Will history look kindly on Ben Bernanke?

Some say he left a big mess. Others are sure he averted a second Great Depression.

By The Week Jan 9, 2014 1:07PM

Federal Reserve Chairman Ben Bernanke (© Jacquelyn Martin/AP)By John Aziz

After eight tumultuous years, Ben Bernanke will soon step down as chairman of the Federal Reserve. How should we judge his 2006-2014 tenure in charge of the world's most powerful central bank?

The short, truthful, and unsatisfying answer is that we don't know yet. Bernanke's legacy as a central banker is still up in the air, because we have yet to see the long-term effects of the programs and policies that the Fed initiated under his watch.

Yet we can, I think, begin to make a preliminary assessment. Bernanke did not leave the Fed in disgrace. He has not been hounded out by mobs with pitchforks or tried for treason, as some politicians suggested he should be. He did not leave due to economic collapse or hyperinflation, as some said he would.

He did leave the Fed after two difficult terms, the first of which included the worst financial and economic crisis since the Great Depression. But in spite of these difficulties, the economy today is larger than it was when Bernanke succeeded Alan Greenspan, and is growing now at a rate of above 4 percent.

The Federal Reserve has a mandate to ensure steady, low inflation -- around 2 percent -- and low unemployment, with the current goal set between 5.2 percent and 5.8 percent. Bernanke has left an economy with 7 percent unemployment and an inflation rate of just under 1 percent. In other words, unemployment is a little higher than might be hoped, and inflation a little lower. But not drastically so.

Bernanke's detractors will say that he missed the housing bubble and then messed up the response to it. But is that really fair?

I'd say no: The events leading up to the 2008 financial crisis were set in motion long before Bernanke became chairman. Although he sat on the Federal Reserve Board of Governors as Greenspan lowered interest rates in the aftermath of the 9/11 attacks (which may or may not have contributed to the housing bubble), he wasn't responsible for the congressionally supported subprime lending, the repeal of Glass-Steagall, the relaxation of lending standards resulting from securitization of risky mortgages, and the evolution of the unwieldy mega-banks.

Indeed, Bernanke's greatest missteps may have occurred before he became chairman, when he was Greenspan's deputy.

Before he became Fed chairman, Bernanke stuck his foot in his mouth, denying that a housing bubble existed and claiming that climbing house prices "largely reflect strong economic fundamentals," such as growth in jobs, incomes, and the number of new households. That was a mistake, especially when other economists such as Robert Shiller were warning that there could very well be a housing bubble.

But upon becoming chairman, Bernanke actually raised short-term interest rates, increasing the cost of borrowing and encouraging saving. So it's not like he was totally blind to the economy beginning to overheat.

And beyond raising rates, what else could Bernanke have done, even if he had believed he was inheriting a ready-to-burst housing bubble, and an irrationally exuberant stock market? The Fed's mandate is stable inflation, low unemployment, and acting as a lender of last resort, not bubble-bursting. It's hard to know with certainty whether there is a bubble until it pops. Trying to prick perceived bubbles carries risks, and tightening too hard may throw the economy into recession or deflation. Indeed, the very idea of bubble-bursting only grew popular after the financial crisis, with the benefit of 20-20 hindsight.

Bubbles, ultimately, are not rational phenomena. They burst when they burst, and very often the best governments can do is limit the fallout.

So the timeframe for judging Bernanke as Fed chairman, I think, begins with the aftermath of the bubble, and the central bank's efforts to stabilize the financial system, and fight off deflation and mass unemployment.

First, let's start with his response to the crisis.

The Federal Reserve -- as a central bank -- is charged with acting as a lender of last resort to prevent financial panics. The financial system is highly interconnected, with banks owing money to each other. This means the failure of one can lead to the cascading failure of many.

The Fed, with the help of JPMorgan Chase (JPM), bailed out Bear Stearns when it ran out of liquidity in March 2008. But when Lehman Brothers also faced a liquidity squeeze in September 2008, the Fed did not come to the rescue. Lehman filed the biggest bankruptcy in U.S. historymarkets panicked, and the economy ultimately tanked.

