The Federal Reserve’s meeting this week will be Chairman Ben Bernanke’s last before he leaves to make room for Vice Chair Janet Yellen to assume her new position at the head of the world’s most important central bank.
Much has been written speculating about what Yellen will or will not change, but before we look too far forward, it is worth looking back at how Bernanke did in the job.
I think Bernanke will be remembered first and foremost for playing the key role in preventing the financial crisis of 2008- 2009 from becoming a world-wide depression. It was he, along with then-Treasury Secretary Henry Paulson, who after the disastrous mistake of allowing Lehman Brothers to collapse decided to underpin the world financial system with an essentially unlimited supply of money, backed by the U.S. government’s credit and its magic dollar printing press.
It was a bold step, controversial and risky at the time, but as a result the crisis of confidence passed and there was time for global financial regulators to sort out which institutions needed to strengthen their capital base and by how much. Even in the darkest days of the crisis, the world wasn’t truly bankrupt. (It just felt that way.) Time magazine named Bernanke its “Person of the Year” for 2009, recognizing the extent to which his leadership and creative thinking minimized the potential damage of the recession and kept it from turning into a true global disaster.
Historians will remember Bernanke’s refusal to surrender to an atmosphere of panic as a heroic action, and they will doubtless contrast his willingness to invent his own measures to keep the economy afloat with the passivity with which central bank heads allowed their economies to spin out of control in the 1930s and, to a lesser extent, in the 1970s. An avid student of the Great Depression, Bernanke’s consciousness about the dangers of deflation helped spur him to action, sometimes in unconventional ways.
Though his crisis management skills were remarkable, Bernanke’s policies during the recovery from the 2008 crisis will probably draw more of a mixed verdict from economic historians, even though the jury is still out on the ultra-easy money policies that have persisted since the crash. Certainly those policies have helped the housing and stock markets to regain their footing, and as Bernanke and his colleagues intended, they have probably bolstered the country’s foundering employment numbers, which nevertheless remain relatively weak. The surge in inflation that many critics, including me, have predicted has not happened so far. But the unwinding process, in which the Fed will eventually need to back off its current multi-trillion dollar position, will inevitably be difficult and messy. The prospect is already producing turmoil in emerging market currencies and contributed to a nasty week on Wall Street last week.
Bernanke has not been as vigorous as he could have been in defending the financial industry against politically motivated attacks. He was also ineffective in arguing against wrong-headed reforms that will limit his successors’ flexibility in dealing with financial crises. Future chairmen won’t have as much latitude as Bernanke himself had. Bernanke did his successors a disservice by not arguing frankly and publicly against the changes that stripped Fed powers to respond to crises.
In addition, whatever economic growth that quantitative easing rounds one, two and three have produced has come at the expense of savers. Restoring healthy incentives for saving and growing capital for future needs is a problem that Bernanke passes to Yellen, who seems to have as little interest in the matter as Bernanke did.
A little over a year ago, my colleague Paul Jacobs noted that Bernanke did not need to worry, as it was reported he might, that anyone would criticize him for doing too little. He was an exceptionally active Fed chairman. While Bernanke’s scorecard is not perfect, I think he will ultimately be remembered as the right chairman to serve at the Federal Reserve at just the time he did.