Bernanke's Test: Ben Bernanke, Alan Greenspan, and the Drama of the Central Banker
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In examining the challenges facing Bernanke, author Johan Van Overtveldt reviews Greenspan's long record as Fed chair, as well as Ben Bernanke's career as an economist prior to replacing Greenspan. The book offers much-needed historical context by exploring the role and reach of the central banker, and how former Fed chairmen — Benjamin Strong, William McChesney Martin, Arthur Burns, and especially Paul Volcker — dealt with the same complex issues Bernanke faces today.
uncertain. Ben Bernanke, who inherited the chairmanship of the Fed from Alan Greenspan early in 2006, became arguably the central figure in the management of the most serious financial crisis since the Great Depression. Before discussing Bernanke and his chairmanship of the Fed during this time of great crisis, it is imperative to present some historical perspective, which is the subject of the first part of Bernanke’s Test. I will begin with the creation of the Federal Reserve System and then
understanding of what was happening left the Fed standing idly by while the American financial system collapsed, thousands of banks failed, the dollar lost much of its value, and production declined dramatically. As Meltzer noted: 28 J O H A N VA N OV E RT V E L D T Deposit insurance, stock market regulation, and separation of commercial and investment banking, among other New Deal measures, showed that the public, through its representatives, no longer trusted the Federal Reserve alone to
frankness become trickier. For one thing, they undermine the implicit deal between the political powers and the Fed: each tends to its own business and leaves the other alone. Speaking out as Fed chairman on clearly political issues, such as tax reform, education, or trade with China, opens the door to political interference with the monetary business of the Fed. For example, Greenspan supported the Bush tax cuts in 2001 and partial privatization of Social Security in 2005. His remarks in these
evidence presented by Bernanke and the others involved in this research reinforced the conclusion reached by Friedman and Schwartz as to cause and effect. As Bernanke commented later: Countries on the gold standard were often forced to contract their money supplies because of policy developments in other countries, not because of domestic events. The fact that these contractions in money supplies were invariably followed by declines in output and prices suggests that money was more a cause than
resilient.” The subprime crisis that erupted in full in August 2007 was only the beginning of what soon turned out to be the worst financial crisis since the Great Depression. In the next chapters, I 160 J O H A N VA N OV E RT V E L D T will briefly reconstruct the chronology of the crisis and then dig deeper into the underlying causes of these dramatic developments. Bernanke, and the policies pursued by his Federal Reserve Board, inevitably play a crucial role in the story. Chapter 13 The