In FED We Trust (11 page)

The enormity of the Great Panic eventually brought many of these points home to Greenspan and challenged his most fundamental assumptions about regulation and the capacity of players with big money in the game to police the poker table themselves. On October 23, 2008, Greenspan faced Representative Henry Waxman, the aggressive chairman of the House Oversight and Government Reform Committee. Knowing he would be grilled, Greenspan hired a PR consultant, David Dreyer, formerly with the Clinton White House, for advice.

In a crowded hearing room with television cameras focused on his face, Greenspan read his prepared testimony, and then Waxman launched his attack. His questions were narrowly focused on the regulation of newfangled securities called derivatives. But Greenspan’s answers were broad, a self-indictment.

“I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms,” he said. “And it’s been my experience, having worked both as a regulator for eighteen years and similar quantities in the private sector, especially ten years at a major international bank [J. P. Morgan, where he served on the board of directors], that the loan officers of those institutions knew far more about the risks involved in the people to whom they lent money than I saw even our best regulators at the Fed capable of doing.

“So the problem here is something which looked to be a very solid edifice, and indeed a critical pillar to market competition and free markets, did break down. And I think that, as I said, shocked me. …I still do not fully understand why it happened.”

Waxman knew he was onto something. He pressed Greenspan: “In other words, you found that your view of the world, your ideology was not right. It was not working.”

“Precisely,” Greenspan replied. “That’s precisely the reason I was shocked because I had been going for forty years or more with very considerable evidence that it was working exceptionally well.”

Perhaps a better title for Greenspan’s book would have been the one that Bernanke chose for the book manuscript he set aside when he came to Washington:
Age of Delusion: How Politicians and Central Bankers Created the Great Depression
.

B
en Shalom Bernanke didn’t seem to mind that his February 2006 installation as the fourteenth chairman of the Federal Reserve was upstaged by his predecessor’s departure. After the paeans of praise heaped on Alan Greenspan, Bernanke added his own heavy measure. He hoped his record would look as impressive as Greenspan’s tenure, he told the ceremony. “My first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years.”

When your middle name translates as “peace,” as Bernanke’s does, you are perhaps inclined by nature to seek harmony. But as much as he did genuinely respect the man he was succeeding, Bernanke was determined to be the un-Greenspan — in style, if not in substance.

Bernanke didn’t think a Fed chairman should be a rock star. He wanted to avoid the cult that had attached to Greenspan, the perception that the chairman
is
the Fed. An economy shouldn’t rely so much on the instincts of a single man, Bernanke thought, even one as wise as Greenspan. Bernanke wanted to elevate the stature of the institution instead. He wanted to make the fourth branch of government more like the Supreme Court and less like a royal court where the king was surrounded by retainers.

To that end, Bernanke thought the Fed should be more explicit and open about its objectives and thinking than it had been in Greenspan’s time. “The Fed needs an approach that consolidates the gains of the Greenspan years and ensures that those successful policies will continue — even if future Fed chairmen are less skillful or less committed to price stability than Mr. Greenspan has been,” Bernanke wrote long before coming to Washington. He imagined a day when the Fed was so easy to understand and so open about its objectives and current views of the economy that a few words from the chairman at a congressional hearing or after-dinner speech wouldn’t move markets because they wouldn’t provide any new information. This would prove a naive hope, a misreading of the chairman’s role that would create confusion in the early stages of the Great Panic.

Ben Bernanke and Alan Greenspan were both brainy and Jewish, lifelong baseball fans, and, oddly, proficient saxophone players. The similarities between the two stopped there, though. Bernanke grew up in a small southern town, Greenspan in New York City. Bernanke was a star of academia but unfamiliar with the corporate and Wall Street universe with which Greenspan was a part. Bernanke’s wife, Anna, was a Spanish teacher whose passion was launching a new school for minority students. The couple didn’t seek to be fixtures at the A-list Washington dinner parties frequented by Greenspan and Andrea Mitchell.

For Ben and Anna Bernanke, excitement was jointly doing the
New York Times
crossword puzzle nearly every day — although they skipped the easier beginning-of-the-week puzzles. “That’s the one thing we do together,” Bernanke joked. “It shows our sexy social life. We’re pretty good. We can do the Sunday puzzle in about forty minutes.”

The trouble for Bernanke, though, was that he couldn’t just wish away celebrity status. During Greenspan’s long reign, the job had become too big for that. After becoming Fed chairman, Bernanke was a clue in at least a dozen published crosswords — including one Wednesday
New York Times
puzzle. (Clue: Federal Reserve chief Bernanke. Answer: Ben.) An August 2007 puzzle in the
New York Sun
offered this clue: “Cause of difficulty in understanding Ben Bernanke?” The answer: FEDOPAQUENESS.

So much for being the un-Greenspan.

Ben Bernanke’s story is an affirmation of the ideal of America as meritocracy. The grandson of European immigrants, he was the clever small-town boy whose ambitious, hardworking parents put him on the education escalator that carried him to the pinnacle of power.

Bernanke’s parents met while attending different campuses of the University of North Carolina, his father at the then all-male Chapel Hill and his mother at the then all-women’s campus at Greensboro. After marrying, they moved to tiny, segregated Dillon, South Carolina, a once-prosperous tobacco town of 6,400 that sits on both the railroad line and the Little Pee Dee River. In Dillon, Bernanke’s father and uncle joined his grandfather Jonas Bernanke in running Jay Bee Drugs, a family business that wove the family into the town’s fabric. “In Dillon, a town that was always very short of the more regular kind of doctor, my father and uncle were popularly known as Dr. Phil and Dr. Mort,” Bernanke once told an audience, “and the prescriptions they dispensed were often accompanied by their free advice on maintaining good health.”

