risking an apocalypse.

Bernanke seems trapped by the psychology of the markets. He sees little evidence of rising prices, and he's clearly irritated by pundits who always seem to see inflation around the next corner, a mentality that reminds him of the misguided central bankers on his wall. And yet he knows he can't be seen as weak on inflation, any more than the Pentagon can be seen as weak on terrorism, because markets could go haywire. There's never been this much cash in the financial jet stream, and the Fed's virtual takeover of the mortgage-finance market will be tricky to unwind without spooking stock and real estate markets. Bernanke seems concerned that deeper deficits could rattle bond markets, pushing up long-term interest rates and potentially triggering a double-dip recession. He's got to worry about currency traders too; the Chinese and other holders of U.S. debt could lose confidence and start a run on the dollar that could shake up the world, or a Dubai-style default hysteria could start a run to the dollar that could cripple U.S. exports.

Meanwhile, the financial system remains vulnerable to another meltdown. The House passed a financial-reform bill on Dec. 11 without a single Republican vote, but action is not imminent in the bitterly divided Senate. So there is still no big-picture regulator to monitor systemic risk, and "too big to fail" firms are still free to use borrowed money to place wild bets with confidence that the government will ride to their rescue. Now they're lobbying frantically to block stronger capital requirements, leverage restrictions and other efforts to rein in their compulsive gambling.

Amazingly, the one reform that has attracted bipartisan support on Capitol Hill has been a crusade to rein in the Fed. The House passed a measure allowing congressional audits of monetary policy, which Bernanke believes would shatter the Fed's independence and immerse its rate-setting in politics. He's also fighting proposals to identify Fed borrowers, pointing out that during the Depression, borrowers turned down Reconstruction Finance Corporation dollars to avoid the stigma of disclosure. There is broad support for stripping the Fed of its consumer-protection functions, and the leading Senate bill would eliminate its regulatory functions as well. At his recent confirmation hearing, Bernanke endured hours of nitpicking and abuse. "Obviously, I haven't succeeded in defusing the political concerns about the Fed," Bernanke says with a wan smile.

Let's cut the guy some slack.

It's no consolation to the 1 in 6 Americans who is underemployed, the 1 in 7 homeowners with a delinquent mortgage or the 1 in 8 families on food stamps, but there would be far more joblessness, foreclosures and hunger were it not for Ben Bernanke. He didn't study economics to get rich — he and his wife still share a Ford Focus that's not quite paid off — and he didn't go to Washington to get a security detail. Instead, he truly believes the Keynesian notion that economists ought to be as useful as dentists. In a time of rabid partisanship, it's a tribute to Bernanke's basic desire to try to do the right thing that Obama aides don't seem worried about handing a Republican the keys to the economy for the next four years.

As the terrifying memories of free-falling markets fade, Bernanke has become a political victim of his apolitical success. His boldness in the crisis feels like yesterday's news. But if he's adopting a less aggressive approach to guiding a weak economy around skittish markets, it's not because he's timid, stupid or indifferent to Main Street. He's earned the benefit of the doubt. It's now up to our dysfunctional political system to let him do his job — and to fix the financial system so that he never has to save the world again.

The Bernanke Record

The December 4, 2009 Wall Street Journal editorial "The Bernanke Record" asks "Will he repeat the mistakes of his four years?"

Federal Reserve Chairman Ben Bernanke faces his Senate renomination hearing today, amid signs that the confirmation skids are greased. We nonetheless think someone should say that, as a matter of accountability for the financial crisis and looking at the hard monetary choices to come, the country needs a new Fed chief.

We say this not because of Mr. Bernanke's performance during the financial panic of 2008, for which he has been widely and often deservedly praised. Like others in the regulatory cockpit at the time, he had to make difficult choices with imperfect information and when the markets were shooting with real bullets.

He supplied ample liquidity when it was most needed last autumn, and he has certainly been willing to pull out every last page of the central banker playbook. If some of those decisions were mistakes, the conditions the Fed faced were extraordinary. Anyone at the helm would have made calls that in hindsight he'd regret.

The real problem is Mr. Bernanke's record before the panic, with its troubling implications for a second four years. When George W. Bush nominated the Princeton economist four years ago, we offered the backhanded compliment that at least he'd have to clean up the mess that the Alan Greenspan Fed had made. That mess turned out to be bigger than even we thought, but we also didn't know then how complicit Mr. Bernanke was in Mr. Greenspan's monetary decisions.

Now we do, thanks to the release of the Federal Open Market Committee transcripts from 2003. They show (see "Bernanke at the Creation," June 23, 2009) that Mr. Bernanke was the intellectual architect of the decision to keep monetary policy exceptionally easy for far too long as the economy grew rapidly from 2003-2005. He imagined a "deflation" that never occurred, ignored the asset bubbles in commodities and housing, dismissed concerns about dollar weakness, and in the process stoked the credit mania that led to the financial panic.

This, too, might be forgivable if Mr. Bernanke had made any attempt in recent months to acknowledge the Fed's role in the mania. Treasury Secretary Tim Geithner, Dallas Fed President Richard Fisher and others have conceded that monetary policy was too loose. How central banks can minimize, if not prevent, asset bubbles without inducing recessions would seem to be a subject for candid Fed debate.

