In FED We Trust (13 page)

The reference wouldn’t have raised an eyebrow in one of his old seminar rooms, but Bernanke wasn’t at Princeton any longer. Bond traders quickly derided him as Helicopter Ben, prompting political cartoons and blog ridicule. One faux ad circulated on the Internet showed a bald, bearded Ben Bernanke action figure in camouflage, getting into a yellow plastic helicopter with a satchel of currency. “Now YOU can drop money out of a helicopter,” it said. But the helicopter line had a more serious effect, prompting bond traders to suspect that Bernanke might be soft on inflation. And that led others to worry that, to erase that perception, he might be tempted to be stingier with credit than he otherwise thought necessary in order to establish his credentials as an inflation fighter.

The metaphor would reappear — appropriately — when the Fed confronted the circumstances that Milton Friedman had envisioned and responded aggressively to the Great Panic. “Big Ben Fires Up the Choppers,” read a
Forbes
December 2008 headline.

Bernanke’s initial appointment to the Fed was for a term that extended to January 31, 2004. In late 2003 he was nominated and confirmed for a full fourteen-year term. About then, Bernanke decided he would stay in Washington more than the couple of years initially planned. Princeton extended his leave of absence. He and Anna sold their house ten minutes from the Princeton campus and bought a town house on Capitol Hill. If he needed any personal evidence of the housing boom, he had only to track his former residence: the Bernankes sold the New Jersey house in June 2004 for $630,000; sixteen months later, it sold again — for $781,000.

In May 2005, in his third year as a Fed governor, Bernanke was still ruminating like an academic economist, not like a man ready to take the controls from Greenspan. His academic training had not included contemplating the month-to-month movements in the economy, a shortcoming he acknowledged publicly. “A part of monetary policymaking for which my background left me imperfectly prepared is what central bankers call ‘current analysis’ …
getting an accurate assessment of the current economic situation,” the synthesis of data, anecdotes, and judgments “to construct a ‘story’ about how the economy is evolving,” he said, contrasting himself to Greenspan, with a public humility that the elder man rarely displayed. “Current analysis is not taught in graduate school, probably for good reason; it seems more amenable to on-the-job training. … It is, nevertheless, an intellectually challenging activity — analogous, it seems to me, to the efforts of a detective to reconstruct a sequence of events from a range of diverse and subtle clues — and I have enjoyed the opportunity to become more proficient at it.”

The candor was disarming, perhaps admirably so. But it was the kind of comment that sowed doubts among Fed watchers that Bernanke had the Greenspan touch for knowing just when to tap the monetary brakes and when to wait. Nonetheless, the doors kept opening for him.

When Greg Mankiw decided to leave the chairmanship of the Council of Economic Advisers (CEA) to return to Harvard, Bernanke was high on the list of potential successors. Perhaps because the CEA post has more cachet among academic economists than among the power-hungry in Washington or the Fed-fixated on Wall Street, perhaps because being a Fed governor in the Greenspan years was like being in a gilded cage, Bernanke was interested in the change. Just as important, the job offered Bernanke an important step toward succeeding Greenspan: an opportunity to get close to Bush.

Greenspan himself had served as chairman of Ford’s CEA, the three-member panel created by Congress in 1946 to provide economic advice to the president. Janet Yellen, now president of the Federal Reserve Bank of San Francisco, had left the Fed board to serve as Clinton’s chairman. The introverted Bernanke nearly missed out on his opportunity, flunking his first few interviews for the job. Al Hubbard, the president’s buddy and economic coordinator, initially thought Bernanke too low key, too bashful, too hard to relate to. That impression was eventually dashed when Hubbard began working closely with Bernanke and as he watched Bush take to him.

During his short, seven-month tenure at the White House, Bernanke’s primary accomplishment was establishing a rapport with the president, but on that point, he scored a major success. Bush tended to be uncomfortable with professorial advisers. However, in briefings, Bernanke was clear and understandable.
He never raised his voice but wasn’t reticent. One aide recalled Bush echoing a view then widespread among politicians and the public, and complaining that “speculators” were driving up the price of oil and making markets more volatile. Bernanke quietly but firmly disagreed, telling the president that every study he knew suggested that speculators dampen, not amplify, the volatility of oil prices.