Could Bernanke have avoided that outcome? No, he says -- Lehman Brothers was beyond saving, because its balance sheet was in such dire straits that it could not post sufficient collateral to qualify for Federal Reserve aid. But as soon as Lehman was bankrupt, the Fed -- beginning with the bailout of American International Group (AIG) -- began lending over $7 trillion into the banking system, and in so doing averted a major systemic collapse.

This proved an important point -- if a default cascade starts due to a bank failure, the Fed can stop it by bailing out the failed bank's counterparties. This hadn't really been tested before. And even if he wanted to directly bail out Lehman (as opposed to arranging a shotgun marriage with a healthier bank), the existing legal framework he inherited forbade him from doing so. The system was cracked with frailties.

Second, the Fed moved to shore up the broader economy. With unemployment rising so quickly, the Fed quickly dropped short-term lending rates to zero, to discourage investors from idly sitting on cash and savings.

Although Bernanke promised to keep rates low, unemployment was still rising, and deflation was setting in. Deflation is problematic for two reasons -- first, it makes past debts more difficult to repay, thus increasing the risk of default; second, it discourages economic activity by depressing wages, leading consumers and businesses to just sit on bonds, cash, or bank deposits.

With its main tool -- lowering the benchmark interest rate target -- tapped out, the Federal Reserve needed a new set of tools to conduct monetary policy. (Congress was little help: After it passed a large stimulus package in 2009, it quickly became clear that no more stimulus money was forthcoming from the gridlocked legislature.)

Japan had experimented with asset purchases to conduct monetary policy at the zero bound. But these methods were controversial, since Japan at the time had suffered 15 years of false starts, weak growth, and deflationary slumps.

Bernanke began this new unconventional monetary regime in November 2008 with a $600 billion program of quantitative easing asset purchases, which was expanded in March 2009 to $1.05 trillion. Bernanke's theory was that if you can't cut interest rates in the traditional way, you can still effectively cut rates by taking yielding assets out of the financial system and replacing them with cash. By taking safe yield out of the system, investors seeking a return on their investments would have to diversify their portfolios with productive assets like equities. More productive activities should produce more growth and jobs, bringing down unemployment and growing the economy.

By late 2009, unemployment finally began to stabilize just below 10 percent, and the threat of a deflationary cycle receded. But 10 percent unemployment is still perilously high, and after another year of stalled growth in the labor market Bernanke announced a new round of asset purchases -- QE2 -- worth $600 billion in November 2010.

Unemployment fell, gradually. Yet each time the Fed began tapering its purchases, the market reverted back to risk aversion.

The real breakthrough in conducting monetary policy at the zero bound may have come as late as 2012, when the Fed initiated QE3. QE3 was not limited to an arbitrary level of purchases like QE1 and QE2. The Fed said it would make a variable amount of asset purchases -- at first $85 billion a month, now $75 billion a month -- until unemployment fell to around 5.5 percent, unless inflation rose above the Fed's two percent target. This would seem to get around the problem of tapering the stimulus too early.

Since commencing QE3, unemployment has fallen significantly, to seven percent, from about eight percent. Year-on-year growth has picked up. Inflation remains very tame. This improvement has been significant enough for the Fed to reduce asset purchases by $10 billion per month.

Some say that this experiment is dangerous, and that the Fed may struggle to unwind its asset purchases. But does the Fed really need to unwind? Not necessarily. The Fed's mandate is low inflation and low unemployment. There is no reason to "normalize" policy, and reduce the Fed's balance sheet unless inflation picks up.

Of course, as the recovery strengthens inflation is likely to rise due to rising demand. In that case, the Fed has two options: Raising interest rates, and reversing asset purchases, which entails sucking cash out of the system in exchange for the assets on its balance sheet. So the Fed now has more tools at its disposal for fighting inflation than before. This may, in the future, prove to be a useful tool for fulfilling its mandate.

This also means that Bernanke and his team may have planted the seeds for a future of workable monetary policy at zero bound. That would be a serious empirical breakthrough in economics and central banking, allowing central banks to fight unemployment and deflation when pulling the old interest rate lever is not an option.

