Goldman Sachs and Morgan Stanley, the two wealthiest investment banks on Wall Street, were also in trouble. During the next forty-eight hours, the Dow Jones Industrial Average fell nearly four hundred points Bank of America announced its purchase of Merrill Lynch and American International Group, the country’s biggest insurance company, began talks with the New York Fed about a possible rescue. On Monday, September 15th, Lehman Brothers, another Wall Street investment bank that had made bad bets on subprime mortgage securities, filed for bankruptcy protection, after Bernanke, Paulson, and the bank’s senior executives failed to find a way to save it or to sell it to a healthier firm. “A lot can still go wrong, but at least I can see a path that will bring us out of this entire episode relatively intact,” he told a visitor to his office in August.īy mid-September, however, the outlook was much grimmer. The credit markets remained open the economy was still expanding, if slowly oil prices were dropping and there were tentative signs that house prices were stabilizing. As recently as Labor Day, he believed that the strategy was working. Ben Bernanke, who seemed to have been selected as much for his predictability as for his economic expertise, is now engaged in the boldest use of the Fed’s authority since its inception, in 1913.īernanke, working closely with Henry (Hank) Paulson, the Treasury Secretary, a voluble former investment banker, was determined to keep the financial sector operating long enough so that it could repair itself-a policy that he and his Fed colleagues referred to as the “finger-in-the-dike” strategy. Morgan of Bear Stearns, a Wall Street investment bank that was facing bankruptcy, the Fed acquired twenty-nine billion dollars’ worth of Bear Stearns’s bad mortgage assets.) These moves hardly amount to a Marxist revolution, but, in the eyes of many economists, including supporters and opponents of the measures, they represent a watershed in American economic and political history. (In March, to facilitate the takeover by J. He has slashed interest rates, established new lending programs, extended hundreds of billions of dollars to troubled financial firms, bought debt issued by industrial corporations such as General Electric, and even taken distressed mortgage assets onto the Fed’s books. ![]() But since the market for subprime mortgages collapsed, in the summer of 2007, the growing financial crisis has forced Bernanke to intervene on Wall Street in ways never before contemplated by the Fed. ![]() Bush to chair the Fed, in February, 2006, he faithfully upheld the policies of his immediate predecessor, the charismatic free-market conservative Alan Greenspan, and he adhered to the central bank’s formal mandates: controlling inflation and maintaining employment. For more than a year after he was appointed by President George W. On a shelf in a nearby closet sits a scruffy gym bag, which in calmer days Bernanke took to the Fed gym, where he played pickup basketball with his staffers.Īt Princeton, where Bernanke taught economics for many years, he was known for his retiring manner and his statistics-laden research on the Great Depression. The office occupied by Bernanke, a soft-spoken fifty-four-year-old former professor, has high ceilings, several shelves of economics textbooks, and, on the desk, a black Bloomberg terminal. Its echoing hallways are lined with sombre paintings. The Fed, which is as hushed inside as a mausoleum, is a place of establishment reserve. Early every morning, weekends included, Bernanke arrives at the headquarters of the Federal Reserve, an austere white marble pile on Constitution Avenue in Foggy Bottom. That is the way with Ben Bernanke, as he struggles to rescue the American financial system from collapse. ![]() And some have radicalism thrust upon them. Bernanke says that he was “mistaken early on in saying that the subprime crisis would be contained.” Photograph by Platon
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