PBS, January 31, 2014
The retrospectives of Ben Bernanke on his leaving the Fed seem to be coming in overly positive. While there is much that is positive about his tenure as Fed chair, many of these accounts have a rather selective view of history.
The part that is clearly wrong is treating Bernanke as a bookish academic who got plucked down in the middle of a financial crisis that was not his making. While Bernanke had a distinguished academic career, he had been in the middle of the action in Washington since 2002. That was when he was selected to be a governor of the Fed. He served as a governor at Greenspan’s side until he went to serve as head of President Bush’s Council of Economic Advisers in June of 2005. After a brief stint as the chief economist in the Bush administration he returned to take over as chair of the Fed in January of 2006.
It was during the period that Bernanke was at the Fed and his tenure in the Bush administration that the housing bubble grew to such dangerous levels. While Bernanke does not deserve as much blame for this as Greenspan, there were few people better positioned to try to deflate the housing bubble before it posed such a large risk to the economy. During this time Bernanke was dismissive of suggestions that the unprecedented run-up in house prices posed any problem. There is no evidence that he dissented in any important way from Greenspan’s view that the Fed need not be concerned about the housing bubble or the innovations in the financial industry that was supporting it.
In fact, even as it started to deflate he consistently underestimated the extent of the problem that would be caused by the bubble’s collapse. In February of 2007, when the financial markets were first showing clear signs of turbulence due to widespread defaults, Bernanke famously expressed his view that the problems would be restricted to the subprime market. When Bear Stearns required a weekend rescue the following year, he told Congress that he didn’t see another Bear Stearns out there.
When the financial crisis reached its peak in the fall of 2008, he deliberately misled Congress to help rush through the passage of the TARP. To highlight the immediate threat to the economy, Bernanke said the commercial paper market was shutting down. This would have meant that even healthy companies would be unable to borrow the money needed to meet their payroll and other regular expenses. Bernanke waited until the weekend after the TARP was passed to announce plans to establish a special Fed lending facility to support the commercial paper market. This move called attention to the fact that Bernanke had the authority to support the commercial paper market without any action from Congress.
During the crisis Bernanke lent massive sums to the financial industry at below market rates, allowing it to largely escape the crisis intact. In fact, because the Fed and other regulators were desperate to prevent a collapse, they allowed several major mergers that at other times would have been subject to serious conditions or blocked altogether. As a result the financial industry is substantially more concentrated now than it was before the crisis.
As an alternative, Bernanke could have explicitly called the attention of Congress to the fact that most of the financial industry was dependent on life support from the Fed. Congress could have imposed restructuring on banks as a condition of receiving the Fed’s assistance. Instead the large banks are bigger and more powerful than ever.
If Bernanke deserves much blame for failing to recognize the dangers posed by the housing bubble and its collapse, and also for saving Wall Street when it would been killed if left to market forces, he does deserve credit for trying to boost the economy out of its slump. After pushing the federal funds rate to zero in the fall of 2008, Bernanke turned to unorthodox monetary policy in an effort to provide additional stimulus to the economy. This meant large-scale purchases of government bonds and mortgage-backed securities which were intended to directly put downward pressure on long-term interest rates.
While the effect of this quantitative easing on the economy has been limited, it has facilitated a massive wave of mortgage refinancing as well as making it easier for businesses and state and local governments to borrow money. Bernanke’s quantitative easing policy has been more aggressive than the policies pursued by most other central banks, with the exception of the recent decision by the Bank of Japan to explicitly target a higher rate of inflation.
In principle, Bernanke could have also targeted a higher inflation rate (a policy he advocated as a Princeton professor), but it’s not clear that he would have been able to get the Fed’s Open Market Committee to go along. Still, given the enormous costs associated with the prolonged period of economic weakness, it would have been worth trying to push monetary policy harder than he did.
On the other hand, Bernanke has been a useful voice in arguing against the deficit cutting that Congress, and to a lesser extent President Obama, have embraced. Bernanke has repeatedly identified the rapid pace of deficit reduction over the last three years as major cause of economic weakness. Unfortunately, it doesn’t seem very many people were paying attention.
The final verdict on Bernanke has to be mixed. He really messed up horribly by failing to recognize the risks from the housing bubble. There was an unprecedented run-up in house prices with no remotely plausible explanation in the fundamentals of the housing market. This run-up was clearly driving the economy, both directly through record levels of construction and indirectly through the consumption boom that was fueled by bubble-generated equity. What did Bernanke think was going to happen when prices fell back to earth?
His efforts to protect a largely unreformed financial system were also hard to justify. The market would have wiped out Wall Street. Iif the government was going to come to its rescue, it should have set the terms.
However he does deserve credit for his efforts to boost the economy the last three years. Hopefully his successor will continue and expand on this aspect of Bernanke’s performance.