How Bernanke's revolution changed the Fed
By Neil Irwin, Los Angeles Times- Washington Post News Service
Published: April 14, 2009, 23:11
Every six weeks or so, around a giant mahogany table in an ornate room overlooking the National Mall, 16 people, one after another, give their take on how the US economy is doing and what they, the leaders of the Federal Reserve, want to do about it.
Then there is a coffee break. While most of the policymakers make small talk in the hallway, their chairman, Ben Bernanke, pops into his office next-door 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 synthesise the views of his colleagues goes a long way toward explaining how he has revolutionised 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 who lacks the charisma of a skilled politician.
He also happens to run an organisation designed for inertia: Decision-making authority is shared with four other governors in Washington appointed by the president; the heads of regional Fed banks in 12 cities 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 past 18 months, Bernanke has transformed that stodgy organisation, invoking rarely used emergency authorities. 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, his leadership style is a stark contrast with that of his predecessor, Alan Greenspan, whose tenure was characterised 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.
"It's not his way. I've known him for 25 years. 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 over the past 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 them to think of creative ways that the Fed can guard the economy from the downdraft of a financial collapse.
This is an institution that not long ago could spend the better part of a two-day policymaking meeting deciding whether its target for short-term interest rates should be 5.25 per cent or 5 per cent. 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 is why Bernanke's Fed has been trying to dream up ideas out of the clear blue sky. The result has been 15 Fed lending programmes, many with four-letter acronyms, most of them unthinkable before the current crisis.
Under one unconventional programme, 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 programmes 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.
"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 programmes, but for many, Bernanke has been the catalyst.
In November, for instance, the Fed moved to push down mortgage rates by buying $600 billion (Dh2.2 trillion) in mortgage-related securities; in March, it increased that number by another $850 billion.
But sources said Bernanke raised the possibility 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 presidents of regional Fed banks.
In November, Bernanke called individual committee members to see whether 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 US government stood behind the mortgage finance giants.
"Having heard that," he might say, "let me add some thoughts of my own."
"In a crisis, the task a chairman assigns is 'Find a way to do this.' It's not a question of 'Can we do this?'" said Vincent Reinhart, who was a senior Fed staffer until 2007 and is now a resident scholar at the American Enterprise Institute.
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 Governor 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.
By Neil Irwin, Los Angeles Times- Washington Post News Service
Published: April 14, 2009, 23:11
Every six weeks or so, around a giant mahogany table in an ornate room overlooking the National Mall, 16 people, one after another, give their take on how the US economy is doing and what they, the leaders of the Federal Reserve, want to do about it.
Then there is a coffee break. While most of the policymakers make small talk in the hallway, their chairman, Ben Bernanke, pops into his office next-door 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 synthesise the views of his colleagues goes a long way toward explaining how he has revolutionised 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 who lacks the charisma of a skilled politician.
He also happens to run an organisation designed for inertia: Decision-making authority is shared with four other governors in Washington appointed by the president; the heads of regional Fed banks in 12 cities 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 past 18 months, Bernanke has transformed that stodgy organisation, invoking rarely used emergency authorities. 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, his leadership style is a stark contrast with that of his predecessor, Alan Greenspan, whose tenure was characterised 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.
"It's not his way. I've known him for 25 years. 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 over the past 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 them to think of creative ways that the Fed can guard the economy from the downdraft of a financial collapse.
This is an institution that not long ago could spend the better part of a two-day policymaking meeting deciding whether its target for short-term interest rates should be 5.25 per cent or 5 per cent. 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 is why Bernanke's Fed has been trying to dream up ideas out of the clear blue sky. The result has been 15 Fed lending programmes, many with four-letter acronyms, most of them unthinkable before the current crisis.
Under one unconventional programme, 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 programmes 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.
"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 programmes, but for many, Bernanke has been the catalyst.
In November, for instance, the Fed moved to push down mortgage rates by buying $600 billion (Dh2.2 trillion) in mortgage-related securities; in March, it increased that number by another $850 billion.
But sources said Bernanke raised the possibility 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 presidents of regional Fed banks.
In November, Bernanke called individual committee members to see whether 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 US government stood behind the mortgage finance giants.
"Having heard that," he might say, "let me add some thoughts of my own."
"In a crisis, the task a chairman assigns is 'Find a way to do this.' It's not a question of 'Can we do this?'" said Vincent Reinhart, who was a senior Fed staffer until 2007 and is now a resident scholar at the American Enterprise Institute.
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 Governor 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.
