Score another one for Ben Bernanke.
As the Fed chairman prepares to ride off into the sunset, evidence continues to mount that he successfully averted disaster and outplayed his international central banking peers, particularly in Europe.
"As the global economy teetered, and with his unsurpassed knowledge of mistakes made during the Depression, he opened the spigots of credit, took interest rates to zero and rescued major financial institutions," writes Bloomberg's Al Hunt. "After the meltdown, he played an important role in fashioning financial and banking reforms. As the U.S. struggled to recover, Bernanke kept his foot on the gas. With interest rates at zero limiting monetary action, he pushed quantitative easing, the purchase of long-term securities, to stimulate the economy. That controversial approach appears to have been modestly successful, spurring faster growth without inflation."
Clearly, the U.S. economy isn't exactly going gangbusters and millions of Americans remain under-employed or unemployed. But the economy has been officially expanding for 54 consecutive months and real fourth-quarter GDP is likely to break 3%. Most economists believe December's weak jobs report was an anomaly and the trend of slow but unspectacular growth -- around 2.2 million jobs per year -- will continue and possibly accelerate in 2014 if business capital spending finally picks up.
While there's plenty to quibble over regarding the state of the U.S. economy, it's hard to deny the U.S. financial system has mounted an impressive recovery from the depths of the 2008 crisis. Profits for the six biggest banks -- J.P. Morgan, Citigroup, Bank of America, Wells Fargo, Goldman Sachs and Morgan Stanley -- hit $76 billion in 2013, just $6 billion shy of the record set in 2006, The WSJ reports. In addition, the KBW Bank Index outperformed the S&P 500 in each of the past two years while J.P. Morgan, despite all the negative headlines and fines, and Wells Fargo hit post-crisis highs last week.
Of course, it's not hard to make money when you can borrow at zero and invest at a risk-free rate now approaching 3% on 10-year Treasuries. But while there's plenty to complain about Bernanke's methods, it's hard to argue with the results. Sunday night's profit miss by European banking giant Deutsche Bank paints a stark picture of what might have been had Bernanke not acted so boldly.
"U.S. banks were forced to take more medicine at an earlier stage than many of the biggest European banks," Yahoo Finance's Michael Santoli recalls in the accompanying video. "They issued equity at lower prices when they didn't want to do it, to raise capital. And a lot of write-downs swept through their balance sheets and got a lot of junk off the books."
In addition, big U.S. institutions have taken preemptive steps to meet new global capital requirements and adjust to the Dodd-Frank legislation's Volcker Rule, which greatly restricts proprietary trading. Once more, credit here is due to Bernanke, who helped create the rules and helped ensure the banks had the financial flexibility to adjust to them.
By comparison, European banks are still struggling with bad loans on the books and only now beginning to adjust to new regulations, judging by Deutsche Bank's lackluster results. The German giant set aside the equivalent of over $930 million against future loan losses, "a likely precursor to other European lenders" -- like HSBC and UBS -- "absorbing financial hits," The WSJ reports.
One irony here is that in the aftermath of the crisis, the U.S. banking industry pleaded for less strict regulations -- claiming it would not be able to compete with European (and Chinese) banking rivals if Dodd-Frank became law. Well, it has and U.S. banks appear to be doing just fine, especially relative to European peers.
The other irony here is that for all the criticism directed at Bernanke -- some of it justified, much of it vitriolic -- it's too bad we won't have him to kick around much longer.
- Banking & Budgeting
- Ben Bernanke