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'Helicopter Ben' Is Being Unfairly Judged

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By JAMES PRESSLEY

Bloomberg News

Published: August 31, 2008

"Ben Bernanke's Fed: The Federal Reserve After Greenspan" by Ethan S. Harris, Harvard Business Press, 237 pages ($26.95)

Federal Reserve Chairman Ben Bernanke has inspired some damning nicknames - Helicopter Ben, B-52 Ben and Bearnanke, to cite just three.

Perhaps we should cut the man some slack, argues Ethan S. Harris in his sensible yet frustrating book, "Ben Bernanke's Fed: The Federal Reserve After Greenspan."

"We should judge the Bernanke Fed on the possible, not the impossible," writes Harris, the chief U.S. economist for Lehman Brothers Holdings Inc. in New York.

Since Bernanke, 54, was sworn in as chairman on Feb. 6, 2006, he has wrestled with rolling financial crises, brickbats and some blunders of his own making. Inflation swelled, the housing bubble burst and credit markets froze. Then the Fed spooked investors with a U-turn last August, delaying its war on inflation in favor of rescuing markets and banks.

Amid a cacophony of critics shouting that the Fed has eased rates too much or too little, Harris states the obvious.

"The Fed cannot both raise rates to fight inflation and cut rates to help the economy and capital markets," he says.

When the former Princeton University professor became the Fed chairman, bond traders voiced doubts, Harris recalls. Wasn't this "Helicopter Ben," the man who once said the central bank could fight deflation with a "helicopter drop" of money?

Harris doesn't shy from laying out the Bernanke Fed's rookie errors, notably during the credit collapse in August 2007. Just 10 days after declaring that inflation was their overriding concern, Fed policy makers reversed course, cutting the discount rate and making financial-market stability the priority for changes in interest rates.

The uneven performance has prompted speculation about whether the next U.S. president will reappoint Bernanke when his term expires in 2010. Yet Harris argues, more or less persuasively, that Bernanke is being unfairly judged.

"We should judge the Bernanke Fed relative to what it inherited: a nasty cocktail of popping asset bubbles and building inflation pressures," Harris writes.

Harris, I'm relieved to say, urges the Fed to take pre-emptive action to deflate suspected bubbles. Yet he also bends over backward to justify why the Bernanke Fed - and most economists - were caught off-guard by the scope of the crisis in capital markets last year. Lehman was the largest underwriter of mortgage bonds before the subprime market collapsed.

How did so many pros get it so wrong? Harris chalks it up to a decade of "tremendous innovations in financial markets."

Yet many a Cassandra had warned that a toxic mix of complex financial instruments and leverage was driving markets toward a fall. And history teems with stories of high rollers who slough off risk so long as the easy money is pouring in.

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