But Mr. Bernanke and Vice Chairman Don Kohn have formed an intellectual moat around the Fed, blaming the credit bubble on the "global savings glut" that they themselves helped to create. They are the Edith Piafs of central banking, regretting nothing.

All of this bears directly on how the Fed will operate over the next four years. We are now in another period of extraordinary monetary ease. Mr. Bernanke is assuring the world that, this time, he knows how and when to start removing this stimulus, even as he also promises that the Fed will remain easy for months to come. The guideposts the Fed claims to follow on policy—the jobless rate, "resource utilization"—also remain the same. Price signals, especially the value of the dollar, count for much less in this Fed's decision-making.

Earlier this decade, the Fed had 20 years of sound-money history as a source of credibility. The world's investors were willing to give the Greenspan Fed the benefit of the doubt—too much doubt as it turned out. But now, after the mania and panic, investors are unlikely to show such forbearance. That's already clear in Asia, where the falling dollar is creating monetary distortions, and investors are bidding up assets and currencies on a bet that the dollar is in for further declines. Sooner rather than later, Mr. Bernanke will have to tighten money even if the U.S. jobless rate remains higher than everyone would like.

The Fed chairman has shown he knows how to ease money, and creatively so. But that is the easy part of his job. The hard part, the time when central bankers earn their fame, is when they have to take the money away. We see little in the chairman's policy history or guideposts to suggest he will be willing to endure the criticism that will come with tightening money amid a lackluster recovery, if that is what is required to protect the dollar or prevent an inflation outbreak.

The political irony today is that even as Mr. Bernanke is cruising toward confirmation, the Fed as an institution is under its most sustained political attack in two generations. The political class is especially riled about the Fed's forays into fiscal policy. While that is understandable given the last year, the response to this action should not be to put the Fed under even greater political control from Congress. That is the Argentinian solution.

The better response is to hold policy makers accountable for their actions, including chairmen of the Federal Reserve. At this monetary moment more than any since the late 1970s, the Fed needs a hard-money chairman with the courage and credibility to resist the temptation to escape from the consequences of the last bubble by floating another one.

Bernanke defends record during crisis

In the December 3, 2009 Reuters article "Bernanke defends record during crisis," Mark Felsenthal and Pedro da Costa report:

WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke, making a case for a second term on Thursday, offered a forceful defence of the U.S. central bank's crisis-battling efforts, which he said prevented an even greater calamity.

"As serious as the effects of the crisis have been ... the outcome could have been markedly worse without the strong actions" taken by the Fed and other authorities around the globe, Bernanke told the Senate Banking Committee.

President Barack Obama nominated the former Princeton University economics professor to another four-year stint as Fed chairman in August, praising his handling of the worst financial crisis since the 1930s. His current term expires on January 31.

Under Bernanke's tenure, the Fed has slashed interest rates close to zero and pumped more than a trillion dollars into the financial system to beat back the worst financial crisis since the Great Depression.

However, the soft-spoken Fed chairman, who was first named to the post by President George W. Bush, was likely to face aggressive questioning at the hearing.

Lawmakers are upset over taxpayer bailouts of financial firms such as American International Group and Bear Stearns, and what they see as lax Fed regulation of banks and lenders that laid the groundwork for the credit crisis.

Senator Bernie Sanders, an independent from Vermont who is not a member of the panel, said on Wednesday he was placing a "hold" on the nomination, arguing the Fed chief had done little for average Americans, while going too easy on big banks.

That move could force Senate leaders to round up 60 votes just to consider the nomination, which could slow the confirmation process and give critics an opportunity to press their case.

The Wall Street Journal, in an editorial on Thursday, also said Bernanke does not deserve a second term.

The paper praised him for his response to the financial crisis but took him to task for perceived missteps in the past, such as his support when he was a Fed governor for keeping interest rates low for prolonged period earlier in the decade, which many critics contend fuelled the housing bubble.

The newspaper's editors also questioned whether he will be willing to make unpopular decisions. "The hard part, the time when central bankers earn their fame, is when they have to take the money away," they wrote.

Despite voices of discontent, the nomination appears likely to overcome any hurdles.

Committee Chairman Christopher Dodd opened the hearing by making clear he would support the nomination, saying the reappointment would send "right signal" to financial markets.

However, the committee's top Republican, Senator Richard Shelby, criticized the Fed's pre-crisis policies.

Earlier on Thursday, Treasury Secretary Timothy Geithner rose to Bernanke's defence. "He did things that had never been done in the past with enormous creativity and bravery, frankly," he told CNBC.

"The president has full confidence in him and we are confident he will be confirmed," he said.

Dodd's panel needs to approve the nomination to send it before the full Senate. If the Senate does not confirm him by January 31, Bernanke could continue to serve until replaced.

Even if confirmed, as widely expected, Bernanke faces the prospect of running a diminished institution if congressional proposals to curtail the Fed's powers and political independence become law.

Dodd has proposed stripping the Fed of its regulatory powers in favour of unifying fragmented U.S. bank oversight under a single roof. He also would require presidential appointment and Senate confirmation of regional Federal Reserve bank board chairmen, taking away a prerogative currently enjoyed by the 12 regional Fed banks.

