The Legacy of Ben Bernanke

History will credit the Fed chairman with preventing a second Depression
Illustration by Bloomberg View

In a speech celebrating the Federal Reserve’s 100th birthday, Chairman Ben Bernanke said one of the central bank’s greatest strengths is its willingness “during its finest hours” to stand up to political pressure and make tough decisions. As a reminder that those pressures aren’t new, Bernanke keeps in his office one of many two-by-fours that construction industry workers mailed to Paul Volcker to protest the former Fed chairman’s double-digit interest rates.

Bernanke, whose eight-year tenure ends next month, didn’t arrive at the Fed in 2006 intent on revolutionizing central banking. Just the opposite: The economy seemed strong, with unemployment at 5 percent and 3.3 percent annual growth. The housing bubble, however, was inflating rapidly. The smartest economists, Bernanke included, failed to see that the combination of undercapitalized financial institutions, subprime loans, securitizations, and exotic derivatives could produce the lethal mix that crashed the global economy. Bernanke’s Fed was responsible for regulating large banks and home loans, and it failed.

What happened next redeems him. Using his deep knowledge of the mistakes of the 1930s, Bernanke set up one lending facility after another to finance everything from commercial paper to auto loans. He helped persuade Congress to adopt the Troubled Asset Relief Program to bail out hundreds of banks. He made sure dollar loans were available to overseas banks. He brought interest rates down to near zero and promised to hold them there indefinitely.

By the end of 2009, the emergency had abated but the economy was still sick. So Bernanke’s Fed got even more creative. It bought enormous quantities of Treasury bonds and mortgage-backed securities to depress long-term interest rates and induce investors to shift into other assets. The Fed’s balance sheet grew from $1 trillion in 2008 to nearly $4 trillion, where it stands today. The policy energized the stock market, lowered long-term interest rates, supported the interest-rate-sensitive housing and auto markets, and cut unemployment—not a lot, but enough to quiet many critics, especially once they saw that inflation remained tame.

Bernanke, meanwhile, backed the Dodd-Frank act’s many financial reforms. He agreed that large banks shouldn’t get taxpayer subsidies in the form of lower borrowing costs because of their too-big-to-fail status. To prevent that, he required the largest banks to hold more capital to absorb future losses. He also required them to submit to rigorous stress tests. Recently, the Fed threw its weight behind a stronger Volcker Rule (to limit banks’ proprietary trading) than most had expected.

A scholar of the Great Depression, Bernanke would not have wished that expertise to be called upon. But it was, and the U.S. can consider itself fortunate he was there.

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