Pity Ben Bernanke.  The Fed Chairman has his detractors in the Senate, although minority leader Mitch McConnell believes the confirmation is not in danger.  It seems more Senators each day join the anti-Bernanke movement, including Sen. John McCain.

Bernanke lost the people’s confidence because of his role in the bank bailout with then Secretary of the Treasury, Hank Paulson, in the final days of the Bush administration.   The two were the primary proponents of the $800 billion controversial Troubled Asset Relief Program (TARP).  According to some, Bernanke took an activist role when he twisted Bank of America’s arm into absorbing Merrill Lynch.  Bernanke threatened the entire Board and the Chairman of B of A, Ken Lewis, with dismissal when Lewis wanted to back out of the deal as he discovered that Merrill’s actual losses significantly exceeded what Merrill disclosed and would cause a “Materially Adverse Change” to the deal structure.¹  Together with the other interventions transpiring at the time, this over-extension of the Fed Chairman’s duties fueled the sense of unease about government’s role in the economy, particularly because the Fed’s role and functions are generally obscure.

There is no doubt, also, that the public feels hoodwinked into swallowing a TARP program that never accomplished the objectives for which it was intended.  Excluding the inexplicable use of TARP funds to bail out automotive companies under pressure from one of President Obama’s core constituents, the United Auto Workers, TARP was used to provide capital directly to banks rather than to purchase their “toxic assets” (exotic securities with no liquid market) as the law was written.  Since TARP increased the deficit, and the deficit is financed by the Fed, the Fed could have worked with the banks directly under its charter to shore up bank capital and prevent failures.  TARP became symbolic of distorted government programs that no one understood but  everyone instinctively disliked, and Bernanke remains a symbol of TARP.

Reading Bernanke pre-crisis, however, leaves a different impression about his core beliefs.  In a 2002 speech honoring Milton Friedman’s 90^th birthday, Bernanke paid homage to the legendary monetarist by an insightful analysis of his and co-author Anna Schwartz’ seminal work A Monetary History of the United States.²  Bernanke agreed with the historical and empirical evidence Friedman & Schwartz adduced and concluded “… the economic collapse of 1929-33 was the product of the nation’s monetary mechanism gone wrong”  caused by the Fed over-contracting the money supply.  Bernanke’s own research, quoted in his speech, “argued that the effective closing down of the banking system might have had an adverse impact by creating impediments to the normal intermediation of credit”; in other words, banks choke off lending if there are widespread bank failures—precisely the situation we now face.  At the end of his speech, Bernanke, as representative of the Fed, famously confessed, “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

We see in these statements Bernanke’s fear of risking another depression in 2007-2008 that explains his reaction extending beyond the bounds of the Fed’s primary purpose to manage the money supply and fight inflation.  Had he stayed with that mission, he might not be suffering the animadversion of today’s politician-turned-economist.

Many are concerned about the affect the extraordinary Congressional dissent is exerting on the independence of the Fed.  This putative “independence” is questioned by economists such as Loyola University professor Thomas DiLorenzo.³  Still others, including Rep. Ron Paul (R. TX.), believe that the Fed should not be independent and should answer to the people through elected representatives, hence his call for an annual audit of Fed operations.  Then there is the White House.  Bernanke’s job is made all the more difficult by the inevitability of tighter money supply in the future that will cause higher interest rates.  Without real economic growth, however, it is difficult to tighten money; yet the perils of another bubble loom if interest rates are held at zero or if more money is poured into the system.  Unbeknown to themselves, the administration’s actions and words seem dispositive to the growing unrest surrounding the Fed, which has little choice but to print the money to finance their runaway spending, cool the uncertainty of speeches that are more populist than substantive, and finance the heavy risk and leverage assumed by Freddie and Fannie.

Bernanke can do himself and the country a great service by recalling the words spoken ten years before his speech by his intellectual mentor.  When asked in an interview, “what would you say are the unsolved economic problems of the day?”⁴, Friedman replied with characteristic trenchancy: “One unsolved economic problem of the day is how to get rid of the Federal Reserve.  The most unresolved problem of the day is precisely the problem that concerned the founders of this nation: how to limit the scope and power of government.  Tyranny, restrictions on human freedom, come primarily from governmental institutions that we ourselves set up.”

Dr. Bernanke might assure his confirmation if he makes his second penance to Dr. Friedman: You’re right, we did it.  We’re very sorry.  But thanks to you, we won’t do it again.

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[1] Letter to Congress by Andrew Cuomo, State Of New York, Office of the Attorney General, 23 April 2009, http://www.oag.state.ny.us/media_center/2009/apr/pdfs/BofAmergLetter.pdf

[2] “Remarks by Governor Ben S. Bernanke at the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois, November 8, 2002, on Milton Friedman’s Ninetieth Birthday”, The Federal Reserve Board, http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm

[3] DiLorenzo, Thomas, J. Dr. “The Myth of the Independent Fed.” The Freeman, April 1997, http://www.thefreemanonline.org/featured/the-myth-of-the-independent-fed/

[4] Interview with Milton Friedman, June 1992, David Levy - Vice President, The Federal Reserve Bank of Minneapolis, http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3748