More worrying for the Fed, legislation the House of Representatives could vote on next week would submit the central bank's monetary policy decision-making to review by a congressional watchdog agency. Sanders has backed a matching measure in the Senate, but Dodd voiced support for the Fed's independence at the hearing.

Bernanke told the panel that most signs point to stabilizing financial markets and an economy tiptoeing out of recession. He said the Fed would carefully calibrate its withdrawal of ultra-low interest rates and the cash flood it has pumped in the financial system, he said.

"We are ... keenly aware that, to ensure longer-term economic stability, we must be prepared to withdraw the extraordinary policy support in a smooth and timely way as markets and the economy recovery," he said. "Determining the appropriate time and pace for the withdrawal of stimulus will require careful analysis and judgement."

Bernanke: Fed will keep eye on sliding dollar

In the November 16, 2009 article "Bernanke: Fed will keep eye on sliding dollar," Associated Press economics writer Jeannine Aversa reports the Federal Reserve System anticipates keeping interests rates extremely low to encourage economic growth. But the declining value of the dollar and continued high budget deficits remain as challenges for U.S. macroeconomoic policymakers.

WASHINGTON – Federal Reserve Chairman Ben Bernanke on Monday said the central bank will monitor the sliding U.S. dollar but pledged anew to keep interest rates at record lows to nurture the economic recovery.

In remarks to the Economic Club of New York, Bernanke engaged in a delicate dance. He tried to bolster confidence in the dollar without taking any real action.

"Bernanke is trying to use words — not interest rates — to prevent the dollar from going even lower," said Jay Bryson, global economist with Wells Fargo Securities.

Bryson and other analysts said they didn't think Bernanke was signaling that the Fed would join with central bankers in other countries to intervene in markets to strengthen the dollar. But that is an option for the Fed if the dollar were to start plunging.

Bernanke's remarks gave a brief lift to the dollar in trading Monday. But it resumed its fall after traders focused on his assertion that the central bank would hold interest rates low for an extended period. The dollar has posted double-digit declines against other major currencies since spring.

Low interest rates could put additional downward pressure on the dollar. And economists say a free-fall in the value of the dollar, while unlikely, can't be entirely dismissed. Still, low rates are needed to encourage consumers and businesses to spend more and fuel the economic rebound.

"We are attentive to the implications of changes in the value of the dollar," Bernanke said in rare remarks about the greenback. The Fed, he said, will continue to "monitor these developments closely."

Commodity prices — such as oil — have risen lately. That pickup likely reflects a revival in global economic activity and the recent depreciation of the dollar, Bernanke said. Commodities such as oil and gold are priced in dollars so they become cheaper when the dollar falls.

Despite "cross-currents" in the outlook for prices, the Fed chief predicted inflation probably will remain "subdued for some time."

That gives the Fed leeway to hold rates at record-low levels for an "extended period," he said, repeating a pledge made at the Fed's meeting earlier this month.

The sagging dollar has helped sales of U.S. exports because it makes those goods less expensive on foreign markets. But if the dollar were to plunge in value, it could ignite a new economic crisis in the U.S., prompting investors to dump their dollar holdings and driving up domestic interest rates.

Still, by holding rates at record-lows, the Fed risks creating a speculative bubble.

"It's extraordinarily difficult to tell" if a bubble is forming, Bernanke acknowledged. "It's not obvious to me in any case."

If a bubble did form, "we use our interest rate tools to try to meet our mandate — full employment and price stability," he said.

The Fed's decision to hold interest rates at exceptionally low levels after the 2001 recession was blamed for feeding the housing bubble. When the housing boom went bust in late 2006 the economy soon followed.

During the question and answer session, the Fed chief also urged Congress and the White House to trim the record $1.42 trillion budget deficit, another force depressing the value of the dollar.

China, the No. 1 lender to the United States, has expressed concerns that the falling dollar threatens the value of its existing U.S. holdings. China also is the third-largest market for American goods, accounting for 6 percent of U.S. exports through September.

The ICE Dollar Index, which measures the value of the dollar against a basket of foreign currencies, has fallen 16.7 percent since March 4. The dollar is off 19.5 percent against the Canadian dollar since March 9, while the euro is up 18.4 percent since March 4. The dollar has also lost 12.2 percent of its value against the Japanese yen since April.

In recent weeks, some Asian countries have been intervening to try to keep their currencies from rising further against the dollar. They are feeling pressure because of China's tight link to the dollar which has meant as the dollar has tumbled since March, China's currency has fallen in relation to their currencies, giving China a competitive advantage.

Economists expect the Fed will hold rates near zero at its next meeting on Dec. 15-16 and into part of next year to help the recovery gain traction.

Bernanke predicted the economy should continue to grow next year, but he warned of "important headwinds" that will restrain the recovery, including a weak job market and tight credit for small businesses and households.

After a record four straight losing quarters, the economy started to grow again in the July-September period at a pace of 3.5 percent. Government-supported spending on homes and cars drove the rebound, raising questions about the staying power of the recovery once that assistance fades.

Bernanke said the rebound reflected more than "purely temporary factors" and predicted growth would continue into next year.

One of the biggest threats hanging over the recovery is rising unemployment. The nation's unemployment rate bolted to 10.2 percent in October. It marked just the second time in the post-World War II period that the jobless rate topped 10 percent.

