Meet Ben Bernanke: Depression Scholar, Superhero

As a schoolboy in the mid-1960s, Ben Bernanke followed the usual rites of passage in tiny Dillon, S.C. He waited tables at South of the Border—a roadside attraction on Interstate 95—and played sax in a high-school garage band ("We murdered 'Light My Fire,' his fellow band member Johnny Braddy recalls). Inevitably, young Ben and his friends found themselves gathering in the afternoon around the comic-book rack at the Jay Bee Drug Store, which was run by his father and uncle and where he worked after school. "He was very efficient," recalls his Uncle Mort Bernanke, but "he loved to be in that comic-book section." Asked now what superhero he most identified with as a kid, Bernanke laughs and allows that he was partial to the stalwarts of the DC Comics group, especially Superman and Batman.

Bernanke, instead, grew up to become Finance Man. Well, OK, a guy in tights with an "F" stamped on his chest is not the image that immediately comes to mind when sitting across from Ben Bernanke. Short, white-bearded and placid, the 54-year-old Federal Reserve chairman seems the unlikeliest of heroes. But in recent weeks, Bernanke has been trying, in effect, to save the world. He has super-empowered the Fed, expanding its lending authority in unprecedented ways, while fighting off a global financial panic that feels to him alarmingly like the one that led to the Great Depression, his life's focus as a scholar. In the past year, Bernanke has more than doubled the Fed's balance sheet—the amount it can spend—to $1.77 trillion, and flung open new lending windows to commercial businesses and governments across the world.

For Bernanke, this is a personal mission as much as it is professional. Mild-mannered though he is, the Fed chief has always had a grand passion for big causes—one reason why, as a newly minted Ph.D. out of MIT, he picked one of the hardest of all problems in economics: what caused the Depression? The main reason, Bernanke ultimately concluded in a study that is often cited by economists, was that in the critical 3½ years between the 1929 stock-market crash and FDR's New Deal in March 1933, the Hoover administration and the Fed allowed at least a third of the nation's banks to go under. Had that not happened—along with the Fed's disastrous decision then to keep interest rates high—the Great Depression might have remained a not-so-terrible recession, he argued. Today Bernanke is testing out his theory in the most dramatic way, with the entire globe serving as his laboratory. He's determined to be proved right. "It's just in his blood. He has an absolute commitment to not let the financial markets collapse," says Mark Gertler, a longtime academic colleague and friend at New York University.

Like one of his Depression-engendered superheroes, Bernanke looks and acts meek until he goes into action. In one typical span of days recently, he spent a weekend mediating between Citicorp and Wells Fargo to buy ailing Wachovia, laid plans on Monday for a revolutionary new commercial-paper instrument and the next day coordinated a global interest-rate cut. So fast did Bernanke move that at one point early in the rescue effort, House Financial Services chairman Barney Frank, an irrepressible wit, told him: "People are referring to you as The Loan Arranger, with your faithful companion Hank." (As in Paulson, the Treasury secretary.) The crack did not go over well with the self-effacing Bernanke, says Frank. "I could feel him grimace over the phone. He was afraid he was getting too much criticism for doing all these loans."

While many economists on both the left and right are now Bernanke fans, some think he's fallen far short of superhero status as Fed chairman. The criticism of Bernanke goes like this. First, he may be working fast now, but he was late to perceive the dimensions of the crisis; Bernanke, like his predecessor Alan Greenspan, mistakenly thought the mortgage mania would collapse in a contained way like the dotcom bubble of the late '90s. Second, in his desperation to avoid deflation by lowering rates and piling on debt, Bernanke is risking a new, long-term wave of inflation. Finally, he still doesn't have a long-term plan beyond the troubleshooting of recent weeks. (His nickname on Wall Street: "Helicopter Ben.")

"He created a lot of uncertainty" by rescuing Bear Stearns, then letting Lehman Brothers fall, says Allan Meltzer of Carnegie Mellon, author of a history of the Fed. "You either have to say you're going to save everybody [what the Europeans did] or not going to save anybody," Meltzer says. Bernanke strongly disagrees. He argues that Lehman was just too far gone to save "legally." Even critics like Meltzer concede that when Bernanke did move, his actions were revolutionary.

But as the panic seems to be receding, the nation is heading into what Bernanke acknowledges will be a somewhat drawn-out recession. He doesn't know how long the downturn is going to last (most economists are pretty much writing off 2009). But privately he is certain that at least he has avoided the worst: a major depression, according to a highly placed source familiar with his thinking. "We've avoided … those critical errors that accounted for the 1930s," Bernanke declared last Wednesday to the Economic Club of New York.

In line with his mild-mannered persona, Bernanke has been careful to move to the back of the stage. Paulson has been the more visible member of the Treasury-Fed dynamic duo, taking the lead in pushing for congressional passage of the $700 billion rescue package. Bernanke knows that his main job in the rescue was to quickly loan out money. Treasury's purview was to persuade Congress to approve the bailout and appoint people to implement it.

