Bernanke depression guru seeks Roosevelt well-being
Ben S. Bernanke argued for 15 years that the Federal Reserve should announce a numerical inflation target. When he finally got his way in January, the victory allowed the central bank to elevate its other mandate: full employment.
By adopting a 2 percent inflation goal, the Fed chairman sought to cement the central bank’s hard-earned credibility for keeping prices low after a 30-year fight against inflation. Bernanke calculated that doing so would anchor expectations for price changes, giving policy makers greater freedom to unleash new stimulus targeted at creating jobs. So far, the move has worked: The Fed embarked on a third round of quantitative easing in September without unhinging inflation expectations.
Bernanke’s shift to emphasizing employment goals is one of the hallmarks in a grueling two-term chairmanship that spanned the worst financial crisis and recession since the Great Depression and a slow labor-market recovery that pinned joblessness above 8 percent for 43 months. The presidential campaign has put the Fed in transition as Republican candidate Mitt Romney said he’d replace Bernanke, though former colleagues doubt he will stay on, no matter who wins.
Bernanke has explicitly returned the U.S. central bank to the broader, more balanced goal that Franklin Roosevelt described in 1937 as seeking “the greatest attainable measure of economic well-being, the largest degree of economic security and stability” when the then-president inaugurated the Fed’s Beaux Arts-inspired Washington headquarters.
“This is a Federal Reserve that helped save the world,” said Frederic Mishkin, a Fed governor from 2006 to 2008 and now a professor of banking and financial institutions at Columbia Business School in New York. “Were there risks to doing so? Absolutely. But sometimes you have to take a tough stance, not knowing exactly what the right thing to do is.”
Some Fed chairmen are defined by crises and how they failed or met the challenge. Paul Volcker is remembered for his battle against inflation during his 1979 to 1987 tenure, when he allowed the federal funds effective rate to rise as high as 22 percent to tame annual price acceleration approaching 15 percent. Bernanke’s increased emphasis on job creation is a product of his era and its economic weakness, according to Federal Reserve Bank of New York President William C. Dudley.
The 58-year-old Fed chairman, who once wrote that an understanding of the Great Depression would be the “Holy Grail of macroeconomics,” served as a governor from 2002 to 2005 when the central bank neglected to take action to slow the housing bubble. He became chairman in 2006 and in March 2007 told the Joint Economic Committee of Congress that “the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”
The 18-month recession began in December 2007, and in March 2008 Bernanke used the Fed’s balance sheet to buy up high-risk securities from Bear Stearns Cos. to save the firm from collapse, establishing the central bank’s role as the nation’s main rescue agent. He shunned orthodoxy as the housing- finance bubble began to deflate and pushed the Fed to “the very edge of its lawful and implied powers,” Volcker said in a 2008 speech. Bernanke gave out more than $2 trillion in emergency aid through six loan programs, currency swaps with other central banks and the rescues of Bear Stearns and American International Group Inc. (AIG)
“It’s a little bit of an accident in history that this guy who did all of this work on the Great Depression got the chance to take the wheel,” Dudley said during an interview in his New York office.
The force with which Bernanke has attacked joblessness has distinguished him, Dudley said. By expanding the central bank’s balance sheet to a record of almost $3 trillion through asset- purchase programs and keeping the federal funds rate near zero for an unprecedented four years, Bernanke has established himself as history’s most bold and experimental Fed chairman in trying to spur growth.