Bernanke transforms Fed with quiet determination
Every six weeks or so, around a giant mahogany table in an ornate room overlooking the National Mall, the 16 leaders of the Federal Reserve, one after another, give their take on how the U.S. economy is doing and what they want to do about it.
Then there’s a coffee break. While most of the policymakers make small talk in the hallway, their chairman, Ben S. Bernanke, pops into his office and types out a few lines on his computer.
When the Federal Open Market Committee reconvenes, Bernanke speaks from the notes he printed moments earlier. “Here’s what I think I heard,” he’ll say, before running through the range of views. He sometimes articulates the views of dissenters more persuasively than they did.
“Did I get it right?” he says.
The answer, in recent months, has been a resounding yes. And Bernanke’s ability to understand and synthesize the views of his colleagues goes a long way toward explaining how he has revolutionized the Federal Reserve, which under his leadership has deployed trillions of dollars to try to contain the worst economic downturn in 80 years.
Famously soft-spoken, Bernanke is an unlikely revolutionary. He is, after all, a career economics professor, not a politician. He also happens to run an organization designed for inertia: Decision-making authority is shared with four other governors in Washington appointed by the president; the heads of the 12 regional Fed banks, who answer to their own boards of directors; and a staff of 2,000 that is led by economists who spent decades working their way through a rigid hierarchy.
Yet in the last 18 months, Bernanke has transformed the stodgy organization, invoking rarely used emergency powers. His decision to do so has drawn criticism -- he has transcended traditional limits on the role of a central bank, stretched the Fed’s legal authority and to some, usurped the responsibility of political authorities in committing vast sums of taxpayer dollars.
The Fed’s actions put the economy on a “perilous” course, said James Grant, editor of Grant’s Interest Rate Observer.
“The real risk is that he will wind up instigating rampant inflation” once the recession has passed, he said. “A related possibility is that the Fed has created incentives to overdo it in borrowing and lending . . . which is what got us into this mess in the first place.”
What strikes many who have worked with Bernanke, though, is that he has pulled it all off without grand speeches, arm-twisting or Machiavellian games. Rather, according to interviews with more than a dozen current and former Fed officials and others familiar with the workings of the central bank, he has enacted bold policy moves through measured, intellectual debates and by making even those who are resistant to some of the new actions feel that their concerns are understood.
To many Fed veterans, Bernanke’s leadership style is a stark contrast with that of his predecessor, Alan Greenspan, whose tenure was characterized by tightly controlled decision-making with only rare open disagreement.
“It’s not Ben’s personality to pound the table and scream and say you’re going to agree with me or else,” said Alan Blinder, a former Fed vice chairman and longtime colleague of Bernanke’s at Princeton University. “He succeeds at persuading people by respecting their points of view and through the force of his own intellect. He doesn’t say you’re a jerk for disagreeing.”
In other words, Bernanke has remade the Federal Reserve not in spite of his low-key style and proclivity for consensus-building. He has been able to remake the Fed because of it.
More than a few times in the last year, senior Fed staff members have logged into their e-mail accounts to find an unusual message. Subject: Blue Sky. Sender: Ben S. Bernanke.
The point of the e-mails has been to encourage staffers to think of creative ways that the Fed can guard the economy amid financial collapse.
This is an institution that not long ago could spend the better part of a two-day meeting deciding whether its target for short-term interest rates should be 5.25% or 5%. But in this crisis, rate cuts, the most common tool for helping the economy, have lacked their usual punch. The Fed already has dropped the rate it controls essentially to zero, meaning there is no room left to cut.
That’s why Bernanke’s Fed has been trying to dream up ideas out of the clear blue sky. The result has been 15 Fed lending programs, many with four-letter acronyms, most of them unthinkable before the current crisis.
Under one unconventional program, the Fed is providing money for auto loans and credit card loans. Under another, it is making money available for home mortgages.
Many of the programs have required legal and financial gymnastics to enact, with the central bank being forced to invoke an emergency authority that allows it to lend to most any institution in “unusual and exigent circumstances.” In the end, though, they have allowed the Fed to effectively create money to keep lending going.