In the middle of this small southern town, Bernanke grew up in a tight-knit Jewish family. Bernanke’s mother, Edna, gave up a job teaching elementary school when Ben, the eldest of three, was born December 13, 1953. She often worked in the store, where Ben was supposed to help out as well, although he usually ended up in the comic book section. On May 23, 1958, the
Charlotte Observer
ran the headline “Ben Will Enjoy Grandma’s Blintzes” over a photo of Bernanke’s grandmother and a recipe (secret ingredient: one tablespoon pineapple jam), plus this quote from four-year-old Ben: “Grandma, why don’t you teach my mommy to make blintzes?”

Young Ben’s maternal grandfather taught him to play chess when he was five or six. Said Bernanke, “He let me win at first, but after a few years I was no longer a pushover.” Bernanke, who skipped first grade, was South Carolina’s spelling bee champion at the age of eleven but was eliminated in the national championship at the Mayflower Hotel in Washington, D.C., when he misspelled
edelweiss
. His excuse: There was no movie theater in Dillon, so
he hadn’t seen
The Sound of Music
, the film that popularized the name of the flower.

At Dillon High School, Bernanke played saxophone in the marching band, taught himself calculus, and scored 1590 out of a possible 1600 on the SATs, an achievement that drew publicity in South Carolina. Edna Bernanke recalled, “One of his teachers said you could put him in a dark closet and he’d still learn. One time, a teacher was sick so he got up and taught the class.” The local schools were integrated while he was in high school, and the event made such an impression on him that he wrote a novel, never published, about the best black and white football players of a newly integrated high school forming a team. He sent the first several chapters to a publisher who rejected it but with an encouraging note suggesting that he keep writing. The manuscript disappeared long ago, and Bernanke is hoping no one ever finds it.

Bernanke obviously was destined for college, most likely the University of South Carolina or, following his father, to UNC-Chapel Hill. Bernanke recalls a customer asking his father what colleges his son was considering. “UNC-Chapel Hill,” replied Philip Bernanke. “That’s a real tough school to get into,” said the customer.

But Kenneth Manning, a Dillon native six years older than Bernanke, had different aspirations for Ben. Like other local African Americans, Manning’s family had been regular customers of Jay Bee Drugs because it was willing to extend them credit when other stores wouldn’t. Manning had gone from Dillon’s segregated schools to Harvard with the assistance of a United Presbyterian Church program — and he was aware of Ben’s precociousness. “It was a small town,” Manning said with understatement. He thought sending Ben to the University of South Carolina would be a waste and approached him about applying to Harvard.

The young Bernanke embraced the idea almost immediately, but his parents worried that their son would be led astray. Manning, now a professor of the history of science at MIT, spent hours assuring them that Ben would not end up on SDS picket lines or lured by drugs or, of most concern to them, lose his Jewish identity. “I assured them there were Jews up in Boston,” Manning recalled. Manning, who was close to a Jewish family in Brookline, took
Bernanke to Rosh Hashanah services his first year at Harvard. To the dismay of Bernanke’s parents, Manning found Jewish services more meaningful than their son did.

Manning’s faith turned out to be well placed. Bernanke “was the superstar of all time as an undergraduate,” said Dale Jorgenson, a Harvard professor with whom Bernanke worked. Bernanke won a prize for the best undergraduate economics thesis — tor a paper demonstrating how deregulating natural gas prices could be good for the economy — and, in his senior year, was designated the outstanding Harvard economics major. (Pictured nearby in Harvard’s alphabetical 1975 yearbook was Lloyd Blankfein, the son of a New York City postal clerk and later chief executive of Goldman Sachs.)

While successfully competing with the children of some of America’s wealthiest and most powerful families, Bernanke returned to Dillon after his freshman and sophomore years to wait tables six days a week at Pedro’s South of the Border, a tacky tourist stop just below the North Carolina border on 1-95, famous for its campy billboards featuring groan-inducing slogans like P
EDRO’S WEATHER FORECAST: CHILI TODAY, HOT TAMALE
. More than thirty years later, the South Carolina legislature would name another 1-95 exit, the one in Dillon, the “Ben Bernanke Interchange” and attribute Bernanke’s success to the knowledge, integrity, and values he acquired in small-town South Carolina.

In the mid-1990s Bernanke’s parents sold the tour-bedroom house in which he had grown up to a couple from Texas and moved to North Carolina. Eventually, the house would become emblematic of the problems Bernanke himself would be called upon to fix. In September 2006 it was sold to Dwayne Thompson, a soldier in the South Carolina Army National Guard, and Sharon Rogers, his former wife with whom he had reconciled but not remarried. When the deal closed early in 2007, they took a $123,000, thirty-year mortgage with a 10.1 percent interest rate, well above the rates that more creditworthy borrowers paid. The couple fell behind on their payments and, under financial strain, broke up again. Twenty-one months after they bought
the house, the bank that served as trustee for the mortgage-backed security that held their loan began foreclosure proceedings. Thompson ended up in bankruptcy. The house was sold to a local banker, Travis Jackson, in December 2008. “It’s just a great sense of pride to know that one of the greatest leaders we have in our time period walked the same floors I walk,” Jackson said.

From Harvard, Bernanke went on to graduate school at MIT, arriving with what his adviser, prominent macroeconomist Stanley Fischer, called “a terrific reputation.” But Fischer, now Israel’s central banker, said, “He wasn’t a prima donna or arrogant. He had the same personality that he has now.”