Opinion

Hugo Dixon

Bernanke deserves 6 out of 10

Hugo Dixon
Jan 27, 2014 09:58 UTC

How should the world outside America view Ben Bernanke’s legacy? Should it lambast the U.S. Federal Reserve chairman, who retires later this week after an eight-year stint, for failing to predict the financial crisis and being slow to react when it hit? Or should it laud him for pulling out the stops to save the financial system and pep up the U.S. economy after Lehman Brothers went bust in 2008? Or should non-Americans be worried that the process of unwinding Bernanke’s unprecedented money-printing policy will deliver a bad case of whiplash?

The answers to the last three questions are “yes, yes and yes.”

Bernanke’s culpability for the global financial crisis is not nearly as great as that of his predecessor, Alan Greenspan. It was, after all, Greenspan who ignored the dangers of financial deregulation, while being ever-too-ready to respond to any sign of market trouble by dropping interest rates – a policy that encouraged banks and investors to run up excessive risks with borrowed money.

By the time Bernanke took over in February 2006, the global credit bubble – and, in particular, the U.S. subprime housing bubble – was already well inflated. There was no way of avoiding trouble. However, the new Fed chairman could have mitigated the damage if he had had more foresight – say, by pushing for tighter regulation of the financial system.

The bigger criticism, though, is that once the subprime bubble burst in mid-2007, Bernanke was slow to appreciate the severity of the situation. True, he did cut interest rates. But he didn’t realise how losses were going to cascade through the global financial system, nor did he push hard enough for financial institutions to increase their capital and liquidity buffers.

What’s more, Bernanke’s Fed did little contingency planning to prepare for a big U.S. financial institution failing. As a result, when Lehman went bust, threatening to drag much of the global financial system down the plughole with it, there was no plan B.

UK Tories mishandle EU relationship

Hugo Dixon
Jan 23, 2014 10:16 UTC

A year after David Cameron promised a referendum on EU membership, the British prime minister and his Conservative party are alienating potential allies across the Channel. He needs to pitch reforms that benefit the whole bloc, not just pander to eurosceptics. Otherwise an “Out” vote looks more likely.

Cameron promised to hold a referendum by the end of 2017, assuming he’s still in power. His original hope was to first renegotiate the terms of Britain’s EU membership sufficiently so that he could then sell the advantages of staying in to a sceptical electorate.

In such a scenario, the expectation was that much of Tory press would rally round – or at least mute their criticism. Meanwhile, business would campaign to stay in, alongside the Liberal Democrats, the junior partners in Cameron’s coalition, and the opposition Labour party.

Renzi-Berlusconi pact gives Italy hope

Hugo Dixon
Jan 20, 2014 10:22 UTC

A weekend pact between Matteo Renzi and Silvio Berlusconi offers new hope to Italy. The constitutional reform deal between the leader of Italy’s largest party and the leader of the opposition addresses one of the country’s biggest problems: its ungovernability. Now Renzi, who runs the centre-left Democratic Party, needs to put his energy behind key economic reforms, especially jobs and public spending.

Italy, where I spent much of last week, has been plagued for years with unstable governments. In part this is because the voting system gives a lot of power to small parties and can lead to conflicting majorities in the two houses of parliament, which have equal power.

The Renzi-Berlusconi deal aims to reinforce the power of larger parties by changing the voting system. It also would demote the upper house so that governments will only need to secure a majority in the lower one. Meanwhile, the two leaders have agreed to cut the power of Italy’s regions – a move which should save money and lead to more stream-lined decision-making.