On Friday afternoon, Ben Bernanke will address the American Economic Association annual meeting in Philadelphia with a speech on "The Changing Federal Reserve: Past, Present, Future". It also amounts to something of a valedictory, coming less than a month before he leaves office. He will be speaking to an audience of academic economists, which of course Bernanke was before his time as a policymaker began in 2003. Here is our story from last month exploring Bernanke's legacy.
When Ben Shalom Bernanke finishes his workday and walks out the doors of the Federal Reserve’s white marble building on Constitution Avenue for the last time on Jan. 31, he will also be walking into history.
He has guided the nation’s economy — and its central bank — through as tumultuous a period as it has faced in its hundred years of history. He will leave behind an utterly transformed institution. And whatever happens in the decades to come, he will be one of the most important shapers of economic policy of the 21st century.
Bernanke will take the stage for what is expected to be his final news conference Wednesday afternoon. There is one question that he cannot really be expected to answer: How, Mr. Chairman, will history judge you?
I have spent the better part of the last seven years scrutinizing everything Ben Bernanke has said and done, first as a Washington Post reporter covering the Fed, then as author of a book on Bernanke and his fellow central bankers, then as an economic columnist for The Post. At one point, I was pretty sure I had identified his favorite necktie — the one he had worn for a New York Times magazine cover shoot and at a few high-profile congressional appearances in a row.
So, how will history judge him? This is my best attempt at an answer.
A novice's communication slip
It’s easy to forget now, but when Bernanke became Fed chair in early 2006, he was a relative novice on the world stage. His two predecessors, Paul Volcker and Alan Greenspan, each had spent decades at the highest levels of economic policymaking. Bernanke had spent less than three years as a Fed governor, seven months as the top White House economist and two terms as a member of the Montgomery Township, N.J., board of education.
Bernanke had to remake himself from an academic with a shaggy beard and tan dress socks into a high-powered Washington operator. There were some hiccups along the way.
It feels like an eternity ago, but the most damaging episode of Bernanke’s early Fed tenure came in the spring of 2006. He said in congressional testimony that the Fed could pause its interest rate increases, which led markets to skyrocket. Bernanke hadn’t been intending to signal a policy change, and when CNBC host Maria Bartiromo asked him whether markets had interpreted him correctly at the White House Correspondent’s Dinner that weekend, Bernanke, thinking the conversation to be off-the-record, said, “No.” Bartiromo reported the conversation on-air, prompting an 80-point selloff in the Dow.
It was a luxury of the age, perhaps, that the minor screw-up seemed like such a big deal. There were 247 articles in major media outlets tracked by Nexis that month, many of them speculating about Bernanke’s failure as a communicator.
But, in a strange way, it may have been good for him to get that trial over with early in his tenure. For someone who had never been in the center of a media maw, it may have helped him become more inured to the inevitable attacks that would come later, when the stakes were far higher. In interviews with many of the people who worked with him closely through this period, I have heard again and again of how they watched him become more savvy, more cynical, more accustomed to the petty hypocracies that accompany public service.
In the early days of his chairmanship, aides told me, Bernanke seemed bewildered that lawmakers who were warm and supportive of him in private meetings would then excoriate him in public hearings. By the time the financial crisis rolled around, he was unfazed.
Oh, and he hasn’t returned to the carnival that is the White House Correspondents’ Dinner since then.
The subprime warnings
Another serious knock on Bernanke’s performance as chair is the Fed’s handling of the blossoming subprime mortgage crisis that had its earliest tremors in his second year as chairman. He famously said in March 2007 that “the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”
Of course, they were anything but contained. An epic housing bubble had emerged by the middle of the last decade, propped up by trillions of dollars in mortgages that never should have been issued. The question in assessing Bernanke, though, is what he could have and should have done differently in 2006 and 2007 that could have reduced the severity of the crisis, or even prevented it altogether.
This has a more mixed answer. The Federal Reserve he inherited was imbued with the laissez-faire approach to financial regulation favored by his predecessor, Alan Greenspan. The Fed had largely avoided using its powers to protect consumers to rein in subprime mortgage lending, though it started ramping up that effort under Bernanke (too little, too late, we know now).
