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What is the milieu while Bernanke is re-assigned
FED Chairman Bernanke will pursue his duty for another period. Bernanke was an academic that studied on Great Depression period of 1930s. Now in the period of a new economic recession emerging eight decades after the Great Depression, he plays a key role in the design and implementation of economic policies. What can we say? Such is life. A fortunate person is that who undertakes responsibilities on an issue he/she get prepared for throughout his/her life, is not he/she? Therefore, Ben Bernanke is a fortunate person. Given that the issue he has been elaborating on for years have recently begun to affect our lives adversely, he holds the position to carry into affect what he has been thinking on for years and to lead us. How happy! But, what should the re-assigning of Bernanke make us think about?
The first point is: The identity of FED Chairman affects the lives of not only Americans but also the whole worlds. In this context, FED chairmen must not be responsible in front of only the citizens of the United States of America. The crisis has proven once more that this is so. This issue will be more important in the future. Bernanke is successful in the US; but its contribution to our lives is highly indirect, because, he has different concerns. This is the first point.
And the second point: That Bernanke is re-assigned as FED chairman primarily means that the President Obama supports the active policy framework currently implemented to tackle the crisis. Bernanke was assigned by Bush. Please remember; during Bush administration, active intervention program to tackle the crisis was rapidly implemented. In the framework of the principle that extraordinary periods require extraordinary measures, unprecedented measures became to be implemented. American economy became to be managed by Washington rather than New York contrary to the conventional case was mainly in Bush's period. In the face of the crisis, President Bush was forced to implement measures he would not even think about under normal conditions. While Turkish government was playing the sleeping beauty; American economy was put in the life support unit with rapid public intervention decisions. We believe that Bernanke played a pivotal role in the design of the active policy design in the mentioned period as well as in persuading at the last moment the Bush administration to this unusual policy framework. He did; he fortunately played a vital role. And this is the second point to keep in mind.
Let us notice rapidly the third point. First of all, we had better recall how FED inch by inch developed the life support unit function. In that period, FED started to provide directly liquidity to the corporate sector. It was the first to step in to operate the inoperable private sector stock market. It pioneered all central banks of the civilized world including European Central Bank. It stepped in to provide liquidity support to foreign central banks. It acted before the IMF. It assumed an active role in government securities market. So, what did FED do? It tried to ensure price setting in financial markets and to enable functioning of a number of financial markets that were inoperable due to mutual distrust. Yes, FED did all of these precisely. It stepped in to reverse and ease the impacts of the crisis. It did not just reduce interest rates and sit back as it was done here. It recognized in time that in a world where the credit channel does not work, transferring liquidity to banks will not solve the problem; thus tried to operate the credit channel and succeeded. It did not try to fill a leaky bucket. It started to transfer funds directly to corporate sector without a second thought. It is necessary to strongly underline this point.
Fourth, in this period full of action, Bernanke reminded us what we have forgotten. It is wise to remember some of this temporarily. The issue we have remembered is: Central banks hold a number of facilities we sometimes forget / are made to forget about in terms of designing expansionary economic policies. They can transfer funds directly to corporate sector through various channels; they can assist price setting in markets; they can even discriminate among firms. In this regard, they can be much more effective than an expansionary fiscal policy. They can in a way act as a development bank. Remember the Central Bank of the Republic of Turkey before the period of former Governor Saracoglu. Back then, the central bank operated exactly in line with this principle. Then, we forgot about this; what Bernanke reminded us about is exactly the idea of a central bank as a development bank. It proved quite beneficial in this period. And this is the third point for today.
Fifth point is embedded in the fourth one: It is correct that Bernanke made us all remember what we have forgotten for long. This part of Bernanke's contributions to policy design must be erased as rapidly as possible from the memory of politicians. What is extraordinary must be treated as it is extraordinary.
Whoever has put us into this active intervention climate must as well take us out of that zone. So, how is the state of affairs considering countries like Turkey? This is what we see: yet, everyone is trying to control the fire in his/her house. No officials including Bernanke seem to investigate in detail the condition of other houses. This alone is bad. If the fire in the neighboring house is not under control; your controlling the fire in your house does not solve the problem.
2008 financial crisis appears to be talked about in form of economic recession in 2010 and onwards. Submitted to whomever this concerns.
This commentary was published in Referans daily on 27.08.2009