Economics, Pethokoukis

How will economic history judge Bernanke?

Image Credit: Medill DC (Flickr) (CC BY 2.0)

Image Credit: Medill DC (Flickr) (CC BY 2.0)

Odds are Federal Reserve Chairman Ben Bernanke almost certainly won’t seek to be appointed to another four-year term in 2014. So 2013 represents his final lap around the track.

How will economic historians judge his tenure running the central bank? To some degree that verdict depends on whether the Fed can exit its low-interest rate policy and reduce its ginormous balance sheet in a way that prevents rising inflation or a sharp economic slowdown.

Beyond that, I subscribe to the criticism that the Fed was too tight in 2007 and 2008, helping turn a modest downturn into the Great Recession. And had Bernanke earlier couched his policy guidance in terms of specific unemployment and inflation numbers, his quantitative easing policy might have proven more effective. Indeed, by better managing expectations, the various QE rounds could have been smaller or even, perhaps, unnecessary. Still, the Bernanke Fed has moved closer to my preferred policy of NGDP level targeting, which is great.

In a new analysis, AEI’s Stephen Oliner, a former Fed economist, looks at the issue of the Bernanke legacy, particularly in terms of communications and transparency:

A full assessment of the Bernanke Fed is still years away. That said, a favorable judgment can be rendered already on the changes the Fed has made in how it communicates with the public about monetary policy. With a strong push from Bernanke, the Fed has moved a long way toward greater transparency. But there is still important unfinished business on the communication agenda that relates to the Fed’s tolerance for inflation. I hope this issue will be addressed in Bernanke’s final year.

Oliner says the low level of the Fed’s new 2.5% inflation threshold shows the central bank still has “very little tolerance for inflation above its target.” But it’s unclear what happens next once “lift off” occurs, and the Fed begins raising interest rates. How will it meet its dual mandate in the future? As Oliner suggests, Bernanke could use the next year to shape the path forward. Whether the Fed moves even closer to NGDP level targeting might depend on what happens at the Bank of England under new boss Mark Carney, who has been positive about the idea.

Oliner also gives the inside line on the next Fed chairman: “Bernanke has a very able successor waiting in the wings – the current Vice Chair, Janet Yellen.”

8 thoughts on “How will economic history judge Bernanke?

  1. It will be difficult for Bernanke to shoulder the blame for the recession when his predecessor has already done so. Sort of. “I made a mistake,” Greenspan said in Congressional testimony in 2008. “It has been painful to realize that I had put too much faith in the ability of the markets to self-correct.”

    • I’m no economic expert, but i fail to see why he think he put too much faith in the ability of the markets to self-correct, when his policy seems to have been to prevent any economic corrections during his tenure.

      had he allowed economic corrections to occur, it seems the collapse wouldn’t have been nearly as bad. maybe i’m wrong, idk.

      • Greenspan did indeed push rates too low in 2003, shifting the mortgage machine into high gear. IIRC, mortgage rates fell below 6 percent that year for the first time since the ’60s. But what he was talking about in his Congressional testimony was his failure to regulate mortgage originators and MBS syndicators, the folks who failed to “self correct.”
        That failure was pretty obvious, too, as his inquisitors in ’08 pointed out repeatedly. If Wall Street can sell a security — ANY security — it will do so until the market dries up or explodes. Anyone with a passing knowledge of the history of manias has trouble reading AEI pronouncements on the infallibility of markets without asking what planet these pundits occupy.

        But you are not wrong. What would have been a bad cold in ’03 became a heart attack in ’07. That said, Mr P’s notion that Bernanke is at fault is pure obfuscation. Once the deck of cards is 15 stories high, there is nothing left for the Fed to do but to pick up the pieces.

        • But you are not wrong. What would have been a bad cold in ’03 became a heart attack in ’07. That said, Mr P’s notion that Bernanke is at fault is pure obfuscation. Once the deck of cards is 15 stories high, there is nothing left for the Fed to do but to pick up the pieces.

          But that is the problem. Instead of letting the markets do their job Bernanke added a few more stories to the pile of cards.

  2. Beyond that, I subscribe to the criticism that the Fed was too tight in 2007 and 2008, helping turn a modest downturn into the Great Recession. And had Bernanke earlier couched his policy guidance in terms of specific unemployment and inflation numbers, his quantitative easing policy might have proven more effective. Indeed, by better managing expectations, the various QE rounds could have been smaller or even, perhaps, unnecessary. Still, the Bernanke Fed has moved closer to my preferred policy of NGDP level targeting, which is great.

    Too tight? The bubble was created because the Greenspan and Bernanke Fed always used liquidity to kick the can down the road rather than to let the market liquidate malinvestments. I remain amused about the affinity that so-called conservatives have for the type of central planning that they attack the big government liberals for supporting. It only shows that Nixon was right; they are all Keynesians now.

  3. I don’t know what the long lasting effect of the QE program will be; but, I wonder if he isn’t creating another asset bubble in these products which the Fed is buying and putting in the inventory for another date down the road?

  4. I seriously doubt Bernanke will try his hand at another term. I agree with Vic. I think his program could have very serious consequences for inflation and the economy in general. We can’t continue to act like money is free, keep interest rates artificially low, and encourage people to spend more than they should. I fear that another bubble is coming.

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