Some economists think it could rise as high as 11 percent by the middle of next year before starting to gradually drift down.

Bernanke said the unemployment rate "likely will decline only slowly" if economic growth remains "moderate" as he expects.

Bernanke's trillion-dollar decision

In the October 24, 2009 Politico article "Bernanke's trillion-dollar decision," Eamon Javors provides an example of why the chairman of the U.S. Federal Reserve System is one of the most powerful people in the world:

The biggest decision of the economic recovery will be made in the next six months, and Barack Obama will have almost nothing to do with it.

Forget the debate over TARP, and never mind the questions about a second stimulus. This decision is about when to pull out $1 trillion that’s propping up the U.S. banking system. And it will be Federal Reserve Chairman Ben Bernanke and his Fed colleagues who make the call.

That’s hard enough for a White House that knows its political fortunes rise and fall with the economy.

What’s worse is that Bernanke and Obama – like many presidents and Fed chairmen past – won’t necessarily have the same goals for this trillion-dollar decision.

Fed chiefs worry about inflation. Bernanke wants to take the money out quickly enough to prevent the economy from overheating and causing a jump in prices that strangles growth. But move too fast, and the economic recovery runs out of fuel.

Presidents worry about jobs. Obama probably wouldn’t mind a little overheating, say, next summer – when voters are starting to make up their minds about the 2010 congressional elections, and he hopes the economy can shake the 10-percent unemployment rate doldrums.

“Any chairman of the Fed will do what’s right for the country, not what’s right for the administration,” said Ernest Patrikis, a partner at the law firm White & Case who spent 30 years at the New York Fed. “That’s his job – that’s why he’s apolitical.”

“The exit will be so difficult,” said economist Joseph Brusuelas of Moody’s Economy.com. “Bernanke wants to engineer a recovery that does not include inflation. Obama wants a more robust recovery and like many political actors may be willing to forgo a little inflation for a little more employment.”

The White House is already worried that jobs won’t be coming back fast enough next year, Fed or no Fed.

Obama economic adviser Christina Romer warned a congressional panel Thursday that the jobs picture will remain “painfully weak” through 2010, with a seriously elevated unemployment rate for another year.

So all the White House can do is watch and wait, and hope it doesn’t pay a political price for any missteps by Fed officials they can’t control.

“It’s a dicey thing to do, and they know it,” said Sen. Richard Shelby (R-Ala.), the ranking member on the Senate Banking Committee. “They have to be careful.”

The Fed’s moves are shrouded in secrecy, their prerogative to move the levers of the economy closely guarded – so much so that there’s been a recent a rise in populist anger about this all-powerful agency that exists largely outside the democratic process.

But because the Fed is an independent agency, it’s even considered bad form for a president to talk much about it – and indeed, the White House refused to comment for this story.

Last fall, the Fed injected $ 1 trillion-plus into the nation’s banking system – at times, by providing financial institutions with cash to cover their losses as the global meltdown spread. Now Fed officials are already talking about the need to withdraw the funds injected into the economy during the darkest days of the crisis, moves that are credited with largely saving the United States from plummeting into an economic depression.

“Given the highly unusual economic and financial circumstances, judging when the time is appropriate to remove policy accommodation, and then calibrating that removal, will be challenging,” said Federal Reserve Vice Chairman Donald Kohn in a speech to the Cato Institute on Sept. 30. “Still, we need to be ready to take the necessary actions when the time comes, and we will be.”

Translation: “policy accommodation” is the cash, and “the necessary actions” are the decision to ease it out of the economy.”

And is the Fed prepared to the pull the trigger? “We will be” seems to cover it.

Already, the Fed is already showing some signs of restlessness. On Monday, the New York Fed tested its “reverse-repo” process -- one tool the Fed could use to use to pull the money out when the time comes. The test run was widely interpreted as a sign the Fed is getting ready to act – but when, nobody knows.

The Fed can also tap on the brakes at the first sign of inflation by raising interest rates, now near zero. The Fed has said it will keep the rock-bottom rates for an extended period, but it won’t be more specific when they could go up – a decision that is bound to be controversial when it comes.

Patrikis thinks the Fed will make a decision on withdrawing liquidity either during the second quarter of 2010, or after the November elections that year – but that it won’t make any dramatic moves in the run-up to Election Day.

Still, he said, it is too early to predict what the Fed might do. And Patrikis points out that Obama will have indirect input into the decision, because there are two vacancies on the Fed’s board now that Obama will fill in the coming months. The president will surely select board members whose economic judgment he trusts.

Between the two vacancies, a member who Obama appointed earlier this year and Bernanke himself, the president will likely have named four of the seven members of the Fed’s Board of Governors by the time they make the call.

But the Fed knows actions like that can have political consequences. “There are few politicians who like higher interest rates,” said one former Fed official. “And President Obama is a politician.” That said, the official continued, “I suspect they will be broadly on the same page.”

That’s because Obama, too, has a longer-term time frame in mind: 2012, when he will be running for reelection. It’s in Obama’s interest for the Fed to take inflation prevention measures now so that he doesn’t have to run a tricky reelection campaign in a high-inflation environment.

Tensions between Presidents and Fed chairmen are nothing new.