The most significant thing that Bernanke might have done to reduce the impact of the crisis would have been to insist on much tougher bank supervision at the start of his tenure. Some of the things now in the Fed’s standard regulatory toolkit — stress-testing the balance sheets of large banks for what might happen amid a recession and home price decline, taking a hard line against off-balance sheet risks that clever bankers might engineer — would have helped reduce the severity of the crisis a great deal.
And, above all, if the Fed had insisted on higher capital ratios for major banks, it would have left the financial sector with more capacity to withstand losses from bad mortgage lending, perhaps even avoiding the need for bailout and the near-collapse of the financial system.
Bernanke did not have the power to enact those changes on his own; bank supervision happens through collaboration with many agencies, along with international regulators. And the idea of radically more aggressive regulation of banks was far from the mainstream in 2006. The banks and their lobbyists would have screamed bloody murder; Bernanke would have been isolated from other U.S. and global regulators and the Bush administration; and it’s not at all certain he could have pulled it off.
But it is also true that he did not see the grave peril facing the global economy clearly enough to try.
Then, there’s the crisis, which in the popular conscience erupted in the fall of 2008 but really started in August of 2007, when the money markets first froze up amid mounting losses on mortgage-related securities.
The consensus view of this time — embedded in multiple books, magazine profiles and comments by high officials — is this: Ben Bernanke and the Federal Reserve rescued the U.S. and global economies from the abyss and prevented a second Great Depression, exhibiting courage and creativity that made us all better off.
The consensus view is correct.
There were many aspects of the governments’ crisis response, some of which Bernanke didn’t have much to do with. The bank bailout known as TARP was requested by the George W. Bush Adminsitration, passed by Congress and carried out by the Treasury Department. The 2009 fiscal stimulus was designed by the Obama administration and lawmakers.
But it was the efforts of Bernanke and the Federal Reserve that played as large a role as any in stopping the economic free-fall that characterized the U.S. economy five years ago. Bernanke pushed his colleagues and subordinates to create an ever-expanding list of novel programs to use the Fed’s limitless supply of money to backstop one market after another. Commercial paper, money market mutual funds, mortgage-backed securities, credit card lending: You name a financial vehicle, and by early 2009, the Federal Reserve under Bernanke's watch was doing something to support it.
At one point, the New York Fed created a table to help people keep track of each of these programs, its structure and goals. It occupied an entire legal-sized piece of paper, in tiny type.
While headlines in the United States focused on the Fed’s role in unpopular bailouts of Bear Stearns and AIG, its broader role as lender of last resort of the global financial system dwarfed them. For example, the Fed undertook swap lines with other global central banks, helping ensure that banks around the world could get access to dollars. The Bear Stearns bailout was $30 billion, AIG was $85 billion. The swap lines peaked at $580 billion.
The most common knock on Bernanke’s crisis performance was his failure (along with Treasury Secretary Hank Paulson and then-New York Fed chief Timothy Geithner) to prevent the Lehman Brothers bankruptcy that started it all. It’s a fair criticism, except for this: I have interviewed enough people and read enough internal e-mails from that period to conclude that no one at the time had come up with a plan to resolve Lehman that was legal and actionable.
The Lehman failure wasn’t a case of Bernanke and his fellow officials facing a choice and deciding wrong. They weren't able to come up with a better option. And at the time, the will— of the Bush administration, Congress and the American people — for further bailouts was at its breaking point. If they had found a way to save Lehman, soon enough there would have come another breaking point, with another institution on the brink and deep-seated demand to let it fall.
Then there was Bernanke’s symbolic role as the even-tempered, wise, calm in the storm. Geithner has called him the “Buddha of central bankers,” and never was that more true than in late 2008 and early 2009. When Paulson needed someone to help him persuade Congress of the necessity of the TARP bank bailout, someone driven by concern for the country’s well-being rather than by helping out Wall Street fatcats, Bernanke was by his side. When Geithner had a difficult start to his time as Treasury secretary and the nation needed credible reassurance that things would be okay, Bernanke appeared on “60 Minutes” with a performance that provided just that.
Bernanke came to office as a shy, low-profile academic who wanted to take away some of the mystique of the imperial Fed chairmanship of the Greenspan era. But when the nation most needed him to take the lead in a very public way, he rose to the challenge.
The long road back
When Bernanke was confirmed for a second term as chairman in January 2010, it looked like his remaining time in office would be devoted to unwinding the unconventional programs that he established in his first term of crisis response.
