Sebastian Mallaby writes: On Tuesday 16 September 2008, early in the afternoon, a self-effacing professor with a neatly clipped beard sat with the president in the Roosevelt Room of the White House. Flanked by a square-shouldered banker who had recently run Goldman Sachs, the professor was there to tell the elected leader of the world’s most powerful country how to rescue its economy. Following the bankruptcy of one of the nation’s storied investment banks, a global insurance company was now on the brink, but drawing on a lifetime of scholarly research, the professor had resolved to commit $85bn of public funds to stabilising it.
The sum involved was extraordinary: $85bn was more than the US Congress spent annually on transportation, and nearly three times as much as it spent on fighting Aids, a particular priority of the president’s. But the professor encountered no resistance. “Sometimes you have to make the tough decisions,” the president reflected. “If you think this has to be done, you have my blessing.”
Later that same afternoon, Federal Reserve chairman Ben Bernanke, the bearded hero of this tale, showed up on Capitol Hill, at the other end of Pennsylvania Avenue. At the White House, he had at least been on familiar ground: he had spent eight months working there. But now Bernanke appeared in the Senate majority leader’s conference room, where he and his ex-Wall Street comrade, Treasury secretary Hank Paulson, would meet the senior leaders of both chambers of Congress. A quiet, balding, unassuming technocrat confronted the lions of the legislative branch, armed with nothing but his expertise in monetary plumbing.
Bernanke repeated his plan to commit $85bn of public money to the takeover of an insurance company.
“Do you have 85bn?” one sceptical lawmaker demanded.
“I have 800bn,” Bernanke replied evenly – a central bank could conjure as much money as it deemed necessary.
But did the Federal Reserve have the legal right to take this sort of action unilaterally, another lawmaker inquired?
Yes, Bernanke answered: as Fed chairman, he wielded the largest chequebook in the world – and the only counter-signatures required would come from other Fed experts, who were no more elected or accountable than he was. Somehow America’s famous apparatus of democratic checks and balances did not apply to the monetary priesthood. Their authority derived from technocratic virtuosity. [Continue reading…]