In the 1980s, Fed Chairman Paul Volcker declared war on inflation. His strategy: raising interest rates. Volcker jacked the Fed funds rate to 20 percent, which contributed to the deep early 1980s recession that caused howls of protest from the White House and incumbent Republicans on Capitol Hill. The Fed, grumbled then-Senate Majority Leader Howard Baker (R-Tenn.), should “get its boot off the neck of the economy.”

Nonetheless, Volcker’s strategy worked, and the Fed broke the back of the inflation cycle. Ironically, Volcker is a top economic adviser to Obama today.

In the 1990s, President George H.W. Bush blamed Fed Chairman Alan Greenspan for his election loss to Bill Clinton. Bush didn’t believe Greenspan was lowering interest rates fast enough to pull the nation out of a recession – which gave Clinton, with his famous “it’s the economy, stupid” campaign, an opening to trounce the elder Bush.

Mark Gertler, a professor of economics at New York University, says the lesson of history is that politicians should not interfere with the central bank. “If the Fed doesn’t act independently, the economy is endangered,” said Gertler. “It would be dangerous if the administration appeared to be interfering with the Fed.”

Financial Services Committee Chairman Barney Frank (D-Mass.) doubts they’ll be any daylight between Obama and Bernanke – who Obama just reappointed over the summer at a time when Wall Street needed a signal that there would be continuity at the Fed.

He argues that Bernanke and Obama will have the same agenda in 2010: fixing the economy.

“I think they are very much in sync,” said Frank. Asked about potential divergence between the Fed and the White House, he said, “That reflects a journalist’s hope that there will be friction. Obama and Bernanke have both argued that at some point they’re going to unwind this.”

Bernanke subdued on Fed's consumer protection role

In the October 1, 2009 article "Bernanke subdued on Fed's consumer protection role," Associated Press economics writer Jeannine Aversa reports:

WASHINGTON – Federal Reserve Chairman Ben Bernanke told Congress Thursday that the central bank is "well suited" to oversee colossal financial companies whose failure could endanger the entire economy.

But his written testimony did not mention the Fed losing some of its consumer protection duties, after the Fed chief previously criticized the Obama administration for its plan to strip the central bank of some of those powers.

Testifying before the House Financial Services Committee, Bernanke said only that protecting consumers from abusive practices involving mortgages, credit cards and other financial products is "vitally important."

In past appearances on Capitol Hill, Bernanke has laid out a spirited defense that the Fed should keep those powers. The administration wants to create a consumer protection agency for risky financial products.

Rep. Melvin Watt, D-N.C., was stunned by what he thought was Bernanke's short shrift to the consumer protection issue. "Five sentences on consumer protection when everything else gets substantially more space," Watt said. "It is just not a good message to send."

During the hearing, Bernanke conceded that the Fed didn't do the job it should have in protecting consumers, but said improvements are being made. He suggested the central bank could take further steps to strengthen such oversight.

"We are competent and have the skills ... I think we can do that," he said.

Bernanke did lay out a case for the additional power over so-called "too big to fail" financial companies, which could include insurance companies, hedge funds and others beyond the big banks traditionally overseen by the Fed. In fielding questions, Bernanke said the "focus" in that regard should remain on financial firms, rather than on other types of companies.

As part of a sweeping rewrite of the nation's financial rule book, the administration has proposed tapping the Fed to regulate those companies, and Bernanke said the central bank has the expertise to best carry out those duties.

For both accountability and effectiveness, that power is "best vested with a single agency," Bernanke said. "I believe that the expertise we have developed in supervising large, diversified and interconnected banking organizations ... makes the Federal Reserve well suited to serve as the consolidated supervisor."

The Fed would be willing to concede some of its bailout power if Congress creates a new mechanism to safely wind down big financial firms on the brink, something along the lines of what the Federal Deposit Insurance Corp. does with banks, Bernanke said. The Fed's bailout of insurance giant American International Group Inc. and its financial backing of JPMorgan's takeover of Bear Stearns angered the public and some in Congress.

On another matter, Bernanke said the Fed is "about to issue" a proposal cracking down on executive pay. It seeks to make sure that bonuses and other compensation don't encourage undue risk-taking that could hurt the company or the larger financial system.

Asked whether a crisis is brewing in the troubled commercial real-estate market, Bernanke responded: "I don't think so. But we'll have to watch it carefully."

To police the broader U.S. financial system for risks, Bernanke supported a council of regulators do that job — also in line with Obama's proposal.

All financial regulators, Bernanke said, should step up day-to-day oversight and have a big-picture approach in this area.

"To further encourage a more comprehensive and holistic approach to financial oversight, all federal financial supervisors and regulators — not just the Federal Reserve — should be directed and empowered to take account of risks to the broader financial system," he said.

Bernanke said potential risks monitored by the council could include significant increases in leverage at companies and gaps in regulatory coverage that can arise when new financial products are created. The Fed chief said a "no doc loan" — where people don't have to document their income to a lender_ would be an example of a risky product. Those loans were made during the housing boom and contributed to the bust.

Bernanke insisted that his endorsement of a council to police risk isn't a shift in his stance. "There has been some misunderstanding ... we support a council ... we never objected to a council," he said.

Both Democrats and Republicans have been loathe to give the Fed additional powers. They argue that the central bank failed to spot problems that led to the financial crisis in the first place.