Bernanke has said his academic research, especially about the Great Depression, convinced him that the Fed has no choice but to move forcefully during a financial crisis, even if doing so means it crosses conventional boundaries.
“Everyone is encouraged to come up with ideas that are a little bit out of the ordinary, to try to encourage creative approaches and to think outside of the box, which is not the usual central bank approach,” Bernanke said in an interview. “But in the current climate I think it is necessary.”
Dozens of staff members have been involved in figuring out how to execute the programs, but for many, Bernanke has been the catalyst.
In November, for instance, the Fed moved to push down mortgage interest rates by buying $600 billion in mortgage-related securities; in March, it bought an additional $850 billion worth.
But sources said Bernanke had raised the possibility of such a move internally more than a year ago, and he pushed to make sure the Fed was prepared to act.
“For many months, the chairman was asking ‘How can we escalate?’ ” said William Dudley, president of the New York Fed. “There was a general consensus that we were getting to the point where traditional monetary policy tools might not be sufficient.”
The decision to flood money into the mortgage market was not Bernanke’s alone; the power to do so belonged to the Federal Open Market Committee, which he leads. The four other governors serve on it, as does a rotating group of five of the 12 regional Fed bank presidents.
In November, Bernanke called individual committee members to see if they would be open to the Fed inserting itself into the mortgage market.
At the time, some committee members viewed the purchase of mortgage securities as a way to lower mortgage rates, encourage home sales and thus find a bottom for the housing market. Others said that buyers were irrationally avoiding even safe mortgage assets and that the Fed needed to act to make the markets function more normally. Still others wanted the Fed to boost confidence in Fannie Mae and Freddie Mac by making more explicit the idea that the U.S. government stood behind the mortgage finance giants.
There were worries, too, that buying mortgage-related securities could make it hard for the Fed to suck money out of the economy once it began to recover, which could lead to inflation, or that doing so could put the government in the role of favoring housing over other sectors.
Bernanke guided the group toward a conclusion. Even though members had differences, most agreed that the economy was in bad shape and that the Fed’s purchase of mortgage debt would help.
“The chair of any committee can respond to comments that challenge his view in ways that essentially inform the committee that the issue isn’t worth discussing. This chairman doesn’t do that,” said Jeffrey Lacker, president of the Richmond, Va., Fed bank, who worried that the Fed was putting itself in the uncomfortable position of allocating capital in the economy. “He takes other views seriously.”
Leaders of regional Fed banks aren’t the only constituency Bernanke has rallied around a set of bold actions. Staff members at the Fed in Washington are known for their high-octane intellects and spirit of political independence. But they also tend to be insular and disinclined to rush into decisions.
One mid-level staffer working on financial rescue issues said recently, “I’ve been here 20 years, and before the last few months never really dealt with anyone outside this building.”
One Fed governor, when he began, was expected to go through layers of bureaucracy just to get a daily update on the Treasury bond market; now he calls the lower-level staff who monitor those markets directly.
From the day he became chairman three years ago, Bernanke has tried to make the culture less hierarchical. Senior staff members now commonly refer to governors by first names, instead of addressing them with the title “Governor,” as they did previously. (The big boss is still “Chairman Bernanke.”)
And, whereas Greenspan once was briefed before meetings in ritualistic sessions with staff, Bernanke presides over sessions with more debate and discussion, often involving anyone on the staff with expertise on an issue rather than just top-level directors.
A decade ago, when the Fed wanted to know how it might deal with technical issues created by the government’s need for fewer Treasury bonds, a study of the issue took 18 months and involved 73 economists across the Fed system. The result was a 165-page report.
This year, the Fed has made decisions of similar complexity and importance over a single weekend.
In developing responses to the crisis, Bernanke collaborated extensively with the Bush administration, and has done so under the Obama administration, even though the Fed traditionally maintains its distance from political authorities.
His inclination to build consensus has extended internationally as well. In October he played a leading role in engineering a joint global interest rate cut with the European Central Bank and the central banks of Britain, Canada, Switzerland and Sweden. He is particularly close with Bank of England Gov. Mervyn King, who shares his academic background, and has quietly urged European Central Bank President Jean-Claude Trichet to move more aggressively to stimulate the economies of Europe.