Why the Fed Should Just Let Bad Banks Die

Arif Ali/AFP/Getty Images

Arif Ali/AFP/Getty Images

When Ben Bernanke began his tenure as Chair of the Federal Reserve in 2006, America didn’t know much about this academic-turned-public servant. Once Chair of the economics department at Princeton University, Bernanke did a stint on the Fed Board of Governors and served as Chair of the Board of Economic Advisers under President George W. Bush. At the time, Bernanke was seen by many as Greenspan Lite, an economist of the same persuasion as the notoriously libertarian leaning former Fed Chair but with a softer touch.

The perception was fairly accurate. Bernanke, along with Greenspan and much of the economic hegemony at the time, did champion a light approach to financial regulation. As a result, the fermenting financial crisis escaped notice or consideration by many, if not most, of the world’s top economists until about 2007 when it was too late to stop.

The root cause of the problem was obvious: the financial sector had become bloated, unstable, and misguided. Worse yet, financial gluttony was fed in part by the Fed itself. Not only had the central bank championed financial deregulation — Glass-Steagall was infamously repealed in 1999 — but it had kept the target federal funds rate low for a long period. Critically, this drove interest rates on mortgages down and helped fuel the sub-prime lending frenzy that fueled the crisis.

To his credit, Bernanke acted swiftly and severely to try to minimize the fallout — and, love him or hate him (I try to maintain a calculated mix of deference and disinterest myself) his actions helped steer the U.S. economic leviathan through the storm. Many in the economic and political hegemony credited Bernanke with routing a second Great Depression.