"We have had debate and will have further debate about exactly what the role of the Federal Reserve will be in the systemic risk regulation. There were some, myself included, who earlier this year thought the Federal Reserve would have a larger role than it looks like it will have," said committee chairman Barney Frank, D-Mass.

Analysis: Bernanke is Obama's safe choice at Fed

In the August 26, 2009 story "Analysis: Bernanke is Obama's safe choice at Fed," Associated Press writers Tom Raum and Philip Elliott explain why it makes sense for Barack Obama to reappoint Ben Bernanke as Chairman of the Board of Governors of the Federal Reserve System:

WASHINGTON – Giving Ben Bernanke a second term as Federal Reserve chairman was the politically safe course for a president beset by multiple crises and wanting no new battles.

The decision also helped soothe jittery financial markets, while drawing applause across party lines.

President Barack Obama cited the former Princeton economist's role in navigating the nation through the worst economic distress in decades in offering him a second four-year term on Tuesday. In so doing, Obama followed the pattern of other recent presidents in reappointing a central bank chief first appointed by a predecessor on grounds that he was doing a good job.

To do otherwise could have jeopardized the still-fragile recovery that Bernanke played a central role in engineering.

While other potential candidates were considered, including top White House economic adviser Lawrence Summers, any choice other than Bernanke might well have roiled Wall Street and touched off a fierce political battle in Washington.

"He couldn't have nominated anybody else," said Mark Zandi, chief economist at Moody's Economy.com. "It would have been destructive to the financial markets and nobody would have ever understood it."

Bernanke, 55, now faces the challenge of meeting the high expectations from the White House — and the rest of the country — to repair the battered economy. To keep inflation at bay, he also must tread carefully in unwinding hundreds of billions of dollars in Fed financial rescue programs once the recovery is under way.

The mild-mannered economist, who has taken some of the boldest, costliest actions of any Federal Reserve chief, does not bring heavy political baggage to the job, even though he served briefly as chairman of President George W. Bush's Council of Economic Advisers.

"I'm sure he hasn't made all the right calls, but he doesn't have a political cell in his body, and that's what you need in a Fed chairman," said Sen. Bob Corker, R-Tenn.

Reconfirmation seems all but sure. White House officials feel certain that any vote of no confidence in Bernanke would come at much too high a political cost to lawmakers with the economy still in a fragile state.

Bernanke is recognized in academic circles as a leading scholar on the Great Depression, deemed a good area of expertise given the current crisis.

Although his present term doesn't expire until early next year, Obama moved to end speculation percolating in political circles and on Wall Street, announcing his decision Tuesday morning on the Massachusetts island of Martha's Vineyard, where the president is vacationing with his family.

"Ben approached a financial system on the verge of collapse with calm and wisdom, with bold action and out-of-the-box thinking that has helped put the brakes on our economic free-fall," said Obama, with Bernanke standing by his side. "Almost none of the decisions he or any of us made have been easy."

The announcement's timing also helped the White House divert attention from a pair of gloomy economic reports issued Tuesday by the administration and Congressional Budget Office predicting a slow recovery and giant deficits for years to come.

First appointed chairman by Bush in early 2006, Bernanke has been widely praised by economists, and his reappointment was generally expected. Still, there remained some uncertainty. Bernanke has been criticized by some lawmakers for not doing more to head off the crisis, and by others for doing too much to combat it with what some see as an overly accommodating monetary policy.

He also drew criticism for strong-arm tactics, along with former Treasury Secretary Henry Paulson, in pressuring Bank of America to acquire the failing Merrill Lynch & Co. And Bernanke put himself at odds with the administration recently by resisting its plan to create a consumer protection agency for risky financial products, arguing that those responsibilities should stay with the central bank.

Obama's announcement removed any uncertainty on Wall Street about a potential replacement.

"Changing Fed chairmen at this point in both the economic recovery and in the midst of ongoing financial rescue efforts would have added uncertainty and would have been disruptive to markets," said Tony Fratto, a former economic spokesman for Bush and himself a former Treasury Department official.

White House chief of staff Rahm Emanuel and Treasury Secretary Timothy Geithner were the chief voices advising Obama to reappoint Bernanke. Obama decided about a month ago it was the appropriate move and told Bernanke of his decision last week during a meeting in the Oval Office, administration officials said Tuesday.

Obama followed a pattern established by the past four presidents in reappointing Fed chiefs who had been in place when they took office. Republican Ronald Reagan in 1983 reappointed Democrat Paul Volcker, who had been first named chairman by Jimmy Carter. Alan Greenspan, a Republican first appointed by Reagan, was reappointed by George H.W. Bush, Bill Clinton and George W. Bush. The Bushes are Republicans and Clinton a Democrat.

Bernanke's re-nomination "will bring continuity to the Federal Reserve that will send the right signal to the marketplace," said Senate Majority Leader Harry Reid, D-Nev. He said he expected Senate confirmation.

Even so, some lawmakers' remarks were pointed, suggesting Bernanke's confirmation hearings could produce fireworks even if the outcome seems assured.

Senate Banking Committee Chairman Chris Dodd, D-Conn., said, "Serious questions will be raised about the role of the Federal Reserve moving forward and what authorities it should and should not have."

