DN Editorial: Law and order

BEN Bernanke exits his two terms as Fed chief this week generally regarded as the wonky econ nerd and student of the Great Depression who used his megamind to save our collapsed economy.

He's credited with taking drastic action to restore some semblance of confidence in the financial system, and this he did. He bought up $4 trillion in mortgage bonds and securities from the big banks, shored up their balance sheets, paid off their worthless IOUs (the AIG bailout) and in the process kept rates low to help goose our anemic recovery.

This is all true. But it's just as true that Bernanke's spending spree (known as "quantitative easing") rectified the obtuse mistakes of the most powerful men in American finance, including a fellow named . . . Ben Bernanke.

Consider these revealing gaffes from Bernanke's early days as Fed chief, uttered in 2007:

* Freddie Mac and Fannie Mae, he then insisted, "are in no danger of failing."

* Fallout from subprime mortgages is "contained."

* The banking system comprises "sophisticated financial institutes" that "understand the risks of derivatives."

* And our favorite: "Household finances appear solid."

The fact that Bernanke was catastrophically wrong is obvious. The more pressing question, as a new Fed chief takes the helm, is why he was so wrong.

First, we need to remind ourselves that the Federal Reserve isn't some Delphic oracle we consult when recessions arise, a printing press we call upon when foolhardy banks seize up.

The Fed is also the banking system's most powerful regulator, its top cop, and, in fact, has unique power (under the '94 HOEPA law) to unilaterally stop the very behavior - shoddy mortgage underwriting and outright fraud - that lay at the root of the crises.

All that need happen is for the fraud to be brought to the Fed's attention. Which it was - by trade groups, the FBI, state regulators and some of the Fed's own governors. Bernanke's predecessor, Alan Greenspan, discounted these warnings, and so, too, did Bernanke upon taking office.

Again, why?

Bernanke admits that he didn't fully understand the new financial products (derivatives) or their risks. His candor is welcome, because it follows Greenspan's markets-are-never-wrong hubris. But he also placed far too much faith in theories and econometric modeling that simply didn't allow for the kind of top-to-bottom, bad-faith business practices that infected the financial system.

Bottom line: Our economy is too important to be left to economists. We also need a sheriff.

We don't mean to give all economists a bad name. Some called attention to the dangers of poorly regulated markets, including Nobel laureate George Akerlof, who, 10 years before the crisis, warned that lax regulation could lead to distorted market information and looting.

His wife, by the way, is Janet Yellen, Bernanke's worthy successor at the Fed. She was one of the few inside the Fed to express concern about a housing bubble.

Here's hoping there's a new sheriff in town.