Ben S. Bernanke will step down as chairman of the Federal Reserve later this month after guiding the institution and economy through one of the worst periods in its 100-year history, but leaving a legacy that has yet to be determined.
Bernanke, who became chairman in 2006, confronted a housing bust, mortgage industry collapse, and global financial crisis, attacking them with bold measures that pushed the central bank to the limits of its legal authority. But he, like many economists, lawmakers, and policy makers, failed to foresee the crisis in the first place, allowing bubbles in the economy to expand to their inevitable breaking point.
He helped engineer massive bailouts of large banks that may have prevented the collapse of the financial system, but also fueled suspicions about the Federal Reserve, its secrecy, and connections to Wall Street. The Fed has been a favorite target of conspiracy theorists since its inception, but regular Americans also came to view the Fed, and Bernanke himself, as pawns of Wall Street, taking to streets and parks in protests.
Yet Bernanke, who steps down Jan. 31, opened the Fed’s Kremlin-esque culture by expanding its communications with the public and even appearing on TV shows, including “60 Minutes.” He also will leave an economy that finally appears to be gaining traction after the worst recession in 70 years.
Ultimately, analysts said, Bernanke will best be remembered for taking decisive action in the heat of a crisis, using new and creative tools to save the economy and financial system from collapse.
“Ben Bernanke gets an A-plus for recognizing that this was a risk of a repeat of the Great Depression and jumping in with a huge set of tools to address it,” said Peter A. Diamond, an MIT economics professor and Nobel laureate. “When we get around to judging some of the decision makers after the crisis, I think Ben will be flagged as being on the right side of the debate.”
Bernanke was nominated as Federal Reserve chairman by President George W. Bush. An economics professor at Princeton, he had deep ties in Boston, graduating from Harvard, earning his PhD at MIT, and later working as a research fellow at the Federal Reserve Bank of Boston. He also developed a deep allegiance to the Red Sox, though news reports say he has switched to the Washington Nationals.
Bernanke’s key area of scholarship was the Great Depression and the Federal Reserve’s reaction then to developments that transformed a recession into a global economic catastrophe. Although these studies did not help him predict the onset of the Great Recession, they guided his response.
Robert Shiller, a Yale economics professor who shared the 2013 Nobel Prize in economics for his research on how human behavior affects financial markets, said he doesn’t blame Bernanke individually for missing the signs of impending disaster. Instead, the culprit was the culture of “groupthink” in the highest echelons of power.
Fed officials and credit rating agencies went along with the generally accepted “enlightened opinion” that there was no mortgage crisis in the making, even though some of the Fed’s own research had identified a housing bubble. Shiller said he spoke with one Fed researcher who had noted the housing bubble in his work, but the view was so unpopular, it caused the researcher to downplay his findings.
Bernanke “didn’t somehow manage to clear his head and think forcefully on this issue,” Shiller said recently. “Eventually, he did take action though.”
Some of those actions, of course, were controversial. The Fed invoked its emergency powers to bail out institutors such as the global insurance giant AIG and Wall Street bank Bear Stearns. Just as controversial was the decision by the Fed and the Bush administration to allow Lehman Brothers to fail, igniting the financial crisis that helped transform a modest economic downturn into the Great Recession.
In a speech at George Washington University in 2012, Bernanke told students the episode was a “very difficult and in many ways distasteful intervention that we had to do on the grounds that we needed to do that to prevent the system from collapsing.”
“Clearly,” he added, “it is something fundamentally wrong with a system in which some companies are ‘too big to fail.’ ”
Many economists say Bernanke and the Fed were slow to recognize the weakness of the economy and the consequences of the looming financial crisis. In late 2007, for example, Eric Rosengren, president of the Federal Reserve Bank of Boston, dissented from the central bank’s decision to cut interest rates modestly, arguing that a deeper cut was warranted to help stabilize deteriorating economic conditions.
Rosengren, a friend of Bernanke’s who worked with him briefly, acknowledged another failing of the Fed in the run-up to the financial crisis. The Fed had not regulated banks, the mortgage industry, and Wall Street sufficiently, which could have prevented some abuses that helped cause the crisis. Instead, he said, the Federal Reserve took no action believing the situation was not as severe or dire as it ultimately became.
“There’s a broad responsibility there that was missed,” Rosengren said. “I would include the Fed and other sectors of the government and the economic profession more generally.”
In the aftermath of the crisis, he said, Bernanke has led efforts to increase Fed bank supervision and introduced stress tests to help gauge whether banks can withstand an economic shock.
Bernanke also has highlighted his efforts to make the Federal Reserve more open and transparent. He instituted quarterly news conferences with reporters, a bold departure for an institution that for most of its history didn’t publicly announce its interest rate decisions.
And instead of speaking in the deliberately vague manner of his predecessor, Alan Greenspan, Bernanke has offered explicit targets for inflation and straightforward information on interest rates. Rosengren said Bernanke had an openness “never seen in a Federal Reserve chairman.”
As Bernanke prepares to leave the Fed, his key monetary policies are expected to remain in place for some time. At his last press conference, Bernanke said policy makers would hold the Fed’s key short-term interest rate near zero until “well past the time” that the unemployment rate drops below 6.5 percent. (The US unemployment rate was 7 percent in November.)
The Fed will trim, but continue, its unprecedented bond-buying program, aimed at stimulating the economy by holding down long-term interest rates, such as for mortgages. Over three rounds of bond buying, first launched in 2008, the Fed has pumped more than $2 trillion into the economy.
But the ultimate success of these programs may well be judged by whether the Fed, under Bernanke’s presumptive successor, Janet Yellen, can withdraw the massive amount of stimulus before igniting inflation or delivering new shocks to the economy. And that means the final chapter of Bernanke’s legacy has yet to be written.
“Obviously, it’s something we’ve never done before,” Diamond said of the Fed’s efforts to taper its stimulus. “It would be silly to not recognize the possibility of surprises.”Megan Woolhouse can be reached at firstname.lastname@example.org