In case you don’t recall, Ben Bernanke famously said the sub-prime crisis was “contained” in 2007. Of course, it was just beginning to spiral out of control and a few short months later we found out how far behind the curve the Fed was. Well, in comments to Congress in July we now know that the Chairman views the Euro crisis in a similar light (via CNBC):
“While a recent report showed that U.S. financial companies have nearly $200 billion in net exposure to Greece, Ireland, and Portugal, the amount is “manageable relative to their capital,” according to a July 14 letter Federal Reserve Chairman Ben Bernanke wrote to members of Congress.
Bernanke warned, however, that “a sovereign credit event in the region could affect a broad range of markets and financial institutions,” including those outside of Europe.”
I hate to be so hard on Ben Bernanke, but comments like this give me the impression that he is viewing the Euro crisis in much the same way that he viewed the sub-prime crisis. It is all consistent with a frightening lack of proactive policy. In 2006 & 2007 I often wrote about how reactive the Fed was by design and why this approach resulted in policy that was consistently behind the curve. What disturbs me about these comments is that the Chairman appears to once again be underestimating how damaging this crisis in Europe could be. Granted, there’s not much he can do to stop the contagion if it were to spread, but I feel like a letter to Congress is the perfect moment to explain to these non-economists exactly how serious this environment is and why they need to stop bickering about debt ceilings and start figuring out ways to help Americans. The Chairman of the Fed wields a mighty powerful stick. And while it’s not likely that he can get them to agree on anything these days, a better understanding of the environment and a strong message from the Chairman of the Fed would almost certainly push them in the right direction. I hope I am being too hard on him, but I fear I am not….
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