Back in the fall of 2008, when it looked like the financial world was falling in, I spoke with Ben Bernanke several times for a long Profile. He was working late hours, as the chairman of the Federal Reserve, to restore calm to the markets and to prevent other financial institutions from meeting the fate of Lehman Brothers, which had collapsed that September. Sitting in his grand office overlooking Constitution Avenue, he looked tired. Some of the criticism he had received, particularly from fellow-economists who were critical of the Fed’s actions, was clearly weighing on him. Reaching into his desk, he showed me a copy of a statement by Abraham Lincoln, from 1862, written after he was criticized for military blunders during the Civil War. It read, in part:
A lowly Fed employee who organized its parking pool had given Bernanke the piece of paper with Lincoln’s words on it, and he had held on to it. This weekend, the soft-spoken former Princeton professor leaves the Fed and takes a well-earned rest, with no need for ten angels to testify on his behalf. The banking system has been restored to health. The stock market is close to an all-time high. And, on Thursday, the Commerce Department announced that G.D.P. expanded by 3.2 per cent in the last three months of 2013. This was the second quarter in a row in which growth has exceeded three per cent.
Things aren’t all right in the United States economy, or, for that matter, in the global economy. But the emergency measures that Bernanke and Hank Paulson introduced back in 2008 eventually stabilized things. Since then, Bernanke has been engaged in the long slog to bring the U.S. economy back to life after the Great Recession. In the past couple of years, particularly, the Fed’s role been crucial. With a Republican Congress baying for budget cuts and the Obama Administration going some way to meet its demands, Bernanke and his colleagues have stepped in and provided much-needed support for over-all spending. The housing and auto industries, in particular, which have been powering the recovery, have both greatly benefitted from the low cost of borrowing that the Fed has engendered.
The ultimate judgment on Bernanke’s tenure isn’t in. Some skeptics would argue that the Fed’s monetary activism has merely been setting the stage for an even bigger blowup. So far, though, the record favors Gentle Ben. Global capitalism didn’t end up imploding on his watch; since 2009, the U.S. economy has outperformed most other advanced economies; stock markets around the world have been on a tear; and other countries, such as the United Kingdom and Japan, have copied the policies he pioneered, principally the one known as “quantitative easing.” (That involves the central bank using its electronic printing press to buy large quantities of bonds on the open market. The goal is to reduce long-term interest rates, such as mortgage rates.)
More recently, Bernanke has taken another important policy step, explicitly tying the Fed’s actions to further reductions in the unemployment rate: until the jobless rate drops below 6.5 per cent, he and his colleagues have pledged, they will not even consider raising the short-term interest rate they control. (Since December, 2008, it has been set at close to zero per cent.) For an institution that has traditionally put more emphasis on fighting inflation than on pursuing its other legal mandate, insuring maximum employment, this represents a historic change—one that Bernanke’s successor, Janet Yellen, a Democrat of liberal inclinations, has strongly supported.
Back in 2006, little of this could have been imagined. When Bernanke took office, he was a bookish academic, albeit one who had served briefly as the head of George W. Bush’s Council of Economic Advisers, and, before that, as a governor at the Fed. In terms of policy, there was little to distinguish him from his predecessor, Alan Greenspan, whose easy-money policies and hands-off approach to the markets he had vigorously supported. Indeed, it was Bernanke, not Greenspan, who had argued most forcefully that rising house prices didn’t represent a bubble, and that improvements in monetary policy had helped bring about a “Great Moderation.”
During Bernanke’s first year and a half as Fed chairman, his views didn’t change much. He and his colleagues were slow to recognize what the bursting of the housing bubble portended, particularly for the financial system. In September, 2008, Bernanke acceded in the government’s fateful decision to let Lehman Brothers collapse, only to reverse course a couple of days later, after all hell had broken loose in the markets, and rescue A.I.G. From then until the spring of 2009, it was a matter of manning the fire hoses. Enacting a variety of emergency programs with mystifying acronyms, the Fed, the Treasury, and the Federal Deposit Insurance Corporation sought to supply stricken financial institutions with sufficient liquidity and capital, and also allowed them, in effect, to borrow the U.S. government’s balance sheet for a time, because theirs were so cluttered with junk.
Some of these policies stretched the laws governing the Fed; others extended its remit in ways that made Bernanke uneasy. “Some are born radical,” my Profile of him began. “Some are made radical. And some have radicalism thrust upon them.” Bernanke was one of the latter. Given the seriousness of the situation, he believed he had no option but to be unconventional.
In the event, the rescue operation that he and others orchestrated worked well—too well, many people came to think. Within a year of being bailed out, the big Wall Street banks were making record profits and paying their senior executives outlandish bonuses, causing widespread outrage. Bernanke largely stayed out of that one, although he did let it be known that the antics of A.I.G., in particular, had made him angry. From then on, he was fully engaged on two fronts: trying to prevent another explosion, principally by forcing the banks to hold bigger capital reserves, and dragging the U.S. economy out of the Great Recession, which officially ended in 2009 but, in many ways, didn’t go away.
