“Mr. Bernanke was the board’s intellectual leader in its decision to cut the fed funds rate to 1% in June 2003 and keep it there for a year despite a rapidly accelerating economy and soaring commodity and real-estate prices. The Fed’s multiyear policy of negative real interest rates produced a credit mania that led to the housing bubble and bust. His record before the crisis was a clear failure.” Wall Street Journal, January 25, 2014

“I believe this WSJ OpEd below is fair and accurate in describing Mr. Bernanke’s legacy at the Fed and as Chairman. However, I think the Journal’s editorial board misses a key point. Whether or not the Fed’s extraordinary monetary actions, in the years after their initial financial crisis rescue, turn out well or not, they probably should not have been pursued. As economic experts (including Nobel Laureates) have noted, monetary policy has virtually no effect on long term output or employment. So, for debatable temporary benefits, the Fed’s monetary policies in recent years have massively distorted markets in the U.S. and abroad; once again causing mal-investment and potentially unsustainable bubbles that may ultimately come home to roost. Why is it that we generally believe in free and fair markets in everything except money? And with our money, why is that we believe that 12 men and women setting the supply and price of money (who have been wrong so many times in the past and can’t seem to produce an accurate, short-term economic forecast) know better than the market?”, Mike Perry, former Chairman and CEO, IndyMac Bank

Other Excerpts from the Wall Street Journal’s “The Bernanke Legacy”:

“One way to think about the Bernanke era is to divide it into three parts: before, during and after the financial panic. His record before the crisis was a clear failure. He deserves good marks for his actions in the eye of the storm. As for his extraordinary monetary exertions since the recovery began, the legacy will depend on how it all turns out.”

“…but keep in mind he was present at the panic’s creation. His role goes back to 2002 when as a Fed Governor he gave a famous speech warning about deflation that didn’t exist. He and Mr. Greenspan nonetheless followed the advice of Paul Krugman to promote a housing bubble to offset the dot-com crash.”

“The Fed transcripts also make clear that Mr. Bernanke underestimated the degree of the housing bust and financial contagion, but so did most others. Less forgivable is Mr. Bernanke’s refusal to acknowledge that the Fed made any mistake in the mania years.”

“Yet despite the Fed’s blowing past all previous monetary restraint (post-crisis) the recovery has remained historically weak. For five years the Bernanke Fed has consistently predicted more robust growth, only to revise its forecasts down again and again.”

“Mr. Bernanke has helped to finance an historic federal borrowing binge while disguising its future costs. The bill for that borrowing will only become clear to taxpayers when interest rates rise.”

“This (the Fed’s compromised independence) may be the largest risk for the future, especially when the Fed must raise interest rates. Politicians—and even some conservative pundits—have adopted the Bernanke standard that the Fed’s duty is to reduce unemployment and manage the business cycle.”

The Wall Street Journal

REVIEW & OUTLOOK

The Bernanke Legacy

Rating the Fed chief’s record before, during and after the panic.

Updated Jan. 27, 2014 7:28 p.m. ET

As the Federal Reserve Chairman prepared to step down, the encomiums rolled in. “The most successful tenure in Fed history,” said the S&P economist. Added a former Fed Governor: “He has been called, and I think justifiably so, the greatest central banker in history.” He was the man who saved the world, a genius, the maestro.

All of that praise was heard eight years ago this month for Alan Greenspan as he prepared to step down after 20 years leading the Fed. A mere two years later views of the Greenspan monetary era were very different, as the credit boom he did so much to create turned to mania, which turned to panic, which became a deep recession.

That reversal is worth keeping in mind now that the same extravagant praise is flowing for Ben Bernanke as he prepares to run his last meeting of the Federal Open Market Committee starting Tuesday. There is no doubt Mr. Bernanke has been one of the most consequential Fed Chairmen in history, but his legacy is still far from clear and is at best more mixed than the effusive praise suggests.

***

One way to think about the Bernanke era is to divide it into three parts: before, during and after the financial panic. His record before the crisis was a clear failure. He deserves good marks for his actions in the eye of the storm. As for his extraordinary monetary exertions since the recovery began, the legacy will depend on how it all turns out.

