Bernanke’s focus on history should help secure his legacy
Bill King says we can hope Janet Yellen will follow the economic policy charted by the former Fed chairman.
Last week, Janet Yellen testified before Congress for the first time in her new role as chair of the Federal Reserve. By all accounts, she acquitted herself well, and the Dow Jones soared nearly 200 points on her testimony. But Yellen has some big shoes to fill.
It fell to her predecessor, Ben Bernanke, who oversaw the Fed from 2004 until Yellen’s confirmation this month, to steer the country through the worst recession since the Great Depression of the 1930s. Bernanke, the quiet-spoken son of a small-town South Carolina pharmacist, rose to the top of the academic world in economics before being appointed by President George W. Bush as chair of the Council of Economic Advisers in 2005 and subsequent Fed chair in 2006.
Long before the onset of the Great Recession, Bernanke had acquired a particular interest in the Great Depression and especially the role of monetary policy during that period. His study led him to concur with the theory proposed by Milton Friedman and Anna Schwartz that the Great Depression was exacerbated by the Fed tightening monetary policy too quickly as the economy began to recover after the initial crash in 1929.
During his academic career, Bernanke wrote and lectured extensively on the dangers of deflation as illustrated by the Great Depression. His views left many somewhat bewildered because the danger of inflation has loomed so much larger in recent decades. But when the banking system teetered on the verge of collapse in 2008 and stock prices plummeted, his warning suddenly became prescient. It is incredibly ironic, and as it turned out fortuitous, that Bush appointed probably the foremost, if not the only real expert, in effects of monetary policy during an economic crisis just two years before one occurred.
While some criticism can be fairly leveled at Bernanke for his failure to see the crisis coming during 2006 and 2007 (he consistently painted a rosy picture of the U.S. economy), once the crisis was upon him, he acted decisively. He did so by slashing interest rates and making unprecedented loans to financial institutions to ensure they had enough cash on hand to deal with the crisis.
And he stayed the course. Many in Congress pilloried him for his policies, predicting they would lead to hyperinflation and further crisis. But Bernanke was convinced from his study of the Fed’s actions in the 1930s that withdrawing monetary stimulus too soon would lead to disaster. He would not budge.
And Congress made his job no easier, as it lurched from arguably not-very-well-thoughtout stimulus to not-very-wellthought-out austerity, with no clear over-arching economic policy. I remember watching Bernanke enduring hours of asinine questioning from members of the House and Senate oversight committees who had shirked their responsibility to manage the economy. He patiently parried attacks from both sides of the aisle that he was either leading the country into economic ruin or not doing enough to help the unemployed. It seemed that for most of his tenure he truly was the only adult in the room in Washington.
While the proper role of the government in creating and regulating money has been a source of controversy since the beginning of the Republic, what the Federal Reserve actually does is a mystery to most Americans. One of Bernanke’s greatest legacies will be that he attempted to explain that role in more understandable terms and to make the operations of the Fed more transparent.
Bernanke will probably never get the credit he deserves for preventing the Great Recession from spiraling into the second Great Depression. We can never prove what would have happened had he not acted decisively, and even the experts disagree on the wisdom of some of his policies.
But I predict history’s judgment in the long run will be highly favorable on Bernanke’s term as Federal Reserve chair. We can only hope that Yellen will stay the course.