Judging Bernanke: What the Fed Chair Got Right and Wrong
Policy + Politics

Judging Bernanke: What the Fed Chair Got Right and Wrong

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Federal Reserve Board Chairman Ben Bernanke will leave the central bank next month, after guiding it through one of the worst financial crises in the Fed’s 100-year history and instituting a policy of unprecedented transparency on issues of monetary policy.

An academic economist by training and profession, when chosen by President George W. Bush, Bernanke at first seemed an unlikely successor to larger-than-life predecessors Paul Volcker and Alan Greenspan, both of whom came to the central bank with extensive experience in the worlds of finance and Federal policymaking.

Related: Many Faces of Bernanke

Bernanke, by contrast, could claim neither. But in his eight-year tenure as Fed chair, he spearheaded multiple creative programs to help support a staggering U.S. economy, all the while facing down critics in Congress and other central bankers who warned that the result of the Fed’s policies would be crippling inflation.

Bernanke left his job as head of the Economics Department at Princeton University in 2002 to become a member of the Fed’s Board of Governors. In 2005, he moved to the White House to head the president’s Council of Economic Advisors. Less than a year later, he was confirmed as Fed Chairman. 

In an often-repeated story, when Bernanke was first called to Washington to be evaluated by the administration for a post on the Fed Board, one of the questions then-President George W. Bush asked him was if he had ever held elective office.

“It may mean nothing here, but I served on my local school board,” Bernanke said, referring to the six years he spent on the Montgomery Township School Board in New Jersey.

 “It’s good enough for me,” Bush told him. “You’re in.”

Related: Will Transparency Be Bernanke’s Enduring Legacy?

While Bush was frequently criticized for making decisions based on his “gut” feelings, it would be hard for even his harshest detractors to deny that when he saw something promising in Bernanke he got it right.

Bernanke took over the Fed in 2006, and his first steps were less than sure. In public statements he was far more candid than his immediate predecessor Alan Greenspan had been, and the markets reacted aggressively and unpredictably.

Before long though, Bernanke would have other things to worry about. In 2007, the housing bubble burst. Inflated housing prices were driven by myriad factors, including a low interest rate environment championed by the Fed – with Bernanke’s approval – as well as mortgage fraud, poor underwriting practices and more.

The collapse had catastrophic consequences for the broader economy. Banks and other major financial institutions, including some of the largest in the country, suddenly found themselves on the verge of insolvency.

Related: Bernanke’s Finale—The Beginning of The End of Easy Money

In conjunction with the Treasury Department, the Federal Reserve helped arrange sales of some banks that were too far in the hole to rescue, and instituted a massive program of lending to other financial institutions in an effort to keep them afloat. They also let Lehman Brothers slide into bankruptcy, a decision that still elicits criticism today.

The Fed’s willingness to keep pumping money into the economy during the crisis was unprecedented, and also drew enormous amount of criticism, both at home and abroad. Inflation hawks, outraged at what they saw as Bernanke’s overstepping of the Fed’s mandate, demanded his resignation. European central bankers, convinced that “austerity” was the key to surviving the crisis, increased interest rates and demanded that indebted countries slash spending even as unemployment skyrocketed.

Bernanke, however, persevered. Under his watch, the interest rate the Fed charges banks that borrow from its discount window plummeted to near zero. And when that failed to increase demand in the economy, Bernanke went looking for other forms of stimulus. In 2008, he settled on the so-called quantitative easing program, through which the central bank has bought trillions of dollars of Treasuries and mortgage-backed securities.

Despite fierce opposition – one presidential candidate in 2012 promised that Bernanke would meet with violence if he ever visited his state – Bernanke kept interest rates at rock bottom and pushed through three rounds of quantitative easing as the economy continued to sputter.

Related: Why No Taper Tantrum? Bernanke Hit the Bullseye

This month, the Federal Open Market Committee determined that the economy was finally far enough along the path to recovery that it could begin to “taper” the QE program, slowly reducing the amount of securities it buys each month.

Whether or how much Bernanke’s unconventional policies helped the slow recovery remain a matter of debate, but what is clear is that Bernanke’s detractors, who warned repeatedly of imminent spikes in inflation, were wrong. And the rate of the recovery in the U.S., while maddeningly slow, has been well above that of the European Union, where policies of austerity were in place, suggesting that Bernanke was also right about the need to loosen, not tighten, monetary policy.

While Bernanke battled to keep the economic recovery on track, he also worked to dramatically change the way the Fed communicates with the public. His immediate predecessor, Alan Greenspan, has said that he was purposefully vague and confusing when he spoke publicly, in order to prevent the markets from knowing the Fed’s position.

Bernanke, by contrast, has brought unprecedented transparency to the Fed. With regular press conferences on monetary policy decisions, and explicit guidance about what sort of triggers the Fed looks at for future action, the markets now know more about the central bank’s monetary policy planning than they ever have.

Related: Bernanke—A Reverse Robin Hood in Middle Class Clothing

The benefits of that may well have been on display last week, when the taper was announced. Despite the fact that it represented a reduction in the monthly stimulus to the economy, the Fed also signaled both confidence in the economy and an intent to keep interest rates low for an extended period of time. Rather than drop, the markets soared.

None of this is to say that Bernanke was perfect. It should be remembered that he supported the very same policies that, in part, inflated the real estate bubble. He also, by his own admission, failed to recognize the severity of the crisis when it first struck.

“Obviously, we were slow to recognize the crisis. I was slow to recognize the crisis,” he said in a press conference on Dec. 18. “In retrospect, it was a traditional classic crisis, but in a very, very different guise: different types of financial instruments, different types of institutions, which made it, for a historian like me, more difficult to see.”

Largely as a result of the QE program, the Fed now carries some $4 trillion in government debt on its balance sheet – an amount more than quadruple what it held prior to the financial crisis.

Related: New Fed Monetary Dove Puts Jobs First 

Others have criticized his willingness to bail out financial institutions that were on the brink of failure, and his extension of the Fed’s authority to lend beyond the world of bank holding companies to a more diverse array of financial firms.

On balance, though, Bernanke’s willingness to stand firm in the face of the vocal opposition of influential opponents, seems likely to have both prevented further economic damage and to have hastened the recovery.

While there is still a lot of economic misery out there, odds are it would be a lot worse if Bernanke had not been chairing the Fed. His nomination in 2006 might have been the best decision George W. Bush made as president.

Follow Rob Garver on Twitter @rrgarver

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