Ben Bernanke's Eventful Years at the Fed

When Ben Bernanke succeeded Alan Greenspan as chairman of the Federal Reserve Board in February 2006, the economy seemed to growing smoothly. Unemployment was under 5 percent.

Little did the former Princeton economics professor know what was to befall him. Within 18 months, it became clear a housing bubble had broken wide open. Within two years, the Fed and the Bush administration were engineering the sale of Bear Stearns to JPMorgan Chase JPM.

Within 30 months, the greatest financial crisis since the Great Depression erupted in full force, forcing the government to bail out American International Group AIG, Bank of America BAC, Citigroup C and others.

Huge institutions disappeared outright in this country: Lehman Brothers, Washington Mutual and Wachovia. Merrill Lynch became part of Bank of America. The crisis spread around the world, exposing bad or least weak economic decision-making, from London to Argentina to China.

The housing market collapsed. General Motors GM and Chrysler Corp. were forced into bankruptcy protection. The unemployment rate hit 10 percent. Some 8.7 million Americans lost their jobs; only 7.5 million of those jobs have been recovered. Millions more are forced to work part-time or have given up looking for work.

Bernanke left the Fed on Monday, to join the Brookings Institution in Washington as a "distinguished fellow in residence." He has been succeeded by Janet Yellen, the first woman to be Fed chairman.

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Bernanke's legacy will be debated for years and years to come. Some say he is the greatest Fed chairman ever. (Others with longer memories believe Paul Volcker, who tamed inflation, was the greatest.)

Others say Bernanke is the worst, because of his use of new tools to try to get the economy moving again.  (Then, of course, there was Texas Gov. Rick Perry who tried to portray Bernanke as a traitor, without offering much if any rationale.)

Here's a look at Bernanke's years at the Fed -- and why they will be debated.

The Fed and the Crash

Bernanke started out as a fairly traditional Republican Fed chairman. He didn't want to bother markets or push the Fed deeply into the economic decision-making.

But conditions changed dramatically, surprising Bernanke. Housing blew up. Sky-high oil prices nearly destroyed the automobile industry. The nation's financial system proved itself to be built on shaky foundations.

So the Fed joined with then-Treasury Secretary Hank Paulson to engineer rescue of the financial system. After letting Lehman Brothers fail, they saved AIG. They provided financial lifelines to hundreds of troubled banks across the country.

They also succeeded in getting Congress to pass legislation to create the Troubled Asset Relief Program, providing assistance to hundreds of troubled banks across the country, including Citigroup and Bank of America.

At the same time, banking systems around the world weren't in much better shape, and Bernanke and other central bankers were able to work together to at least stabilize the global credit system.

Critics have argued the government and the Fed should have let AIG, Citigroup, Lehman Brothers and others collapse. Others have scoffed at the idea, saying that a passive Fed was largely responsible for turning an ugly recession in 1929 and 1930 into the Great Depression.

Here's one opinion from Mohamed El Erian, former CEO and co-CIO of PIMCO, the big bond house, quoted in The Wall Street Journal. Bernanke's "courageous actions in 2008-09 helped the world avoid an economic depression that would have devastated millions of lives," he said, "as well as harm the prospects of the next generation."

The Fed and the Stress Tests

Bernanke and Tim Geithner, Paulson's successor as Treasury Secretary, forced the biggest banks and financial institutions to undergo annual stress tests, to see if they could survive another panic.

The big banks hated the exercise, first done in early 2009. The results, however, actually proved an enormous aid in rebuilding confidence in the banking system -- and helped to give the market rally, that began in March 2009, much-needed fuel.

The Fed, the Economy and Quantitative Easing

Bernanke was frustrated that the Obama Administration and Congress couldn't agree on a plan to boost the economy after 2010. He was often called "the only adult in the room." When Congress and the administration appeared close to a government shutdown, Bernanke cheered markets by saying the Fed would make sure the financial system would function.

In addition, he and the Fed instituted three so-called quantitative easing programs.

The QE programs worked like this: The Fed would buy in billions of dollars of mortgage and Treasury securities. That poured lots of liquidity into the financial system and kept interest rates at record low levels. The hope was that banks would lend money, and businesses would be able to finance new expansion, allowing the economy to grow.

Many liberals have hated the QE programs; they simply made the rich way too rich while most Americans struggled with stagnant incomes and job insecurity.

Conservatives, meanwhile, have nearly gone out of their minds -- convinced the QE programs would lead to runaway inflation and worse. Ending the programs would be impossible without causing major economic disruptions. Rutgers University economist Michael Bordo has argued that, by keep rates so low, banks had no real incentive to lend.

That may prove to be true, or not.

The selloff that hit stocks, starting at the beginning of January, seemed to confirm that view. The Dow Jones industrials were off as much as 7.3 percent after an ugly sell-off on Monday, and bond prices soared as a result -- driving interest rates lower.

So the question is, was Ben Bernanke any good during high eight years as Federal Reserve Chairman? There are three conclusions to the question:

He wasn't good in the early going, because the Fed didn't appreciate the rising risks to the financial system. To be honest, few people did.

Once he and the Fed understood the risks -- aided by years as a scholar studying the Depression -- Bernanke did a really good job, especially in the fall of 2008.

His efforts to push the economy into a higher gear have been less successful -- but probably not disastrous. The problem that harmed the efforts of the Fed and Bernanke has been the dysfunctional relationship between Republicans and Democrats.