Plodding towards recovery: has public confidence in the effectiveness of free markets been lost forever and will this result in an American economy bound by the chains of government regulation?

• Author: Thomson, James W.
• Position: Business & Finance

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ON AN OTHERWISE slow news day, Pres. Barrack Obama made one of his Administration's most important decisions Aug. 25 by nominating Ben Bernanke for a second four-year term as chairman of the Federal Reserve Board. Bernanke will continue as the world's most powerful central banker and person most responsible for guiding the U.S. economy out of the Great Recession.

Like most economists, Bernanke had failed to recognize the severe downside risks of modern finance. He had supported the sweeping financial deregulation measures begun during the Reagan Administration when Alan Greenspan headed the Fed. In 2004, Bernanke praised the "macroeconomic flexibility and stability" provided by "the increased depth and sophistication of financial markets" and increased openness to international capital flows which, in effect, lauded the same factors that later were to trigger the financial meltdown that plunged the nation into recession.

Bernanke's overly optimistic views were evident early on as the financial crisis deepened. In May 2007, when the subprime mortgage markets began to crumble, Bernanke's Fed predicted that the effect on the broader housing market would be "limited" and that there would be no "significant spillovers" to the economy or financial system. As late as October 2007, when the credit markets tightened as a result of their lethal exposure to toxic assets, Bernanke stated, "The banking system is healthy." He could not have been more mistaken. During Bernanke's first four years, the economy grew steadily (coupled with low inflation), but then fell apart as the nation staggered into the worst financial debacle since the dismal 1930s. After the shocking bankruptcy of Lehman Brothers in September 2008, Bernanke finally responded to the threat of an imminent economic collapse in unprecedented fashion by bailing out the financial sector with huge buyouts and loans.

In nominating Bernanke, Pres. Obama praised the Fed Chairman for his "bold action and out-of-the-box thinking," which the President suggested had helped to prevent a repetition of the Great Depression. Bernanke loaned hundreds of billions of dollars to stressed financial institutions and struggling megabusinesses, slashed Fed interest rates close to zero, and used Federal funds to salvage the falling mortgage industry.

What were the causes of this crisis? In forthright testimony before Congress in 2008, Greenspan, once hailed by the financial world as "the greatest central banker who ever lived," admitted that he was "shocked" that the financial markets had failed to perform as he expected. Greenspan stated that he had "made a mistake in presuming that the self-interest of...