Report Card for Fed Chief Bernanke

After a busy week at the Federal Reserve — assisting with JPMorgan Chase's takeover of Bear Stearns and allowing big investment houses to get emergency loans directly from the central bank — how does the Fed chief rate? Yale economist Robert James Shiller, Smith Moore analyst Juli Niemann with Noah Adams.

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From NPR News, it's ALL THINGS CONSIDERED. I'm Noah Adams.

There was lots of economic news this week, of course, most of them involving the Federal Reserve and its chairman, Ben Bernanke. First, the Fed negotiated the emergency sale of Bear Stearns which was on the verge of bankruptcy. The Fed also became the lender of last resort for other investment banks. In the past, only commercial banks could get loans and the Fed.

Also this week, the Federal Reserve lowered short-term interest rates by three-quarters of a percent. So, all in all it's a big week for Mr. Bernanke and we thought we would get an assessment from two experts.

Ms. JULI NIEMANN (Analyst, Smith, Moore & Company): I'm Juli Niemann. I'm an analyst with Smith, Moore & Company, St. Louis, Missouri.

Professor ROBERT JAMES SHILLER (Economics and Finance, Yale University): I'm Bob Schiller. I'm a professor of economics and finance at Yale, and I have a company called Macro Markets that issues securities.

ADAMS: And welcome, the both of you. It's Good Friday, the markets are closed, we have a bit of time to reflect.

And Juli Niemann, let's start with you there in St. Louis. How would you grade Chairman Bernanke at the end of this week? What do you think?

Ms. NIEMANN: Well, I think all the way along, he has been doing an excellent job simply because he's had no other choices - none of this was of his doing. He inherited this whole mess. And honestly, you don't know what to do until you're right into the middle of the mess. Unfortunately, the financial markets are always blaming the Fed for everything. They get themselves into this mess, and they expect constant government bail out. It's the history of the United States.

ADAMS: Robert Shiller, the plumber analogy comes to mind here - it's when you have a new plumber coming in your house and he looks at the old stuff and says, who in the world was your last plumber? Do you think that's the right situation for Bernanke to be reflecting on Alan Greenspan's work, the previous chairman?

Prof. SHILLER: Well, I think that Bernanke does share some of the responsibility because he was chair of the council under Bush. And I don't think that he showed much reaction to the current crisis, which is developing over a period of years.

ADAMS: Am I hearing this properly? Both of you are saying that he could have acted faster and more assertively, Bernanke.

Ms. NIEMANN: I think probably, the biggest problem is he's faced with a couple of things. First of all, if you do that, you're creating a moral hazard. You're encouraging the bad guys to continue with their bad behavior. Well, that's a risk unfortunately that we have to take now because the alternative will be absolutely intolerable. The other thing is inflation , and very clearly the dollar and commodities are all reflecting the fact that these moves are inherently inflationary, but the Fed has to basically make the decision - do you look for the financial collapse or do you go for fighting inflation later? They've telegraphed that message: first the economy, then we'll fight the inflation.

ADAMS: What about we've been hearing all week that if the Fed moves quickly, decisively, the world looks at this and says, oh, we really are in trouble, so we better hold back everything we're doing. Mr. Shiller?

Prof. SHILLER: Well, that of course is the paradox. That's one reason why it's very difficult to manage monetary policy, it has so many nuances and subtleties. I think that Bernanke is really a very capable chair because he understands what is the big issue - and the big issue that we're facing is the possibility of a financial melt down. And he is a scholar who studied the Great Depression. He's going to make sure that we don't let that happen again, and that involves decisive action. I think that's one thing we can credit him for having done.

ADAMS: There are some criticism, the idea the Federal Reserve getting directly involved in helping out an investment bank in trouble like Bear Stearns, that's a Bernanke move. Would Alan Greenspan have done that?

Prof. SHILLER: Well, I think it is important that we maintain a sense of trust in our financial institutions. Bear Stearns wasn't really bailed out because they ended up selling the company for a little over $200 million. People who were working for Bear and owned shares, you know, they're really destroyed. What the government did do is to try to make sure that the system doesn't implode, and I think that was the right thing to do.

ADAMS: Mm-hmm.

Ms. NIEMANN: And Greenspan did bail somebody out - it was long-term capital -and he was given accolades as being a genius for having done that. I think Bernanke should be accorded those same words.

ADAMS: Mr. Shiller, do you think that Mr. Bernanke at the end of this week is saying, well, that's the end of that and it's just going to swing the other way, or is he saying, gee, this could be the beginning of something really bad?

Prof. SHILLER: Well, I can't read his mind, but I imagine that he is really worried because he has taken a number of steps, you know, they created a number of new institutions - this term auction facility - and then the terms securities lending facility, and then the prime dealers credit facility. These are major steps. Now, we're loaning to non-banks, to dealers in treasury securities. So, he's expanding the scope of monetary policy. I think he is worried that he is going to run out of ammunition. Cutting the Fed funds rate, he doesn't have that much further to cut it, so he's looking for other tools and I give him credit for that. He's thinking ahead that we might have a serious crisis and he's acting on it.

ADAMS: I just wonder if you, Mr. Shiller, have confidence in Ben Bernanke at the end of this really difficult week. The stock market seems to be saying, he's okay.

Prof. SHILLER: Well, I admire Ben Bernanke and I think he's one of the best choices. On the other hand, I don't think that he or Greenspan were very focused on human psychology. And I think that they didn't see this.

ADAMS: Final word from Juli Niemann?

Ms. NIEMANN: When you're looking at the stock market though, this is a short-term reaction to what the Fed's doing, but we still have further to go on this because the recession is here, earnings are coming down. We have to batten down the hatches.

ADAMS: Juli Niemann is an analyst with the brokerage firm Smith, Moore in St. Louis. Robert James Shiller teaches at Yale University's International Center for Finance. He is the author of the forthcoming book "Subprime Solution."

Thanks to both of you.

Ms. NIEMANN: Thank you.

Prof. SHILLER: A pleasure.

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