The Alchemists: Three Central Bankers and a World on Fire

by Neil Irwin

  The reserve bank presidents’ argument was simple: Stripping small-bank regulation from the Fed would amount to cutting the regional bank system off at the knees, leaving all the power in Washington and New York. “I felt it was important in my own heart,” said James Bullard, president of the St. Louis Fed. “This system is carefully designed to have a Washington component to the Fed and an important bank in New York, but also to get other representation around the country. It was part of the original compromise, and that seemed important to preserve.”

  • • •

  Democratic lawmakers were starting to feel assailed. Their landmark health care legislation had passed the Senate in December, but only after a long and ugly battle. They were being attacked as tools of Wall Street interests—an image not helped by Dodd’s slow, consensus-driven approach to financial reform.

  The recession may have technically ended, but the malaise had continued. At the end of 2009, the unemployment rate was a hair under 10 percent, still at its highest level since the 1980s. Against that backdrop, the unthinkable happened: In a special election held on Tuesday, January 19, 2010, a Republican was elected to the Senate in Massachusetts, the most liberal state in the nation, to fill the seat of the legendary Ted Kennedy, who had recently died of a brain tumor, thus costing the Democrats their sixty-seat supermajority.

  There was a collective shock following the victory of Scott Brown against the hapless Massachusetts attorney general Martha Coakley, with Democrats scrambling to consider not only what might become of their entire legislative agenda, but also why their party had become so unpopular so quickly. The obvious answer was the economy, which had been wrecked by Wall Street. Which, the conventional wisdom went, had been aided and abetted by the Fed. Which was represented by Ben Bernanke. Coincidentally, it was less than two weeks before his term was set to expire on January 31—and while Obama had renominated him, he had yet to be confirmed by the Senate.

  Two days after the election, Senate Democrats met for a weekly lunch to discuss their strategy. In a tense meeting, the more liberal members of the party, and even some of more middle-of-the-road temperament, were livid that at a time when voters were furious about the economy and Wall Street bailouts, legislators were being asked to confirm a guy who was responsible for both. “Massachusetts was kind of a wake-up call to many Democrats,” said Bernie Sanders that week. “People are disgusted and furious with Wall Street and with the state of the economy, and a number of Democrats have been scratching their heads, saying, ‘Why do we want to reappoint a guy who was a member of the Bush administration?’”

  Byron Dorgan of North Dakota, no liberal bomb thrower, came out in opposition to Bernanke. He was followed by two farther-left senators, Barbara Boxer of California and Russell Feingold of Wisconsin. Most dangerous of all for the Fed chairman’s prospects, Richard Durbin of Illinois, a close ally of Obama and the number-two-ranked Democrat in the Senate—the majority whip, whose job it is to round up votes—was on the fence.

  Much was at stake in Bernanke’s confirmation. Rejection would have left the Fed without a chairman at a time of nearly 10 percent unemployment and shaky confidence in the financial markets. In addition, having one of the president’s highest-profile appointments rejected by a Senate controlled by his own party would have been a major loss for Obama. A fight began.

  “The White House political guys didn’t love Bernanke and weren’t in it with their hearts, so it was a struggle to get them engaged,” said one official involved with the effort. “But once they realized what a loss it would be for the president if the nomination went down, they got engaged.”

  In the White House, Rahm Emanuel and David Axelrod, the president’s chief political adviser, began a campaign to lean on wavering senators. Emanuel, a man of manic intensity and with a deep Rolodex acquired from his days as a leader in the House of Representatives, worked the phones. So did the president himself, emphasizing the potentially disastrous impact to markets if Bernanke was rejected. Even Hillary Clinton, the popular secretary of state, mentioned the Bernanke confirmation in conversations with senators that were mainly about foreign policy matters.

  Bernanke and his allies at the Fed were gearing up for battle in their own way. Like most of what came from the Fed, it was careful, methodical, and below the public radar. They set up a war room in Linda Robertson’s office, tracking what was known about how each senator was leaning and influence they might bring to bear on him or her. Would they like a meeting with Bernanke? Forty-two senators took the chairman up on the offer, unprecedented in the experience of Robertson and others with experience in confirmations. Might a nudge from a sympathetic industry group help? The Fed had discreet contacts with some key business lobbies that were locked into battle with the White House.

  The U.S. Chamber of Commerce was intensely opposed to the president’s health care legislation, but the lobbying association’s head, Tom Donohue, was willing to go to bat for Bernanke. He called Republican senators. The Financial Services Forum, a group that represents the CEOs of the twenty largest Wall Street firms, asked some of its members to make calls to senators with whom they had relationships. Jamie Dimon, the charismatic chief of J.P. Morgan, worked the phones. Even Lloyd Blankfein, the chief executive of Goldman Sachs—a firm that was a political pariah even as it remained a financial powerhouse—made at least one call, to Senator Bob Corker.

  If Bernanke’s job was going to be saved, it would be in part thanks to activism by executives of the country’s most loathed companies, the major banks that helped cause the crisis.

