Hey Ben Bernanke - Just Apologize

Jan. 27, 2010 2:25 AM ETAIG, GS, BAC4 Comments
Rick Newman profile picture
Rick Newman

It worked for Bill Clinton, Mel Gibson, David Letterman and even dog-abuser Michael Vick. Millions of embattled husbands have done it, finding much relief. Even Tiger Woods is likely to do it sooner or later.

Just say you’re sorry.

Federal Reserve Chairman Ben Bernanke apparently doesn’t think he has anything to apologize for. But lots of others do, and the disagreement threatens not just Bernanke’s future but the standing of the Federal Reserve, with him or without him.

The controversy over Bernanke basically boils down to two issues: The Fed’s low-interest-rate policy in the early 2000s, and the handling of the AIG bailout in 2008 and 2009. On interest rates, the Fed famously drove interest rates very low after the tech bubble burst in 2000, to help limit the pain of a downturn. The Fed began lowering rates at the beginning of 2001 and stuck with that policy until the middle of 2004, bringing rates close to historic lows. “It’s worth asking why the Fed took rates to such ridiculous extremes,” writes Barry Ritholtz in Bailout Nation. “The 2001 recession was fairly mild.” Ritholtz’s conclusion: The Fed was mainly trying to pump up the stock markets and bail out investors who got creamed in the dot-com meltdown.

Those low rates did help boost the markets—and a lot more. Many economists feel that the Fed’s cheap money helped pump up the housing bubble, as borrowers found loans plentiful—whether they qualified or not—and investors seeking higher returns cranked up demand for subprime mortgages and risky derivatives tied to them.

Bernanke has staunchly defended the Fed’s actions during that time. In one recent speech, he presented a detailed technical case for why low interest rates couldn’t have caused the housing boom and bust. He acknowledged that regulators—like the Fed—should have been more vigilant in their oversight

This article was written by

Rick Newman profile picture
I am Chief Business Correspondent for U.S.News and author of the regular Flowchart column (http://www.usnews.com/flowchart) at usnews.com (http://usnews.com/). I'm a journalist, obviously, not a financial professional, and I don't take positions on stocks or investment themes. Instead, I try to make the connections between the things consumers care most about and the abstruse workings of the global economy. Oh - and point out the many myths and follies of our hyperbolic media. Busy times for that.

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