On November 8, 2002, in his speech on the occasion of Milton
Friedman’s ninetieth birthday, Ben Bernanke said, “Let me end my talk by
abusing slightly my status as an official representative of the Federal
Reserve. I would like to say to Milton and Anna: Regarding the Great
Depression. You’re right, we did it. We’re very sorry. But thanks to you, we
won’t do it again.”
And he did walk the talk when the US economy was indeed caught
in economic mayhem in 2008 triggered by subprime mortgage loans, which everyone
feared might end up as the second Great Depression.
It is, perhaps, his years of research into ‘economics of
depression’ that gave him enough courage to go beyond the standard response of
central banks and experiment with unconventional monetary policy measures for
getting the US out of its worst financial crisis since the Great Depression of
the 1930s—his innovative measures flowed thus:
- Acted decisively in offering imaginative but untested emergency funding avenues to the teetering banks;
- Lent more than a trillion dollars to help troubled financial firms/banks;
- Bought the debt of industrial corporates such as GE;
- Taken over the distressed mortgage assets onto Fed’s books;
- Used Fed’s balance sheet uniquely to buy not only short-term T-bills but also long-term bonds and mortgages as a tool to manipulate prices and thereby keep interest rates at virtually zero level for an unprecedented period—that ran almost to 62 months;
- Rallied Central bankers around the globe to pursue expansionary monetary policies and got the clogged arteries of global financial system simply opened up; and
- Simultaneously, he cautioned the concerned that all his policies do carry costs and risks, and the more the Fed persisted with these, the more would be the time required for the global economy to get back into balance.
It hardly needs to be stressed here that it is Bernanke’s
perfect understanding of the magnitude of the crisis duly backed by his
knowledge of the 1930’s Depression that enabled him to make Fed the ultimate
hope of the economy by launching such unconventional measures that could
somehow offer the shattered American economy the much-needed credit and confidence
and nudge it towards more activity and creation of jobs.
In an environment where banks, scared by the risks associated
with additional lending and no hope of additional rewards, panicked to
undertake fresh lending even to their sister banks, when Fed put in operation a
couple of hitherto untried measures such as enhanced forward guidance about the
likely path of the federal fund’s rate and large-scale purchase of long-term
securities into Fed’s portfolio, Bernanke was bitterly criticized by some
economists for risking hyperinflation. Yet Bernanke, being himself a
distinguished scholar of the 1930 crisis, acted decisively as a panic-fighter
by implementing what Walter Bagehot, the great Victorian economic journalist
urged: made unrestricted lending available to solvent institutions. All these amazing deeds of Bernanke simply
make one sing in chorus with Paul Krugman:
“How anyone could have done more to stem the crisis?”
Amidst all these accomplishments, there are also certain
failures which are hard to explain by even Bernanke. One such prime lapse is: his
misreading of the US subprime market—as reflected in his presentation before
the Congress in 2007: “At this juncture, however, the impact on the broader
economy and financial markets of the problems in the subprime market seems
likely to be contained”—which later proved to be instrumental for all the mayhem
that the global economy witnessed within a year from the said presentation, for
the subprime loans that were so thickly entangled in global securitized pools
could spur contagion, throwing American investment banks such as Bear Stearns,
Lehman Brothers, and AIG out of gear
like in a typical bank run. But once it became evident that he was wrong
in his understanding of the full impact of subprime loans, Bernanke acted
decisively and effectively to do what was expected of Fed to restore confidence
among the investors and public in the strength of the financial system and could
succeed in bringing the investors back to the market.
That said, some economists/analysts now worry about the exit
from Bernanke’s exceptional policies—the hard part of withdrawing the stimulus
without letting inflation go out of control and without rocking the markets. Of
course, there would be challenges in withdrawing the stimulus, but there are
tools to handle it—without its side-effects undoing whatever good the stimulus
did. Nevertheless, as Professor Rogoff said, “We exist in this world of
tremendous uncertainty where we won’t know if monetary policy got it right”,
Bernanke’s successor has to handle the withdrawal of the stimulus program
launched by him more cautiously with, of course, well-calibrated measures.
Lastly, a word about the other noteworthy initiative that Bernanke
launched: Fed’s “transparency and accountability”, which is obviously critical
for the Fed to claim “democratic legitimacy.”
As a part of it, quite often, he tried to share the logic behind his
acts with the public at large, particularly the Fed’s act of monthly bond
purchases, which is a part of its ‘quantitative easing’ policy to revive the
economy—one such latest attempt being what he said with more than a hint of a
smile in his address at the Brookings Institution: “The problem with Q.E. is
that it works in practice, but it doesn’t work in theory.”
On the whole, as Ben Bernanke laid down his office as Fed
Chairman on January 31st, one can’t but cheer Bernanke when he said,
“We did the right thing—I hope,” at his public address at the Brookings
Institution on January 16, 2014. Your most obedient is totally with him when Bernanke
also hoped that in time “people will appreciate and understand what we did—‘a
Main Street set of actions aimed at helping the average American’—was necessary
and in the interest of the broader public.”
Yes! Professor: Certainly, you are not the “Federal Reserve
chairman who presided over the second Great Depression.”
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