Financial Times Review: Too Soon to Judge Bernanke
Might Wessel be too enamoured of his intrepid musketeers? Could tomorrow’s consequences be worse than anticipated? There are two reasons to be wary of Wessel’s conclusions. First, none of the musketeers saw the crisis coming. All of them, particularly Bernanke, were strongly supportive of Greenspan’s now controversial decision to keep US interest rates “too low for too long” following 9/11 (thus stoking the housing bubble). Likewise, of the Fed governors, only the late Ned Gramlich attempted to persuade Greenspan to exercise the Fed’s existing powers of regulation over the subprime mortgage industry. To no avail.
Second, the financial crisis is by no means over. In the space of a few months, the Fed’s balance sheet has more than tripled to almost $2,500bn – an extraordinary expansion that has almost certainly staved off deflation but at the risk of a return to what others, including the Chinese, fear may be a Great Inflation.
Finally, the political chickens have yet to come home to roost. As Wessel observes: “The more the Fed got involved in these politically charged bail-outs, the more it risked its prized independence in setting interest rates ... without fear of political interference.”
The Fed’s independence is under challenge on Capitol Hill. No one can discount the risk of a return to inflation. Until Bernanke has settled these two accounts, the jury should delay its verdict.
Edward Luce is the FT’s Washington bureau chief