Bernanke's Speech, as Chairman Ben's Brief for Reappointment

If you're chairman of the Federal Reserve, you don't get paid to spread gloom and doom. So, not surprisingly, Ben Bernanke had some uplifting things to say in today's speech at the Kansas City Fed's economic conference in Jackson Hole, Wyo. The economy is "beginning to emerge" from its deep global recession, he said. A year from now, we will have seen "substantial progress" toward a sustained economic recovery. Standard boilerplate.

But there was reason to take note. Bernanke's speech constituted his most extensive and aggressive argument that the Fed's actions—along with those of other central banks and government agencies—had averted what could have been another Great Depression. Almost simultaneously, the announcement of an unexpectedly large 7.2 percent increase in sales of existing homes in July seemed to vindicate optimism—and the stock market reacted accordingly, with the Dow closing up 1.6 percent to more than 9500. Victory, it seems, has been snatched from the jaws of disaster.

Still, with Bernanke's term as Fed chairman expiring in January, it's hard to read this speech just as an analysis of the crisis. His reappointment has strong support in the financial community and among economists, but he has critics in Congress, and the White House has yet to signal its intentions. In many ways, today's speech was like a cover letter listing all the reasons for his reappointment. As Bernanke sees it, they are:

ONE: THE CRISIS WAS GLOBAL, SO THE RESPONSE HAD TO BE GLOBAL
Bernanke reminds us that, among myriad bailouts, the Swiss rescued UBS; the British nationalized mortgage lender Bradford and Bingley; and the governments of Belgium, Luxembourg, and the Netherlands effectively nationalized Fortis, a $1 trillion institution. He recalls that on Oct. 8, the Federal Reserve and five other major central banks simultaneously cut interest rates 50 basis points. And he counts Oct. 10 as a "watershed" in the crisis because the finance ministers and central bankers of the G-7 countries agreed to collaborate in stabilizing the world financial system.

TWO: THE CULPRIT IN THE FALL WAS PANIC
Bernanke concedes that even in August he didn't see the tidal wave that was about to hit. To be sure, Bear Stearns had failed, the economy was weakening, and unemployment was up a percentage point from a year earlier. But the problems, he insists, didn't threaten the viability of the financial system until panic seized following the Lehman bankruptcy. From then on, the distress of financial markets quickly spread to the "real economy" as consumers and firms entered into a downward spiral.

THREE: ONCE THEY SPOTTED THE CRISIS, GOVERNMENTS HAD TO MOVE. FAST.
"History is full of examples in which policy responses to financial crises have been slow and inadequate," he said. By contrast, the Fed and Treasury—and their counterparts in other countries—acted quickly to stabilize financial markets in the wake of the Lehman bankruptcy. For its part, the Fed quickly decided to lend money to shore up the markets for commercial paper, money-market funds, and home mortgages. It also cut the overnight Fed Funds rate from 2 percent in September to effectively zero in December.

FOUR: IN OVERSEEING THE FINANCIAL SYSTEM, LIQUIDITY MATTERS
Traditionally, government regulators have focused on loan quality and capital. Superficially, this makes sense. Capital and loan-loss reserves act as cushions against lousy loans. So, banks that make decent loans and keep ample capital should be safe. But this sort of supervision doesn't go far enough. In times of crisis, even banks with mostly good loans and ample capital can experience severe outflows of short-term funds that threaten their viability and feed a systemwide panic. Government regulators, Bernanke implied, might want to put limits on the extent to which banks can rely on short-term funds.

How much do these points help or hurt his prospects? Bernanke does make a fairly strong case that, without decisive and collective actions by governments and central bankers, the world might be much worse off than it now is. On the other hand, that raises a major question. Could the crisis have been averted, or at least mitigated, in the first place? There are those who contend that, once Bear Stearns failed, the Fed and the Treasury should have recognized the extreme fragility of the fianancial system and responded to it. Bernanke sidesteps that issue. His critics may not let him off so easily.