The recovery that began in 2009 proved, again and again, to be weak, halting and uncertain. Perhaps this should have been expected, given the historical track record of post-financial crisis recoveries. But Bernanke and his Fed colleagues made the analytical error of repeatedly predicting stronger growth just around the corner, which has still not arrived.
What Bernanke did in response to the frustratingly slow recovery will shape his ultimate legacy as significantly as did his crisis response.
Inside and outside the Fed, there was by 2010 a deep sense of crisis fatigue, a sense that all the things that the Fed and other policymakers were doing to try to stimulate growth wasn’t doing any good, and might have been doing harm. Congress was locked in partisan battles, taking any action from fiscal authorities off the table. Bernanke could have sat on his hands, as well, concluding: “Well, we did our best. What happens to the economy next is outside our control.”
Instead, he looked to his reservoir of academic knowledge to ask what the Fed could do to help things. Where in late 2008 Bernanke was focused on preventing the Great Depression, from 2010 on, the Fed faced a different historical antecedent: Japan in the 1990s.
Bernanke as an academic had argued that Japan’s policymakers needed to be much more aggressive to stop a cycle of deflation and stagnant growth from setting in. With the United States on the precipice of the same sort of economy in 2010 — inflation was falling well below the Fed’s 2 percent target, and growth was weak — Bernanke guided his colleagues toward an unpopular policy that became known the world over as “QE2,” the second round of quantitative easing.
He did it again in 2012, and the program of bond-buying appears likely to continue well beyond his own chairmanship. When Bernanke became chairman in 2006, there was $811 billion in reserve bank credit on the Fed’s balance sheet. The crisis response drove that up to $2.2 trillion by the time his second term began. He will leave office with a Fed balance sheet exceeding $4 trillion, the result of five years of money-printing.
So, has it worked? The answer depends on what you mean by “worked.”
Inflation is still below the Fed’s target, running in the low 1 percent range. Predictions of high inflation from the programs’ critics have not materialized. The stock market and other financial instruments have risen dramatically in value during the easing programs, helped in no small part by a gush of money pumped out by the Fed. Some markets — for farmland in middle America, emerging market bonds — have even flirted with bubble territory, helped along by Bernanke’s money printing.
Growth is a different story. The repeated monetary jolts from the Fed’s easy money policies have been enough to help prevent a double-dip recession but haven’t created the kind of robust growth that Bernanke and his colleagues would hope for. The unemployment rate is down dramatically — from 9.5 percent in mid-2010 to 7 percent today — though that has come in significant part because people have been dropping out of the labor force.
History will decide
This time eight years ago, as Alan Greenspan went off into the relaxing existence of six-figure lecture fees and seven-figure book advances, he was as universally and enthusiastically praised as a public figure can be. His 17-year chairmanship had aligned almost perfectly with a period of unprecedented economic expansion and low inflation. Just two years later, a darker picture emerged: Under the Greenspan Fed, an epic credit bubble had been building, the collapse of which devastated the global economy.
All of which is a long way of saying: Assessing Ben Bernanke requires a healthy level of intellectual modesty, because his legacy will depend on things we can’t yet know. So far, the evidence points to the Fed’s post-crisis role as having been helpful and constructive. But for the ultimate answer, we’ll have to wait and see.
Will the unwinding of his QE policies, to be carried out by a Janet Yellen Fed, be a smooth process in which growth returns, unemployment falls and the central bank can exit from half a decade of zero interest rates and a $4 trillion balance sheet without sparking a new crisis? Can the Fed handle the immense task it has been given under the Dodd-Frank Act, to act as an all-purpose guardian of the financial system? Bernanke will not be around to carry them out, but the answers will shape whether he is a hero or villain of history.
But whatever the answers to those questions, you can say this about Ben Bernanke. At a time when there was a sense of economic despair across the country, when official Washington was immersed in a kind of fatalism, unwilling to take on the hard task of trying to coax growth out of a stagnant economy, he was different. He didn’t have the perfect tools for the job, but he searched his academic knowledge of how economies work, and used what he did have to try to put America’s jobless back to work.
Bernanke’s chairmanship has been a fight for the idea that good policy can make people’s lives better, and he has exhibited the courage to take risks to make it so. For that alone, he deserves our thanks.