Fed Chairman Ben Bernanke during his final planned news conference in December. Reuters

Most Bernanke assessments focus on the 2008 crisis and its aftermath, but keep in mind he was present at the panic’s creation. His role goes back to 2002 when as a Fed Governor he gave a famous speech warning about deflation that didn’t exist. He and Mr. Greenspan nonetheless followed the advice of Paul Krugman to promote a housing bubble to offset the dot-com crash.

As Fed transcripts show, Mr. Bernanke was the board’s intellectual leader in its decision to cut the fed-funds rate to 1% in June 2003 and keep it there for a year. This was despite a rapidly accelerating economy (3.8% growth in 2004) and soaring commodity and real-estate prices. The Fed’s multiyear policy of negative real interest rates produced a credit mania that led to the housing bubble and bust.

The Fed transcripts also make clear that Mr. Bernanke underestimated the degree of the housing bust and financial contagion, but so did most others. Less forgivable is Mr. Bernanke’s refusal to acknowledge that the Fed made any mistake in the mania years.

Once the crisis hit, Mr. Bernanke and the Fed deserve the benefit of the doubt. From the safe distance of hindsight, it’s easy to forget how rapid and widespread the financial panic was. The Fed had to offset the collapse in the velocity of money with an increase in its supply, and it did so with force and dispatch. One can disagree with the Fed’s special guarantee programs, but we weren’t sitting in the financial polar vortex at the time. It’s hard to see how others would have done much better.

Which brings us to the Fed’s performance since the panic ended and “recovery” began in mid-2009. These include Mr. Bernanke’s unprecedented bond-buying, the huge expansion in the Fed’s balance sheet, and the near-zero interest rate policy now into its 62nd month.

All of this flowed from Mr. Bernanke’s belief, as a student of the Great Depression, that the Fed’s foremost goal was avoiding any premature tightening after a financial meltdown. His defenders say he has done so without the inflation that some of his critics predicted, which makes him a hero. Austan Goolsbee, President Obama’s former chief economist, recently made this case on these pages.

Yet despite the Fed’s blowing past all previous monetary restraint, the recovery has remained historically weak. For five years the Bernanke Fed has consistently predicted more robust growth, only to revise its forecasts down again and again.

The Fed blames slow growth on fiscal policy and economic troubles elsewhere in the world, but one imponderable is how much the Fed’s own actions have contributed to the policy uncertainty that has undermined business investment. Bank lending continues to be weak, which is one reason the velocity of money hasn’t revived enough to rekindle the risk of inflation. At some point a Fed chairman has to take some responsibility for the mediocre growth—and lack of real income growth—on his watch.

The biggest test will be what happens when Mr. Bernanke’s successors are obliged to unwind his policies. If the Fed can end its bond-buying and return to a normal interest-rate regime while sustaining the recovery, his great monetary experiment will have been a success. But if it ends badly, with continued subpar growth, or bursting asset bubbles, or budding inflation that requires a rapid rise in interest rates, the Bernanke Fed won’t be able to pass the buck.

***

The other great cost of these post-crisis policies is the intrusion of the Fed into politics and fiscal policy. Mr. Bernanke has helped to finance an historic federal borrowing binge while disguising its future costs. The bill for that borrowing will only become clear to taxpayers when interest rates rise. Mr. Bernanke has also made the Fed a political adjunct of the Treasury on regulation and even on taxes and spending, which has compromised its independence.

This may be the largest risk for the future, especially when the Fed must raise interest rates. Politicians—and even some conservative pundits—have adopted the Bernanke standard that the Fed’s duty is to reduce unemployment and manage the business cycle. His successor, Janet Yellen, believes this fervently and she will have her chance to prove it. The point regarding the Bernanke-Yellen legacy is that the true test of any monetary cycle is not how it begins, but how it ends.

 

Posted on February 6, 2014, in Postings. Bookmark the permalink. Leave a comment.

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