Of course, the future is unpredictable. There remain doubts about the health of the financial sector. There remains risk, even after five years of gradual deleveraging, that private debt is too high and cumbersome. Some charge that having been bailed out, the financial sector has not learned many lessons from 2008, that the Dodd-Frank regulatory overhaul giving the Fed authority to wind down banks that are deemed "too big to fail" is insufficient, and that another financial blowup may be on the horizon. And unforeseen shocks -- wars, natural disasters, energy shocks, political shocks -- may derail this recovery and stain Bernanke's legacy. So would the emergence of uncontrollably high inflation or uncontrollable deflation.

But in spite of the difficult start he faced, the signs are beginning to point to history looking kindly on Ben Bernanke as America's central banker.

More from The Week

Jan 9, 2014 2:26PM
Uncle Ben and the Global FEDS have not averted a Global Depression, they have merely delayed it. History will have an assortment of viewpoints about what Uncle Ben and his Global Cohorts have done. It's laughable to behave as if this is just Uncle Ben, this is Global Collusion and could not have been done with Global Collaboration. Nor is too early to pass judgement, he is a failure. Uncle Ben and the other Global FEDS have one mandate, preserve the Wealth of the Elitists. They have succeeded beyond their wildest Dreams. They done little to nothing to change for the better, anything else.

Uncle Ben has punished Savers and rewarded criminals. Uncle Ben has targeted the Social Security and Medicare Trust Funds which depends on interest payments to stay solvent. A problem that it would not have if they put the stolen money back. We have about $3Trillion Dollars of Bogus IOUs instead. So when folks behave as if Uncle Ben has saved anyone other than the usual Bad Suspects, It's a major insult to the intelligence of every Human Being on the Planet.

Jan 9, 2014 1:41PM
Bernanke averted a 2nd Great Depression?

Take away all the food stamps and you'd see people standing in bread and soup lines.  Take away the 2 years of UE benefits and millions of "convenient" disability claims and you'd have people lined up begging for jobs, instead of dropping out of the workforce altogether.  Take away the artificially suppressed mortgage rates and you'd see millions of homeless folks setting up shanty towns.

Things are just as bad, we're just doing a much better job of hiding them now.

Jan 9, 2014 2:16PM
I never have bought into the notion that the future is unpredictable. Is it almost impossible to give exact DATES, certainly. Currently from how I see things, the Global Trajectory is clear, we are heading towards Global Epic Fail with eventually a push for One World Government and One World Currency. That's why we are seeing a push for all things electronic, especially for currency.

On your Job, they want every one to have direct Deposit and no physical checks. Ditto for taxes. More folks are likely paying thing electronically as opposed to physical cash. Eventually the powers that be, one way or the other, will convert everyone to the same electronic currency, regardless of if you want to or not.
Jan 10, 2014 1:33PM
Since it's an election year, we Repukelicans all of sudden, care about the poor.

Could we get your vote please and in return, we promise to take good care of you. In fact, when we are done with you, you will never suffer from pain or worries ever again. WE HAVE A PLAN!

We are also setting up thousands of food trucks from coat to coast, to help feed you and your families through these tough economic times.

So, all you beautiful poor people,.... "Come and get your gruel, we aren't at all that cruel".
Jan 10, 2014 1:33PM
Something you so called Christian Republicans can talk about next Sunday in church:

Many aspects of capitalism have come under attack from the anti-globalization movement, which is primarily opposed to corporate capitalism. Environmentalists have argued that capitalism requires continual economic growth, and that it will inevitably deplete the finite natural resources of the Earth. Such critics argue that while this neo-liberalism, or contemporary capitalism, has indeed increased global trade, it has also increased global poverty - with more living today in abject poverty than before neoliberalism, and that environmental indicators indicate massive environmental degradation since the late 1970s.

Many religions have criticized or opposed specific elements of capitalism. Traditional Judaism, Christianity and Islam forbid lending money at interest, although alternative methods of banking have been developed. Some Christians have criticized capitalism for its materialist aspects and its inability to account for the wellbeing of all people. Many of Jesus's parables deal with clearly economic concerns: farming, shepherding, being in debt, doing hard labor, being excluded from banquets and the houses of the rich, and have implications for wealth and power distribution.