Behind the scenes, Bernanke has played a more powerful role. He has prodded Paulson and an ideologically squeamish White House to go along with him at critical junctures. After he injected $85 billion into AIG insurance on Sept. 16, Bernanke invited Paulson into his sparsely decorated office a block from the State Department and convinced him they needed a more systematic solution. Paulson had to go to Congress to get legislative approval for a huge fiscal bailout, Bernanke told the Treasury secretary, according to two sources familiar with the conversation who would describe it only on condition of anonymity. Paulson agreed.

Even then, however, the two differed on the focus of the $700 billion plan. Bernanke all along wanted a direct capital injection into the banks—the financial equivalent of an adrenaline shot to a stopped heart—as the best way to open up the frozen credit markets. But that would mean partial nationalization—anathema to the free-marketers in the White House and Congress. Paulson held out for an alternative scheme to buy up distressed mortgage securities from the banks. But no one could figure out how to price the securities in a way that wouldn't either sink the banks or rob the taxpayers. After the markets tanked yet again (and Britain injected its own banks with capital, starting the trend), Paulson finally endorsed the Bernanke approach on Oct. 13. Yet even on the day he announced the plan, the Treasury chief continued to proclaim his reluctance to directly buy stakes in the banks. (Asked about Bernanke, Paulson told NEWSWEEK he was "fortunate" to be working with him. He's "willing to make tough decisions," he said.)

Last week, in response to the new approach, the high interest rates in credit markets did begin to ease slightly. Now it's a question of waiting for banks to start lending again, although Bernanke believes the financial system may need another slug of federal money. "The amount of mortgage credit outstanding, if you include both residential and commercial, is on the order of $14 trillion. So $700 billion is only 5 percent of that," he noted. The most the current fund can do is "create some liquidity"—while everyone hopes for house prices to bottom out soon. "He's attacking this as a gigantic plumbing problem," says Gertler. "It's not ideological. It's not political."

Bernanke does seem temperamentally suited to the task. By all accounts, he never seems to lose his cool—unlike his comrade in ARMs Paulson. "Even as a teenager he seemed to have a calming influence on all those around him," says his hometown friend Braddy. Bernanke also prefers to manage consensus from the sidelines. That distinguishes him from his predecessor Alan Greenspan, who in 18 years turned his chairmanship into a czardom

. Greenspan heartily endorsed Bernanke as his successor in 2006—just before the markets turned. Since then, to a startling degree, Bernanke has quietly repudiated the laissez-faire approach of Greenspan. The former Fed chief, whose mantra was that the market was doing fine assessing the risk of "derivatives" on its own, declined to write even marginal regulations for mortgage lending for 14 years despite the 1994 congressional mandate to do so. But Bernanke, in July 2008—far too late to make a difference in the subprime scandal—announced a new "Regulation Z," which finally created some common-sense lending rules such as forbidding mortgages without sufficient documentation. Bernanke is tending toward the conclusion that the Fed is going to have to deal with bubbles before they go on too long. He's still leery of using interest rates to "pop" bubbles, just as Greenspan once shied away from containing "irrational exuberance." But Bernanke believes regulation and oversight will have to be rethought in a major way. The key, he knows, is not to overdo it as in Japan—another economy he has studied closely.

Bernanke does, however, share some qualities with Greenspan. Both were child prodigies at math—"Ben was in first grade for two weeks, and the teacher said he doesn't belong here and put him in second grade," says his Uncle Mort—and both are musicians. Both men are conservative acolytes of arch-free-marketer Milton Friedman. But there the similarities end. While Greenspan leans toward libertarianism—the idea that markets work fine on their own, and government should keep out—Bernanke made his grade at Princeton teaching and studying the greatest market failure of modern times. (Bernanke always loved history as a kid, but he gravitated toward economics—and his study of the Depression—because it was about real people rather than kings and queens.)

Asked how he's managed to stay calmly at the center of the whirlwind all these weeks—with his life's work on the line—Bernanke just shrugs. He still manages to spend some Clark Kent time with his wife, Anna, doing the New York Times crossword puzzle together and watching favorite shows like "House." (Bernanke jokes that as an economist, he's appalled at all the money Dr. House spends in ordering MRIs.) Even so, the Fed chief knows he's not going to have much leisure time in the months ahead. Paulson will almost certainly depart with the new administration. Bernanke—whose term runs until 2010—will have to make his case all over again with a new Congress next January. A lot is riding on his success in doing that. Both the Fed and the Treasury—and by implication the American taxpayer—have gained the kind of authority over the U.S. economy that no one would have dreamed of a few months ago. As a man who began as a small-town boy from Dillon, S.C., says Braddy, Bernanke "understands Main Street as well as he does Wall Street." He will need to make heroic efforts to save both in the years ahead.

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