  The largest companies in America weren’t the only Bernanke allies, however. On Thursday, January 22, Cam Fine of the Independent Community Bankers of America was out of town for a speech when he received an urgent text message: Durbin was thinking of coming out against the nomination. Fine returned to Washington and set up a war room in his office. His lobbying staff gathered intelligence about which senators were leaning for or against Bernanke; Fine called every one he thought might be willing to vote yes. The effort was driven by the belief that Bernanke, whatever his faults in the eyes of the small banks, would at least give them a fair shake.

  “We didn’t always agree with Bernanke, but I was convinced that if it wasn’t him, we’d get some vice chair of Goldman Sachs running the Fed who didn’t know what a community bank was, and that worried me,” Fine said. “I’d much prefer an academic to a Wall Street trader.”

  The battle over Ben Bernanke was no longer about whether the balding former economics professor was the best person to lead the central bank for the next four years. It was about whether the U.S. government would allow itself to be guided by sheer populist rage.

  The anger came from both the left and the right. Progressive advocacy group MoveOn.org told its members, “Fed chair Ben Bernanke spent trillions to bail out Wall Street, but he’s turning a blind eye to regular Americans.” Tea Party–affiliated South Carolina senator Jim DeMint released a statement opposing Bernanke’s confirmation, maintaining that the Fed chair had “led the fight against bipartisan legislation in the House and the Senate to require a full audit of the Fed so Americans know what has taken place and what mistakes have been made.” Calls and e-mails bombarded Senate offices—fewer than during the debate over the financial bailout in the fall of 2008, staffers said, but not by a lot.

  On Friday, January 23, Dodd and Senator Judd Gregg, a New Hampshire Republican, issued a joint statement saying they expected Bernanke to be confirmed. And little by little, in the form of written announcements and television interviews, the tide started to turn.

  “To blame one man for the financial implosion is simply wrong,” said California Democrat Dianne Feinstein. Bernanke, “for reasons of stability and continuity, should be reconfirmed.”

  Durbin made his decision, if reluctantly: “I have some misgivings about Fed policy and economic policy,” he said on Face the Nation on Sunday the twenty
-fifth. “But I really do have to say, this man guided us through the worst economic crisis this nation has seen since the Great Depression.”

  Republican leaders played the vote cagily. On one hand, it was clear that they would like anyone else Obama might nominate less than Bernanke. On the other, Bernanke had become anathema to their conservative base. And they seemed to enjoy making the Democrats sweat and making the president expend time and political capital on the confirmation battle. By holding back Republican votes, they could force more Democrats to vote for Bernanke, saddling the opposition with an unpopular vote. That helps explain this appearance on Meet the Press by Senate Republican leader Mitch McConnell:

  “He’s going to have bipartisan support in the senate, and I would anticipate he’d be confirmed,” McConnell said.

  “Will you vote for him?” asked David Gregory, the program’s host.

  “He’s going to have bipartisan support.”

  “But you won’t say how you’ll vote?” said Gregory.

  “I’ll let you know in the next day or so.”

  “You have concerns about his renomination?”

  “I think he’s going to be confirmed.”

  “But do you have concerns about his renomination?”

  “Some of my members do, but I think he’s going to be confirmed.”

  McConnell was right. On Thursday, January 28, barely a week after Bernanke’s nomination seemed to be falling apart, the Senate voted 70–30 to confirm him. Eighteen Republicans and twelve Democrats voted against the reconfirmation, in the narrowest margin of any Fed chair in history.

  But the center held, and Ben Bernanke got four more years.

  There was no time to celebrate. The battle was already shifting back to financial reform. The regional Fed presidents were in full-on lobbying mode, trying to keep their role overseeing banks. Their basic pitch: We’re the institutions that keep the Federal Reserve rooted in Main Street America. We’re the counterweight to the big-bank-loving, bailout-giving guys in Washington and New York. Dodd’s plan of putting only $50-billion-and-bigger banks under Fed oversight would create a system that was much more weighted toward big Wall Street interests.

  “If you’re a central bank in Washington or New York but without this other network, you’re located in the nation’s political or financial capital and preserving that independence is harder because there’s no external ballast to balance those interests,” said Charles Plosser, president of the Philadelphia Fed. “We have two failed banks down the street here—the First and Second Banks of the United States—which failed precisely because they had no balance. Their charters were revoked by Congress because of the perception that they were run for bankers and politicians and that the interests of people outside Washington, Philadelphia, and New York were being overlooked, so when the Fed was created the core tenet was to decentralize authority.”

  The reserve bank presidents pressed their case, calling and visiting lawmakers in Washington so aggressively that, according to one Senate aide, “Whenever I looked up, there seemed to be another of the regional Fed presidents in town.” Many of them were more natural politicians than Bernanke, and they had much more experience in the kinds of interactions of which retail politics is made. Part of their job, for example, was giving speeches at the local chamber of commerce, trying to persuade businesspeople of the rightness of their policy ideas.

