Federal Reserve Board Chairman Ben Bernanke’s first term is nearing expiration, and many are wondering if he will be reappointed by Pres. Barack Obama to a second term. Some think that his willingness to shore up the financial services sector with hundreds of billions of federal dollars and guarantees might have raised his stature high enough for Obama’s economic advisors to recommend a reappointment.
The American Enterprise Institute’s Desmond Lachman isn’t so sure. Writing in The American, Lachmann notes that Bernanke’s background and expertise should have allowed him to see the impending financial services meltdown.
“What Bernanke’s supporters happily gloss over is the policy role that he played in both the run-up to and in the deepening of the country’s worst economic recession in the three and half years since he was first sworn in as Federal Reserve chairman in February 2006. They also make no mention of how closely involved Bernanke was with former Secretary Treasury Henry Paulson’s less than successful attempts to promote financial stability through the (correctly) much maligned Troubled Asset Relief Program (TARP). Nor do they mention Bernanke’s involvement with the Lehman debacle.
“In rating Bernanke’s overall tenure as Federal Reserve chairman, one might start by asking why he was as passive as he was in 2006 when the worst of the sub-prime mortgage loans were being made under his watch. During that year, a total of around $600 billion in sub-prime mortgage lending, or around one half the final amount of sub-prime lending that was extended, was made on conditions that were materially more lax than earlier vintages of sub-prime lending. Indeed, it became commonplace for banks to extend loans up to 100 percent of the value of the underlying property and to make such loans to borrowers without incomes, without jobs, and without assets.”
Of course, Lachman’s analysis assumes that these events could have been forecast effectively. It’s not clear to me that anyone but a handlful of highly knowledgeable financial analysts really understanood the implications of subprime mortgage foreclosure fall-out on the financial services industry. It wasn’t the subprime lending per se, it was the peculiar way the loans and guarantees were packaged into mortgage backed securities.