Richard Shelby of Alabama, the committee's senior Republican, said he wanted to explore "the impact ad hoc decision-making had on the financial markets during the crisis," including what he called a "panicked response" by some regulators.

Senate Republican leader Mitch McConnell, R-Ky., said he hoped the confirmation hearings would offer lawmakers "greater insight into the cumulative impact the administration's trillions in new spending, borrowing and debt will have on the American taxpayer."

U.S. housing, confidence data point to recovery

According to the August 25, 2009 article "U.S. housing, confidence data point to recovery," Ros Krasny reports recent economic data suggest the current economic decline may be ending:

CHICAGO (Reuters) – Larger-than-expected gains in U.S. housing prices and consumer confidence on Tuesday lent new weight to views that the economy is emerging from the longest recession since the 1930s.

U.S. single-family home prices rose for the second month in a row in June, according to a closely watched index, and consumer confidence jumped in August.

In addition, President Barack Obama nominated Ben Bernanke to a second term as chairman of the Federal Reserve, removing some niggling doubt from investors' minds. The move promised a consistent approach to monetary policy in the years ahead.
The developments helped buffer the blow of projections for the U.S. budget deficit to reach its highest level in 2009, relative to the total economy, since World War Two.

"The recession appears to be over, with consumer attitudes lagging behind broad economic developments," said Steven Wood, chief economist at Insight Economics in Danville, California.

Major U.S. equities indexes closed higher after briefly hitting new 2009 highs on the day's events. Treasury bond prices initially fell as signs of a resurgent economy reduced interest in safer investments, but later rose after decent demand for an auction of two-year notes.

The Conference Board, an industry group, said consumer confidence climbed to a reading of 54.1 in August from 47.4 in July, handily beating forecasts, on an improved outlook for the job market and the overall economy.

The rise sent the index to its highest level since May. Still, some analysts warned not to get carried away.

"Confidence remains well below its historical average of 95 and it has not even regained the level of 61 seen before the collapse of Lehman almost a year ago," said Paul Dales, U.S. economist at Capital Economics in Toronto.

The weak labor market remains a sticking point to recovery, and especially a revival in consumer spending. Even the Fed has conceded the likelihood of a "jobless recovery," with the unemployment rate staying high long after growth resumes.

Americans saying that jobs were "hard to get" in August dropped to 45.1 percent from 48.5 percent but only 4.2 percent said jobs were plentiful.

"Most of the strength was in the 'expectations' component, so it looks like even though the near-term conditions are still a bit rocky, there is hope for the future," said Kim Rupert, managing director, global fixed income analysis, Action Economics LLC in San Francisco.

HOUSING PRICES IN BROAD-BASED GAINS

Other data supporting recovery hopes came from the Standard & Poor's/Case-Shiller housing price index. The housing market is considered a critical component to an economic recovery.

Prices of U.S. single family homes rose by 1.4 percent in June from May, after creeping up by 0.5 percent in April, suggesting the crippling housing slump is easing.

The Case-Shiller 10- and 20-city indexes have plunged by 54.3 percent and 45.3 percent, respectively, from their 2006 peaks.
June's improvement was broad based, with 18 of 20 metropolitan areas logging gains for the month.

"The most important take-away is the breadth of the rise," said Adam York, economist at Wells Fargo Securities in Charlotte, North Carolina. "The absolute worst is behind us."

Separately, the Federal Housing Finance Authority said U.S. home prices rose by 0.5 percent in June, according to its seasonally-adjusted monthly index, while prices fell by 0.7 percent in the second quarter.

"The S&P/Case-Shiller report dovetails with evidence from the FHFA house price index and the National Association of Realtors existing home sales report, suggesting that house price deflation has bottomed," said Anna Piretti, economist at BNP Paribas in New York.

BEN'S BACK

Bernanke's reappointment, while widely expected, was seen as a plus for markets that feared new uncertainty at a time the U.S. economic ship is finally righting itself.

Fed officials have warned that politicizing the U.S. central bank risked higher long-term interest rates as investors began to fear higher inflation taking root.

"Were Bernanke to be denied a second term in favor of, say, a current White House 'insider,' this would inevitably add to concerns about the blurring of lines between fiscal and monetary policy and the potential compromising of Fed independence," said strategists at analysis firm 4CAST Ltd.

For the time being, though, Bernanke & Company still face deflationary pressure from the huge "output gap" in the U.S. economy created by the deep recession.

"The news that the deflation-conscious Bernanke is going to be at the helm .... provides tentative support to our view that the zero-interest rate policy will remain in place until 2011 at the earliest," said Capital Economics' Dales.

The nonpartisan Congressional Budget Office (CBO) on Tuesday gave updated projections on the likely U.S. budget deficit in fiscal 2009 and beyond.

Spiraling deficit forecasts stretching far into the future have been cited as one element behind a dip in Obama's polling numbers, as Americans start to fear that tax hikes will almost inevitably follow.

The CBO forecast a fiscal 2009 deficit at $1.59 trillion, or 11.2 percent of projected gross domestic product, falling to $1.4 trillion or 9.6 percent of GDP in 2010.

It gave a 10-year deficit forecast of $7.14 trillion against $9.1 trillion.

