Ben Bernanke’s first exposure to monetary policy was reading the works of Milton Friedman, the Nobel laureate. That was 30 years ago, when Bernanke was a graduate student at M.I.T., and he has been studying central banking ever since. By the time President Bush nominated him to run the Federal Reserve, at the end of 2005, Bernanke knew more about central banking than any economist alive. On virtually every topic of significance — how to prevent deflationary panics, for instance, or to gauge the effect of Fed moves on stock-market prices — Bernanke wrote one of the seminal papers. He championed ideas for improving communications between the Fed — whose previous chairman, Alan Greenspan, spoke in riddles — and the public, believing that clearer guidance about the Fed’s aims would help the economy run more smoothly. And having devoted much of his career to studying the causes of the Great Depression, Bernanke was the academic expert on how to prevent financial crises from spinning out of control and threatening the general economy. One line from his “Essays on the Great Depression” sounds especially prescient today: “To the extent that bank panics interfere with normal flows of credit, they may affect the performance of the real economy.”

Bernanke, who came to the job with a refreshing humility — a desire to be less an oracle like Greenspan than a plain-speaking technocrat —faces exactly this sort of crisis now. Ever since last summer, a meltdown in financial markets has led to daunting losses in the banking industry and throughout Wall Street. Despite having written extensively on how to deal with such episodes, Bernanke has thus far been unable to reinstill a sense of confidence. His faith in modern forecasting models notwithstanding, he failed to foresee that the sudden rise in homeowner defaults, which triggered the crisis, would have such far-reaching effects. And the monetary medicine that he has prescribed, including some of the very tools that he lovingly detailed in his research, have yet to produce a turnaround.

Read it all. Mr Bernanke has had a very rocky start, and the Fed blew it badly in December 2007, but he also has an exceptionally difficult job. People forget that new Fed chairman have a learning curve, the same was true of Ben Bernanke's predecessor--KSH.

Filed under: * Economics, Politics • Economy

1. Charley wrote: There’s not a whole lot a Fed Chairman can do when an economic expansion was built on the teetering foundation of making large, six figure loans to people with tenuous credit at best. I’d suggest he re-read a little Adam Smith and simply let chips fall where they may.  Tough love, baby.  You can only put lipstick on the pig of billions of dollars worth of bad lending decisions for so long.  It will ultimately have to work its way through the marketplace and it will hurt. January 21, 8:21 am | [comment link]

2. William P. Sulik wrote: I agree with Charley above—as much as I hate the suffering capitalism can cause.  I believe the triggering event was the bill that was passed which alleviated the credit card companies from the responsibility of passing out debt without the responsibility for checking on risks.  This was a terrible thing. Also it should be noted that the Fed Chair is the Chair of a Board—it is the he Federal Reserve Board of Governors which collectively make the decisions. January 21, 11:20 am | [comment link]

3. Tom Roberts wrote: 2- I’d put the underregulation of the mortgage market (esp. Fannie Mae and Freddie Mac) on the same plane, with more $‘s associated with the issue. As long as buyers could flip their real estate assets in an escalating market, mortgage lenders didn’t have to check for credible valuations either. It is cut from the same cloth as your retail credit card issue. January 21, 11:25 am | [comment link]

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