LONDON -- Some people's position or reputation allows them to influence the world's financial markets. You will often see this happen when news hits the market about Warren Buffett's Berkshire Hathaway having invested in a company; its share price will quickly rise because many investors like to mimic Buffett's trades.
George Soros is another investor whom the financial world watches closely, and he has been known to make and break currencies (and governments) through his activities in the foreign exchange markets, as when he sold sterling in 1992 to precipitate Britain's exit from the Exchange Rate Mechanism.
But there is only one person who can cause the markets to rise or fall with a single word: Ben Bernanke, the chairman of the U.S. Federal Reserve. His public pronouncements carry so much weight that if he made the slightest hint that he was considering a third round of quantitative easing, the world's stock markets would rise sharply.
Academic turned governor
Bernanke is first and foremost a professor of economics. After obtaining his doctorate at the Massachusetts Institute of Technology, he taught economics and business at Stanford, New York, and Princeton universities from 1976 to 2002.
He then went on public-service leave when he was appointed as one of the governors of the Federal Reserve, though he still occasionally teaches and recently gave a series of lectures at George Washington University.
In February 2006, President George W. Bush appointed Bernanke as the chairman of the Federal Reserve on a four-year contract. The Senate renewed his contract in January 2010 by 70 votes to 30 -- the smallest-ever majority for this post, which reflects the increasingly polarized state of American politics and the anger some people feel toward him for his policies in the wake of the credit crunch.
What he does
Bernanke is in charge of America's central banking system and is the key decision-maker when it comes to interest rates and monetary policy -- although, despite what many people think, he does not have absolute power, as his decisions go through a committee process and will also receive some input from the U.S. Treasury.
Many people -- especially those who, like I, hail from the Austrian School of Economics -- disagree with the modern system of central banking. This is because central banks are all too often heavily influenced, or even controlled, by politicians whose main concern is to print and borrow money in order to buy short-term popularity and votes. This stokes inflation, harms savers, and damages the country's long-term prospects.
That said, I'd much prefer for a central bank to be run by someone like Bernanke instead of the bunch behind the European Central Bank that has allowed countries like Greece and Spain to issue mountains of debt, which they are now finding extremely difficult to service.
For me, the most reassuring thing during the financial crisis of 2008 and 2009 -- particularly after Lehman Brothers collapsed and it looked as if the banking system might be next -- was that Bernanke was in charge of the Fed.
Lessons from history
George Santayana famously said that "Those who cannot remember the past are condemned to repeat it." This doesn't apply to Bernanke and his understanding of financial crises, because he is an acknowledged expert when it comes to the economic history of America and, in particular, the Great Depression of the 1930s.
One thing that greatly exacerbated the Great Depression was the policy of raising real interest rates and cutting the money supply. This led to the collapse of many banks, which destroyed people's savings and sharply curtailed the supply of credit, worsening the depression. Bernanke did the complete opposite in 2008 when he slashed interest rates, pumped money into the financial system, and then shored up its weaker parts by buying so-called "toxic assets."
It worked, though Bernanke is now seen by many people as having protected the bankers from their own folly by bailing them out. But the biggest beneficiaries of the bank bailout weren't the bankers; it was their creditors, many of whom were ordinary Americans who had deposited their savings with the same banks.
Life and poker
There's an old saying that life is like a game of poker: You play the hand that you've been dealt in the best way that you can. In 2008, when the financial crisis hit, Bernanke did just this.
To me, criticizing Bernanke for doing this is like telling the fire brigade they shouldn't tackle the fire in your house until they have discovered what caused it. In a crisis, you fix the problem, and only then do you make sure that it doesn't happen again. While bailing out the banks' creditors without making them take a hit was unpopular among many, the alternative of letting the financial system collapse would have been far worse.
Most of the criticism against Bernanke should instead be directed toward the U.S. Federal government, as it has been reluctant to pursue criminal charges against the biggest culprits. Those people who were behind the system of passing off high-risk securitized mortgages as triple-"A"-rated assets really should have been made to answer before a court.
Bernanke's equivalent in Britain is Sir Mervyn King, the Governor of the Bank of England. During the financial crisis, King took a similar position to Bernanke by slashing interest rates and pumping money into the system. Like Bernanke, he is also constrained by a governing committee, and recently his proposal for a further 50 billion pounds of quantitative easing was defeated by five votes to four.
King and the Bank of England played a prominent role in the nationalization of Bradford & Bingley and the Northern Rock, persuading LloydsTSB to rescue HBOS and also taking big stakes in The Royal Bank of Scotland and Lloyds Banking Group. As in America, the biggest beneficiaries of these actions were the banks' creditors, rather than the bankers themselves.
Hopefully, today's politicians will listen to professor Bernanke, if only because he can give them a useful historical perspective. I have my doubts, though, mostly because a substantial proportion of the modern electorate loves to vote for people who give them free goodies while sticking someone else with the tab.
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Tony owns shares in Berkshire Hathaway and Lloyds Banking Group. The Motley Fool owns shares of Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.