Reading Michael Grunwald’s homage to Ben Bernanke, the 2009 Person of the Year, what’s striking is the list of defenders and opponents. At the top of the piece, Grunwald talks about how he has been assailed by “criticism from all directions”, but doesn’t really name names, relying instead on generalities such as “bleeding-heart liberals and tea-party reactionaries alike”. The list of named detractors is: Ron Paul, on the right, and Paul Krugman, on the left.
Meanwhile, the people lining up to praise Bernanke include Stanley Fischer; Mervyn King; monetary historian Liaquat Ahamed (who wrote the book Bernanke “wishes he had written himself”); Alan Greenspan; Frederic Mishkin; Jean-Claude Trichet; Kevin Warsh; Tim Geithner; and Hank Paulson. It’s heavy on Davos-circuit central bankers — the kind of men who instinctively circle their own wagons in times of crisis and will always say nice things about each other if asked. Besides, substantially all of them, bar Ahamed, would implicitly be criticizing themselves if they said anything bad about Bernanke’s decisions: they all signed on to what he did.
Grunwald himself has clearly decided that Bernanke is a hero, dismissing serious criticism of say the decision to let Lehman fail by simply saying that “it’s not clear how the Fed could have saved Lehman without a buyer”. (Of course there was a buyer — Barclays (BCS) — and it’s precisely by stepping in with some short-term Bear-style financing that the Fed and Treasury could have allowed a smooth acquisition to proceed.)
Most interestingly, Grunwald never mentions the Fed’s massive loss of independence over the course of the crisis. While it’s understandable as a policy response — the last thing you want in a crisis is the fiscal and monetary authorities pulling in different directions — it also carries much greater risks than some of the other things that Grunwald worries about. On the other hand, Grunwald I think understands the black-swan world that Bernanke’s facing:
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.
It’s not that either of these things are likely, of course, but the point is that markets are volatile, and that the dollar is liable to move sharply in an unknown direction with very little warning. The same is true of stocks and credit: if they can rise as far as they have done over the past 9 months, they can fall fast too.
So Bernanke needs to remain on a war footing, willing to react as necessary to chaos if it re-emerges, and staying in very close contact with Treasury. That will only solidify the degree to which he’s defended by the international technocracy, but it also makes it much harder for him to break the ropes tying him to the White House when he needs to start making politically-unpopular decisions.