In Bernanke We Trust

Illustration by Marc Boutavant

Talk about pressure! Talk about crummy timing for a book tour! Two days before the most important Federal Reserve meeting in a decade, Ben Bernanke, the rookie Fed chairman, had to listen to the national icon, his predecessor, Alan Greenspan, hawk his new book, The Age of Turbulence, in virtually every venue on earth, replete with a main story line about how great he is and how clueless everyone else is about monetary policy in the United States.

The last thing Bernanke—under intense pressure to slash interest rates to save the credit markets—needed to hear was the Oracular One talking about how reining in inflation with high interest rates is job number one for whoever sits on the Fed throne, and how Greenspan deserved immense credit for doing just that. Maybe Greenspan accomplished what he wanted—a spit-polished legacy, the top spot on Amazon, and a huge boost to his consulting business—but he cast an avuncular shadow so gigantic and dark over the new guy that it’s a wonder Bernanke could even find his way to the Federal Reserve building for last Tuesday’s meeting.

Could it be that Bernanke had the former Fed chief’s 60 Minutes interview on mute? Or maybe Bernanke realized the true gravity of what was shaping up to be the worst credit crisis since Citigroup almost went belly-up in 1990 and chose not to heed the long-term advice of the sainted one. Whatever the reason, the rookie shook off the Greenspan shroud and hit the ball out of the park with a fat half-point cut in the federal funds rate. Because of Bernanke’s bold move—the half-point cut was twice as deep as most Fed followers, including yours truly, who had been a vocal critic of the Fed’s stewardship, had expected—I’m now confident that what would have been a given in 2008, a brutal recession that started with housing but was spreading, Ebola-like, to the rest of the economy, will now be avoided and prosperity assured. What a save!

What was Bernanke saving us from? What caused the mess that forced him to take drastic action, not one of those itty-bitty quarter-point interest-rate jobs? How about a chaotic, frozen, dysfunctional economy fueled by defaulting mortgages based on irresponsible teaser rates that his predecessor pushed hard and often for every prospective home buyer to take, including those who could ill afford them? Where’s that in the book? And then, after hooking millions of unqualified buyers to take low-interest teasers that would reset in two years, Greenspan gaffed the borrowers with fourteen straight interest-rate hikes that put the reset mortgage rates out of reach for all but the wealthiest. Those vicious and, I believe, foreseeable resets—foreseeable if you are going to set the rates, as Greenspan did—are causing a national wave of defaults the likes of which haven’t been seen since the Great Depression. And why did Mr. Prudent champion these reckless teasers almost as heavily as the endless Ditech and Countrywide television pitchmen who buried us in these adjustable-rate nooses did? Because he needed to work his way out of the dot-com crash by stoking the housing market. And what had caused the dot-com bubble? That would be the low margin rates that fueled ridiculous speculation in junk stocks—rates controlled by, you guessed it, our lovable hero, Alan Greenspan. At any given time the author of The Age of Turbulence could have prevented, well, the Age of Turbulence, by simply raising margin rates, by discouraging the use of exotic teaser mortgages, and by encouraging regulations that would have ended the travesty of giving money to speculators to flip houses. But Greenspan, an acolyte of libertarian Ayn Rand, disdains regulations. Instead, he seemed to like the power and mystery of endlessly taking rates up and down, disrupting the whole economy instead of managing discrete stock-market or house-speculation bubbles. Just a little regulation could have avoided both of those bubbles, with no need to overstimulate and then wreck the overall economy with crushing rate increases like the ones with which Greenspan stuck Bernanke.

Bernanke wasn’t just up against Greenspan’s blinding halo last week. He was also up against President Bush and the man in charge of Bush’s management of the economy, Hank Paulson. Despite the record mortgage defaults, despite more than 100 mortgage brokers’ going under, despite multiple bailouts of the largest lender in the country, Countrywide, and despite an actual loss of jobs in August, Bush and Paulson on virtually every occasion trumpeted that the “fundamentals are sound.” That bullish claptrap put Bernanke in the incredibly awkward position of having to cut rates even as the president and his Treasury secretary proclaimed boom times. Blessedly, Bernanke, after a slow start during which he hiked rates himself only to have to flip-flop when he saw the possibility of runs on banks in this country and no credit to buy almost anything larger than a shanty, managed to shake off the Hoover-like assurances of the president and the Treasury secretary and recognize that the fundamentals were anything but sound.

I’m not surprised by President Bush’s sunny economic outlook—this president would praise the Weimar Republic’s hyperinflation as great for Home Depot and the wheelbarrow industry. But Hank Paulson? I expected better from the ex–Goldman Sachs chief. One of the few honest-to-Betsy revelations in The Age of Turbulence was Greenspan’s acknowledgment that the position of Treasury secretary, once a post for the best and brightest businesspeople and economists, has under Bush been reduced to nothing more than White House water boy for the “fundamentals are sound” mantra. The previous holders of the position, Paul O’Neill and John Snow, were either lightweights or totally useless housemen, unwilling to speak up beyond the party line on anything, whether it be ballooning deficits or reckless home lending. I had hoped that Paulson would be like Bob Rubin and Larry Summers, Treasury secretaries under Clinton whom Greenspan correctly praises in Turbulence for being anything but yes-men, for offering creative solutions that solved most of the nineties’ economic problems. Paulson had the stature and experience his Bush-administration predecessors lacked, and for a change could actually think and talk independently from Bush propaganda. Or so I thought. But the sole sour note I have heard from his office is from his undersecretary for domestic finance, Robert K. Steel, who had the horse sense to admit in front of Congress that we have a real housing-finance problem in this country that won’t go away by itself. Throughout this period of intense turmoil behind the scenes at places like Bear Stearns, Morgan Stanley, and Goldman Sachs (which Paulson ran), we never heard a peep out of Paulson that anything was awry. Who would have ever thought that Paulson, a coldhearted, some would say vicious, realist at Goldman, would become one more pol in what used to be a distinguished office?

It would have been terrific had Bernanke been able to break the boom-bust rates cycle that Greenspan fostered in the past decade. It would have been spectacular if the fundamentals were sound and Bernanke didn’t need to do a thing. Unfortunately, Bernanke’s got to clean up the turbulence left by his predecessor. With any luck, this time the Fed chief won’t have to cut too much further and we can get what is ultimately desired: a Fed that does no widespread tinkering and just suggests limited regulation—or regulates—when a market gets out of line.

James J. Cramer is co-founder of He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. E-mail:

In Bernanke We Trust