“I came to trust his judgment, his calm demeanor, and his sly sense of humor,” the president would say as Bernanke was leaving his White House post.

Bernanke also disarmed the president with probably his most famous prank. One day, Bernanke showed up for a monthly Oval Office economic meeting wearing a dark blue suit and light tan socks.

Bush noticed. “Ben,” the president said, according to one participant, “where did you get those socks?”

“Gap,” replied Bernanke. “Three pair for seven dollars.”

The president wouldn’t let it go, mentioning Bernanke’s light tan socks repeatedly during the forty-five-minute meeting.

When the time came for the next meeting of the same group, Bernanke and White House economic staffer Keith Hennessey agreed they would both wear tan socks and recruit others to do the same. Hennessey asked his boss, Al Hubbard, what he thought about the whole team’s wearing tan socks. Hubbard was game but said he didn’t own any. Hennessey volunteered that he had some.

Hennessey then asked, “Do you think the VP would wear them?” Hubbard, who had been on the job only six months, called Dick Cheney and asked, with considerable trepidation, if he would join the prank. Cheney agreed but said he didn’t have any tan socks either. “Well, I’ve got some,” Hubbard replied. When Bush arrived for the meeting, nearly everyone was wearing tan socks. The president roared with laughter.

Bernanke was chairman of Bush’s CEA for less than seven months and had little apparent impact on the president’s economic policies during that time.
After he was anointed as Greenspan’s successor in October 2005, he almost disappeared from public view as he prepared for Senate confirmation hearings. Bernanke did breed loyalty among those beneath him by resisting the rigidities of the White House hierarchy. In general, “principals” — tike Bernanke — go to “principals” meetings. Their “deputies” — the other two members of the council — go to “deputies” meetings. CEA chairmen tend to jealously guard their time with the president in the Oval Office.

Bernanke was different. In late 2005, the CEA got a request from Bush’s chief of staff for an economic briefing before the president traveled to Asia. Matthew Slaughter, an international economist on leave from Dartmouth’s Tuck School of Business, was sitting in his office when Bernanke walked in and asked Slaughter to take the lead on the briefing. Slaughter agreed, saying he assumed Bernanke meant taking the lead on preparing the briefing. “No,” Bernanke said. He wanted Slaughter to join him in the Oval Office — in itself unusual — and to do the talking. “I will go to his funeral because of that,” Slaughter said.

If Bernanke was worrying about house prices at the time, he wasn’t saying so very loudly. “While speculative behavior appears to be surfacing in some local markets, strong economic fundamentals are contributing importantly to the housing boom,” he said in March 2005. “These fundamentals include low mortgage rates, rising employment and incomes, a growing population, and limited supply of homes or land in some areas. … However, our best defenses against potential problems in housing markets are vigilant lenders and banking regulators, together with perspective and good sense on the part of borrowers.”

As would later become painfully clear, neither lenders nor regulators were being “vigilant,” and “good sense” was in very short supply.

The search for Alan Greenspan’s successor began in the spring of 2005 and was conducted by Vice President Dick Cheney; Scooter Libby, Cheney’s
chief of staff; Andy Card, the White House chief of staff; Josh Bolten, Card’s deputy; Liza Wright, the White House personnel director; and Al Hubbard. After consultations with Greenspan among many others, the group came up with a long list that was winnowed to five finalists. Bernanke’s proximity to Bush inevitably had heightened the public speculation that he would be among the finalists, and he was.

The other finalists included Mankiw, the Harvard economist who had preceded Bernanke at the CEA; John Taylor, the monetary policy scholar who had received mixed reviews as the Treasury’s top international official earlier in the administration; Marty Feldstein, the prominent and outspoken Harvard Republican professor, who had long been mentioned as a potential Fed chairman; and a dark horse whose name never surfaced in the press, Stephen Friedman, the former Goldman Sachs chief executive, who had preceded Al Hubbard as Bush’s White House economic-policy coordinator.

Each was interviewed by the entire search committee in Cheney’s office for about ninety minutes. Bernanke talked about housing, a growing concern by then. He and the others were asked how they would handle hypothetical situations — like a call from the CEO of Citigroup saying his bank was in trouble.