In his 84-page apostolic exhortation Evangelii Gaudium, Pope Francis described unfettered capitalism as "a new tyranny" and called upon world leaders to fight rising poverty and inequality. In it he says:

Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting.
Jan 10, 2014 1:32PM
Opinions are like a$$holes, we all have one.

And that's my opinion!

Jan 9, 2014 4:31PM
History will record Bernanke as a stooge of the failed Obama administration.   A man that enabled him to increase the debt from 10.2 trillion to 20 trillion, and causing long term economic disaster in the USA.    A true Keynesian economist that destroyed the dollar and eliminated the middle class.

It is hard to believe history can find any other verdict...
Jan 9, 2014 5:14PM

Bernanke was appointed by your Buddies, Mirage....And "much of what he did" was pretty much decided before Obama came into office....

Please don't "deflect from the truth."

I'm not totally satisfied either of how things are going, but the alternative would have put you out of business....I'm pretty sure..

Because we would have contributed to Worldwide failure event.

Jan 10, 2014 12:28PM

Mirage...Not necessarily jaded by any past liberal explanations or ideas of what went good or bad during our Great Depression..1928-to the Early 1940s into at the beginning of WW2 or right after the start.

Give or take a year or two on either end of those dates...Depending on opinion..

Will not argue or discuss that time frame or dates, a useless waste of time.

I'm in no way, a student of Keynesian Theory, nor Austrian Economics or theory, ideas, practice etc.

I agree with your margin statements and leverage problems, that lead us down paths of economic instability...

I don't agree that this last Debacle is or was a Depression of any sort...

We did fall into a Worldwide Deep Recession, on the verge and there were a few Countries, mostly in Europe or Eurozone that bordered into Depression...As we know.

The original premise of this Article is, did or did not the FED and Government pull us through this Deep Recession and keep us from falling into a Depression...??

Like in the Article and I would somewhat agree, Very Hard to write that History yet. In my mind.

We have buried ourselves with debt...

We have been slow to recovery..

But we are recovering, although haphazardly.

I believe we are falling back into some of the same traps, that fueled our Recession.

I also believe unfettered Capitalism is taking Advantage of a bad situation...

Maybe they should have failed completely, then we would all start out on an equal footing again.

And yes I agree Government has gotten in the way of a better Recovery...

But I do not blame Obama for anymore then his share...And feel Congress should be hung.

Yes I do realize, to build any substantial business in this Country is difficult at best..

Again to much Government intervention, in one form or another.

Jan 9, 2014 5:08PM

Well here is where we part the ways...Most of you have less knowledge about the Depression, then I and my first hand knowledge is nil....There may be small a number of posters that have heard the stories, witnessed the after effects, and/or knew their families were almost destroyed or were.

An average age of 90-95+ could have given us better insight, if we still had our memories.

The Depression was pretty devastating and long lasting, some say up until we were into WW2.

That's about 12-14 years, coupled with things like the "Dust Bowl" times were pretty tough.

A large part of our population lived in rural areas, many associated with farming.

Today we have huge populace and Metro areas, many actually most of those people are not self sufficient, many seem somewhat helpless...IMO..

I'm not in a favor of having as many banks bailed out as was; Also not in favor of banks being involved in risky investments or mixed as an investment house both..

Us and our Government allowed that to go unchecked for the most part.

But without the FED, TARP and etc....We as a Nation would have went down the tubes, and dragged the rest of the World with us....U/E would have at least been doubled, their could have more then twice as many foreclosures, loss of homes and businesses...

And there would not have been enough soup and bread to feed the lines, or all of us.

We would have been in very deep trouble and contend with chaos, run amok.

This all may sound like supposition, but I don't believe it would be far from the truth.

So blame or give credit where credit is due, and let's hope for America. 

Jan 9, 2014 5:59PM

Dave...(half past noon) Coolidge and Hoover led us into the Depression, Hoover was quite "flippant" about it and we headed into the "double dip" of sorts..

FDR, was pretty much given credit for us coming out, his attitude was "we will try anything."

Many say it was the War that finally ended the/our "dark days."

There are so many books and opinions about the Depression...It is really hard to argue or debate, the devastation or outcome or successes...

As I've said before, every participant has 10 so-called experts in their back pockets to back up their chosen side or opinions.

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