Separately, the White House raised its forecast for the budget deficit between 2010 and 2019 to a total of about $9 trillion.

Bernanke optimistic economy will grow again soon

In the August 21, 2009 article "Bernanke optimistic economy will grow again soon" Associated Press economics writer Jeannine Aversa reports Ben Bernanke, the chairman of the Board of Governors of the Federal Reserve System, thinks the U.S. is on the cusp of economic recovery:

JACKSON, Wyo. – Federal Reserve Chairman Ben Bernanke on Friday offered his most optimistic outlook since the financial crisis struck, saying the economy is on the verge of growing again.

Speaking at an annual Fed conference, Bernanke acknowledged no missteps by the central bank in managing the worst crisis since the Great Depression. But he conceded that consumers and businesses are still having trouble getting loans, even though the financial system is gradually stabilizing.

Economic activity in both the U.S. and around the world seems to be leveling out, and the economy is likely to start growing again soon, Bernanke said in a speech at an annual Fed conference in Jackson.

The mood here was decidedly more hopeful than it was last summer, when a sense of foreboding hung over the forum just before the financial crisis erupted.

Bernanke's hopeful remarks on the economy contributed to a rally on Wall Street. The Dow Jones industrial average surged about 155 points, or 1.7 percent, and broader stock averages also gained sharply.

Despite his upbeat tone, Bernanke cautioned that the recovery is likely to be "relatively slow at first."

Unemployment, now at 9.4 percent, is widely expected to hit double digits later this year and to remain high for many months.

The financial markets have stabilized, and some businesses and consumers have found it easier to get loans. Still, the banking system has yet to return to normal, Bernanke said.

Financial institutions face further losses on soured investments. And many businesses and households still can't get the credit they need to fuel the economy, he said.

"Although we have avoided the worst, difficult challenges still lie ahead," Bernanke told the gathering of fellow bankers, academics and economists. "We must work together to build on the gains already made to secure a sustained economic recovery."

Reviewing the past year's crisis, Bernanke outlined the many emergency measures the Fed and other regulators took to help ward off a global financial meltdown. He declined to acknowledge critics' arguments that regulators failed to detect signs of the crisis before it occurred — or that Wall Street bailouts sent a message that big companies that make reckless bets would be rescued with taxpayer money.

A $700 billion taxpayer-funded bailout program to prop up financial institutions incensed many Americans. So did the repeated bailouts of AIG, which paid hefty bonuses to employees who worked in the division that brought down the firm.

Some analysts said Bernanke appeared to be angling to keep his job for another term.

"The lack of any mea culpa suggests the Fed chairman wants to be reappointed," said Richard Yamarone, economist at Argus Research. "When you go on an interview, you never speak of your shortcomings."

President Barack Obama will have to decide in coming months whether to reappoint or replace Bernanke, whose term expires early next year.

Ken Mayland, president of ClearView Economics, said Bernanke was engaging in a "bit of cheerleading to inspire confidence," especially among consumers whose caution could restrain the recovery.

Elsewhere at the conference, European Central Bank President Jean-Claude Trichet responded to a research paper on the origins and the nature of the financial crisis by saying he was a "little bit uneasy" about talk of a return to normalcy.

"We have an enormous amount of work to do, and we should be as active as possible," Trichet said.

The bulk of Bernanke's speech chronicled the extraordinary events of the past year.

Financial markets took a dizzying plunge starting in September and into October, nearly shutting down the flow of credit. The crisis felled storied Wall Street firms. The government took over mortgage giants Fannie Mae and Freddie Mac, as well as insurance titan American International Group Inc.

Lehman Brothers failed. It filed for bankruptcy on Sept. 15, the largest in corporate history, roiling markets worldwide.

The Fed swooped in with unprecedented emergency lending programs to fight the crisis. It eventually slashed a key bank lending rate to a record low near zero. And Congress enacted programs to stimulate the economy, including a $787 billion package of tax cuts and increased government spending.

"Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major firms would have failed and the entire global financial system would have been at serious risk," Bernanke said.

Unlike in the 1930s, Washington policymakers this time acted aggressively and quickly to contain the crisis, said Bernanke, a scholar of the Great Depression.

"As severe as the economic impact has been, however, the outcome could have been decidedly worse," he said.
Global cooperation in battling the crisis was crucial, with central banks slashing interest rates and the U.S. and other governments delivering fiscal stimulus, he noted.

"The crisis, in turn, sparked a deep global recession, from which we are only now beginning to emerge," the Fed chief observed.

The conference, sponsored by the Federal Reserve Bank of Kansas City, draws a virtual who's who of the financial world — Bernanke's counterparts in other countries, academics and economists. This year's forum focused on lessons learned from the crisis and how they can be applied to prevent a repeat of the debacles.

Bernanke again urged a rewrite of U.S. financial regulations, something Congress is involved in. He repeated his call for stricter oversight of companies — such as AIG — whose failure would endanger the entire financial system and the broader economy. Obama wants to empower the Fed for that duty, something many lawmakers oppose.

Bernanke also said the U.S. needs a process to wind down globally interconnected companies, as the Federal Deposit Insurance Corp. does for failing banks.

A strengthening of financial regulation is needed, he said, "to ensure that the enormous costs of the past two years will not be borne again."