In the end, Bernanke wasn’t the unanimous first choice of the committee. He had the intellect and the credentials as well as the respect of his peers, but he seemed, as he often did, nervous in the interview and had never been tested in a crisis. Friedman had a great interview but would have been a surprise, out-of-the-box choice, and the White House had just seen an out-of-the-box choice for the Supreme Court — White House counsel Harriet Miers — turn into an embarrassment. The committee eventually coalesced around Bernanke and recommended him to Bush.

But so much time had passed between his interview and the decision that Bernanke figured someone else had been chosen. One Thursday afternoon, he got a message to stop by Andy Card’s office in the White House West Wing before the next day’s 7:30
A.M.
White House senior staff meeting. He told his wife he expected Card to make the bad news official; she was relieved. Bernanke showed up as requested, sat down facing Card, and heard
him say: “How would you like to be Fed chairman?” When he telephoned his wife with what he considered to be good news, she burst into tears. She realized, more than he did, that the job would be all-consuming and change their lives.

If Bernanke was daunted by filling Greenspan’s shoes, he didn’t admit it. He figured he was as well equipped as anyone available, better at some things than Greenspan was, not as good at others.

“I felt that I had my own set of distinct skills,” he said, “and I had a lot of confidence in the support I would get from the staff and my FOMC colleagues.”

The nomination was announced the following Monday, October 24, well in advance of Greenspan’s planned retirement. To offset Bernanke’s inexperience on Wall Street, the Bush White House pursued Hank Paulson at Goldman Sachs for Treasury secretary.

After only a few years in Washington, the brainy kid from South Carolina had stepped into a post sometimes described as the second most powerful in the country.

Bernanke’s first year as Fed chairman was uneventful, especially given what was to follow. The handoff from Greenspan to Bernanke went surprisingly smoothly. Greenspan had been steadily raising the Fed’s key interest rate for years; Bernanke continued to do so and indeed left many of his predecessor’s monetary policies untouched. But true to his determination to dampen the cult of personality that had grown up around Greenspan, Bernanke set out to give other Fed policy makers more say and to be more open with the public.

Vincent Reinhart, a senior Fed staffer until September 2007, said Bernanke “embarked on a fundamentally selfless act by attempting to make the Federal Open Market Committee more central to policy making.” Under Greenspan, the Fed’s policy-setting Federal Open Market Committee extended its one-day meetings to two days only twice a year; under Bernanke, by 2009, all eight scheduled meetings were two days long.

Greenspan had relied on the staff to satisfy his insatiable appetite for obscure data or for intense one-on-one discussions of economic data. Bernanke shot hoops with them in the Fed gym. Greenspan rarely confided in the other Fed governors. Bernanke conducted a running seminar with several of them. Greenspan was famously cryptic, even boasted of his ability to put fewer thoughts into more words than almost anyone. Bernanke vowed and tried to be more “transparent.”

Despite the respect Bernanke won from his staff for these changes, financial markets weren’t fully prepared for another of Bernanke’s innovations, his new brand of “clarity.” In April 2006, when markets were preoccupied with how much further the Fed would lift interest rates, Bernanke told a congressional committee that the Fed might not raise rates at every scheduled meeting. “Future policy actions will be increasingly dependent on the evaluation of the economic outlook,” he said, adding that “at some point in the future the committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook.”

When Greenspan said something “might” happen to interest rates, he meant it was almost a sure thing. Financial markets, conditioned to listening to Greenspan, read Bernanke as sending a clear signal that the Fed was going to take a break in its interest-rate lifting campaign at the next meeting. That wasn’t Bernanke’s intent, and he said as much a few days later in what he assumed was an off-the-record conversation with CNBC’s Maria “The Money Honey” Bartiromo at a
Wall Street Journal
cocktail party before the annual black-tie Saturday-night dinner of the White House Correspondents Association. The following Monday afternoon, Bartiromo broadcast the news, jarring markets and unleashing a firestorm of criticism of Bernanke. The Fed raised rates at each of the next two meetings and then paused. Bernanke later told Congress that his conversation with Bartiromo was “a lapse in judgment” and promised “in the future, my communications with the public and with the markets will be entirely through regular and formal channels.”