  Much of their time was spent explaining to members of Congress just what these little-understood reserve banks around the country actually do. One congressman visited Richard Fisher at his office at the Dallas Fed, full of anger at the Federal Reserve for its work supporting big Wall Street banks and having signed on to Ron Paul’s Audit the Fed bill. Fisher personally approved every discount-window loan the Fed made—even during the crisis, when the lending hit $9 billion a night—and as it happened, the day before, the discount window had extended credit to a bank in the congressman’s district.

  “I just lent $10,000 to a bank in your district last night,” Fisher said. The congressman was startled—he had no idea that the Fed was so deeply involved in the routine operations of local banks.

  “Would you have wanted to be involved in that decision?” Fisher asked. “Because effectively, if you are going to do what you signed on to do with the Ron Paul bill, you are going to be involved in that decision and making monetary policy.”

  • • •

  It was an unusually snowy winter in Washington, a city consistently unable to deal with even a few inches of the stuff. When nearly three feet fell at Dulles International Airport on February 5 and 6, 2010, the federal government closed for days—“Snowmageddon” became the popular name for the storm.

  The shutdown created a convenient opportunity for the newly confirmed Bernanke and his closest advisers to think through their strategy in the final push for financial reform legislation. With snow still on the ground and no one but a few security guards at work in the Eccles Building, Bernanke gathered together Don Kohn, the vice chair of the Fed Board of Governors; Kevin Warsh, a Fed governor who frequently acted as Bernanke’s liaison to Republican politicians and Wall Street CEOs; Scott Alvarez, the Fed’s chief lawyer; Michelle Smith, the Fed’s communications chief; and Robertson.

  The attendees started by discussing the core principles and goals of the Fed. They weighed the merits of being a more specialized agency focused on monetary policy and the financial plumbing of the big banks versus having a broader role overseeing nearly every bank in the country and protecting consumers. On one hand, a more targeted agency could be more effective. On the other, Bernanke and his advisers believed, the Fed was already better at doing its assigned tasks than most bureaucracies. It attracted high-quality staffers and was well run, which a new agency might not be.

  What mattered, and what could be given up without much problem? The first priority, they concluded, was keeping political independence in their monetary policies. Audit the Fed needed to be fought at all costs.

  The agency needed to keep oversight of the biggest banks in order to carry out monetary policy effectively and make sure the financial system was working. It was becoming clear that the financial reform being passed would place greater expectations on the Fed to guarantee financial stability, and it needed to regulate the likes of Citigroup and Goldman Sachs to be able to do that. The Fed also needed to keep the oversight of small banks for a few reasons, Bernanke’s inner circle agreed: to have insight into a sector that was, in the aggregate, a major driver of U.S. economic activity, but also to maintain the ballast that comes from the Fed system having a vivid presence across the United States. Bernanke and his associates were more willing to give up its role as a regulator protecting consumers. That was never a core function of the Fed, and Bernanke’s line to Congress became, in effect: If you choose to leave it with us, we’ll carry out the responsibilities better than in the past, but if you want to take it away from us, that’s your prerogative. The good news that snowy day in Washington was that, on the things that really mattered to the Fed, the tide seemed to be shifting in its favor.

  For all the occasional distrust between Fed leaders in Washington and at the reserve banks, by this crucial period in the first months of 2010, the reserve bank presidents were becoming strong allies, each with something to offer the other. Bernanke and the Fed leaders in Washington had the inside game, with their relationships with Geithner and House and Senate leaders. But the reserve bank presidents had, in many cases, relationships with a wide range of members of Congress from across the United States—along with experience explaining financial concepts to people who aren’t specialists.

  As time passed, more lawmakers who weren’t normally attuned to financial regulation started to focus on what would become the Dodd-Frank Act. And they often turned to their reserve bank presidents to help understand the issues. Robertson’s staff even arranged events at the Fed’s headquarters in Washingto
n in which reserve bank presidents would invite congressional staff from their districts to come for hours of briefings.

  Ironically, some of the sources of tension between the board and the reserve banks at times proved an asset.

  Hoenig gave speeches assailing bailouts and the culture of too big to fail, implicitly criticizing the Fed’s crisis-era decisions. As if trying to atone for his acquiescence to the low-interest-rate policies of the mid-2000s that may have helped stoke the crisis, he dissented from the Fed’s monetary policy decisions at each meeting in 2010, objecting to the central bank’s promise to keep interest rates low for an “extended period.”

  It may have irritated some of his Fed colleagues, but it also strengthened his credibility with many of the legislators who would decide the fate of the Fed. If you’re annoyed by what the Fed has done over the past few years, so am I, his actions suggested to lawmakers. But the way you’re responding is counterproductive.

  Hoenig also went after a proposal meant to bring more democracy to the reserve banks by making the chairmen of their boards of directors subject to Senate confirmation. He and his reserve bank colleagues viewed this as an increase of political control over an institution that already had plenty—and as a consequence of decisions made in Washington and New York that had nothing to do with the regional banks.