Over the years, the criticisms of Bernanke didn’t cease. They merely changed shape. Some of the attacks, particularly from the libertarian right, which never liked the Fed to begin with, didn’t have much to do with economics. During the 2012 campaign, Rick Perry, the Texas governor and G.O.P. Presidential candidate, described quantitative easing as “treasonous.” But two substantive issues remain.
According to one view, with which I have some sympathy, the Fed and the Treasury, in rescuing Wall Street from its self-inflicted follies, encouraged irresponsible behavior in the future—a problem economists refer to as “moral hazard.” Indeed, it can be argued that the response to the financial crisis, which involved merging troubled banks with healthier ones, made the incentive problem more acute. Before 2008, there were about a dozen big banks, some of which were widely regarded as too big to fail, though nobody could know for certain. Now we can be sure. The heart of the U.S. financial system consists of just six firms—Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo—and it’s almost unimaginable that the government would let any of them collapse. The survivors of 2008 are effectively, if not legally, wards of the state.
But what else could Bernanke and Paulson have done? Letting Lehman fail didn’t exactly work out. Nonetheless, some Chicago-school economists still argue that the authorities should have stood aside and allowed the financial system to collapse, damn the consequences. Of course, it’s a lot easier to take that view from the banks of Lake Michigan than from the Fed’s building in Foggy Bottom. Fortunately, Bernanke was an expert on the Great Depression. He knew that the hands-off approach to bank failures had been tried in the early nineteen-thirties, and that it had helped put the “Great” in Great Depression.
Should the authorities, once they had rescued and patched up the big banks, have split them up into competing smaller entities? There is a more persuasive case to be made there. What we have now—an oligopoly that harks back to the days of JP Morgan’s “money trust”—pleases nobody. The public hates the banks. The banks chafe at the regulation that is necessary to keep them in line. Almost everybody agrees that an alternative outcome would have been preferable. But splitting up the banks, or remaking the financial system in some other way, was primarily an issue for Congress and the Obama Administration, not the Fed chairman.
The other outstanding debate concerns the long-term effects of quantitative easing, which the Fed, believing the U.S. economy is finally on the mend, is now seeking to scale down. (On Wednesday, for the second month in a row, it announced a reduction in the amount of money it will spend on bond purchases.) Since the beginning of the program, which has been enacted in three stages, monetarist economists have warned that it will lead to an upsurge in inflation. That hasn’t happened, though, which shouldn’t be surprising. Money is only inflationary if it is spent. But most of the money that the Fed has created to purchase bonds—more than two trillion dollars—hasn’t been spent. Instead, it has remained on deposit at the central bank, where the financial institutions that sold the securities to the Fed maintain reserve accounts.
A more serious argument is that the Fed’s asset purchases have distorted the markets, keeping interest rates and risk premiums artificially low. If such a policy is maintained for too long, there is obviously a danger of generating another asset price bubble, and we’d be back to where we were when Bernanke’s tenure at the Fed began. And with tech I.P.O.s proliferating and house prices rising by more than twenty-five per cent on an annualized basis in parts of the country, there are some signs of frothiness. Last year, Larry Fink, the head of BlackRock, the world’s biggest asset-management firm, issued a warning along these lines, and so did Andrew Huszar, a former Fed official who had previously helped manage the quantitative-easing program. The danger of bubbles isn’t the only one, Huszar argued. Unwinding quantitative easing could have “huge downside risks for the U.S. economy,” he said.
We won’t know for some time which side is right: quantitative easing certainly comes with risks attached. But that’s the thing about monetary policy. Taking action is risky, and so is doing nothing. In the summer of 2012, before the Fed embarked on its latest round of bond purchases, the economy appeared to be stalling, and some observers criticized Bernanke for being too timid and for not doing enough to help the unemployed. (I was one of them. In fact, mea culpa, I ill-advisedly suggested that President Obama shouldn’t have reappointed Bernanke to a second term.) In September, 2012, Bernanke announced a third round of quantitative easing. He had made the judgment that the potential benefits outweighed the costs. As of now, it looks like he was right.
Throughout it all, he was a reassuringly calm presence. And, in a town of raging egos, he was commendably modest. Earlier this month, in a speech reviewing the past eight years, he ended by thanking his colleagues for their hard work, their dedication, and their expertise. “Whatever the Fed may have achieved in recent years,” he said, “reflects the efforts of many people who are committed, individually and collectively, to pursuing the public interest.”
Bernanke himself was a commendable public servant, and we all owe him a debt of gratitude. He may not be the greatest Fed chairman in recent history. Most commentators, myself included, would reserve that title for Paul Volcker, who, during the nineteen-eighties, braved mass protests and a deep recession to break an inflationary spiral. But Bernanke will also go down in the history books as an important figure. If he hadn’t demonstrated the flexibility and open-mindedness he did, things could have been much, much worse.
Photograph: Andrew Harrer/Bloomberg/Getty
