The Bernanke Legacy
Federal Reserve Board Chairman Ben Bernanke gave his last press conference as chair and already the retrospectives have begun. One item that should be corrected off the top, Bernanke did not just inherit an economic disaster from Alan Greenspan.
Bernanke did not go directly from being a Princeton economics professor to being Fed chair. He got there by being a member of the Board of Governors of the Fed from 2002 to 2005 and then was chair of President Bush’s Council of Economic Advisers from the spring of 2005 until he took over as Fed chair in January of 2006. In other words, Bernanke held top policy posts during the period in which the housing bubble was growing to ever more dangerous levels driven by a flood of junk mortgages.
While Greenspan certainly deserves the most blame for the economic disaster caused by the housing bubble, there were few people better positioned than Bernanke to try to slow the growth of the bubble before it grew to such dangerous levels. There is no evidence that he ever suggested any concern about the risks posed by the bubble and the reckless lending that drove it. (He explicitly dismissed such concerns in a session of the American Economics Association in 2004.)
So we have to understand that Bernanke was cleaning up a mess that he had helped to create. In this role his performance was at best mixed. The pundits routinely give Bernanke credit for heading off a second Great Depression, but this is mostly because they heard someone else say it, not because they have any idea what they mean by saying it.
The first Great Depression was not just the result of an inadequate response to a financial crisis; we had a prolonged period of double digit unemployment due to inadequate fiscal policy over the next decade. The massive stimulus provided by World War II, which eventually lifted us out of the depression, could have come just as easily in 1931 as 1941. The problem was one of political will, not some intrinsic law of economics.
In the same vein, had the Fed and Treasury not stepped in to stop the cascade of failing financial institutions in the fall of 2008 there is no way that this could have condemned the country to a decade of double digit unemployment. If we did experience a prolonged period of high unemployment following such a crash it would be the result of the deficit hawks insisting that their infatuation with low budget deficits would have to take priority over jobs and growth.
That is not impossible as a political outcome, but it is important to understand the nature of the argument. The argument was that the country could face another Great Depression because the deficit hawks are so powerful that they could even impose a decade of double digit unemployment to satisfy their deficit fixations.
From this vantage point, the argument about saving Wall Street is essentially a question of hostage taking. If Bernanke did not bail out the Wall Street banks then the deficit hawks would have made the country endure a decade of double-digit unemployment as punishment.
Bernanke certainly did everything he could sell the bailouts. He insisted on the urgency of the TARP, telling Congress that the commercial paper market, an essential funding line for most major companies, was shutting down. Bernanke never mentioned the fact that he unilaterally possessed the ability to support the market, waiting until the weekend after TARP passed to announce the creation of a special lending facility for this purpose.
Bernanke also tried to shield the identity of the banks who opted to take advantage of the Fed’s special lending facilities, getting access to credit at below market rates in the middle of the crisis. He only released aggregate lending data, until Congress included a provision in Dodd-Frank requiring that the Fed disclose information on the terms of the loans from its special lending facilities.
Bernanke could have used his post to call attention to the fact that the big Wall Street banks were essentially bankrupt and that Congress could force restructuring as a condition of survival. Instead Bernanke worked to conceal the extent of the problem, leaving the industry more concentrated than ever in the wake of the crisis.
While Bernanke deserves considerable blame for allowing Wall Street to escape little changed from the crisis, he does deserve credit for his aggressive efforts to try to boost the economy. His quantitative easing (QE) policy is an innovative way to try to spur growth in a context where the federal funds rate is already at zero and can’t go any lower.
Bernanke has taken considerable heat from the right for his expansionary monetary policy, with the governor of Texas even going so far as to suggest that the Fed chair would be in physical danger if he visited the state. There were near frantic screams that QE would set off a burst of hyperinflation. The screams only get louder the longer inflation remained low.
Bernanke deserves credit for sticking to his guns through this ordeal and taking the limited steps available to the Fed for boosting demand. He also deserves credit for criticizing the fiscal contraction of the last three years for slowing the economy. These are big plusses, but given that the economy is still far below full employment, and that we are likely to be haunted by the bigger than ever Wall Street behemoths long into the future, it is hard on net to see Bernanke’s tenure in positive terms.