After Bernanke

Ben Bernanke, the chairman of the U.S. Federal Reserve, has said he probably won’t serve another term when his current one expires this coming January. His decision to skip the Fed’s annual conference in Jackson Hole, Wyoming, this summer has only reinforced the view that he won’t be coming back. But history has yet to issue its verdict on the world’s most powerful central banker.

Undoubtedly, Bernanke will be remembered as a bold policy leader who helped avoid a global depression by courageously taking the Fed into uncharted waters using highly experimental — and highly risky — policies. At the same time, he leaves his successor with a set of unprecedented and unresolved problems to contend with, from weaning the economy off life support to navigating the consequences of an unusually large balance sheet. And with so much uncertainty about the success of the Bernanke way, econ textbooks and quarterly unemployment figures just don’t hold enough answers to how his stewardship of the U.S. economy will play itself out in the years ahead.

Bernanke might well end up regarded as one of the bravest, most innovative Fed chiefs yet. But history made him as much as he made history: The global financial system started to show signs of unusual stress soon after he assumed the chairmanship in early 2006. By September 2008, when Lehman Brothers’ collapse set off a global panic, Bernanke, having brilliantly analyzed the historical causes and consequences of the Great Depression as an academic — and having already taken some exceptional measures as Fed chairman — understood the importance of quickly going all in to counter a potential tragedy of enormous proportions. After galvanizing the Fed into the role of audacious financial first responder, he went to Capitol Hill with Treasury Secretary Hank Paulson and, in what has been recalled by many as an extraordinary meeting, persuaded (or, more accurately, terrified) reluctant politicians to take unprecedented steps, including a massive emergency fiscal injection to save the financial system. Things really were that dire — so much so that, worried that the banks might not open the next morning, I told my wife to withdraw as much cash from the ATM as possible.

Bernanke took a lot of heat for these bold moves, but he also did the best he could to leverage what Congress had authorized, working closely with the Treasury Department and other central bankers around the world. The result was an impressive set of coordinated policy responses that unclogged the pipes of the global financial system, got the money flowing again, and avoided an economic collapse with terrible human costs. He also departed from previous Fed practice by communicating these extraordinary measures to the public, including giving the first TV interview for a sitting Fed chairman in more than two decades, on 60 Minutes.

There’s no question that Bernanke played a critical role in steering the global economy back from the brink in 2008 and 2009. Yet his unusual brand of policy activism did not end there — and here’s where his legacy is more complicated. In five years we might look back and say that he bought just enough time for the United States to heal its economy — or that he’s to blame for a new bout of disastrous financial turmoil.

Bernanke saw that, having overdosed on debt and credit entitlement, Western economies faced a multiyear "new normal" characterized by unusually sluggish economic growth, alarmingly high unemployment, worsening income distribution, and concern about overextended fiscal balance sheets. Meanwhile, pronounced dysfunction in Washington, including an extremely polarized Congress, frustrated all attempts at comprehensive reform. Once again, Bernanke bravely went on the offensive. He pivoted from normalizing broken financial markets to using the Fed to deliver higher growth and more robust job creation — a significant challenge given the relatively limited tools at his disposal, the nature of his mandate, and the extent of bipartisan rancor in Washington.

The Fed had already been forced into a series of new, untested maneuvers, including buying securities on the open market. Bernanke’s hope was that these exceptional moves would buy enough time for politicians and other government agencies to get their act together. It didn’t happen. So he courageously signaled in August 2010 at the Jackson Hole conference that the Fed would do even more.

Confronting a sluggish economy and unemployment hovering around 10 percent, Bernanke decided that opening up all sorts of emergency funding windows for banks at the Fed was not enough. He combined three policy initiatives that had once been deemed irresponsible, if not entirely unthinkable: He floored policy interest rates at zero for an exceptionally long period, committed to keeping them there even longer through what is called "forward policy guidance," and used the Fed’s balance sheet aggressively to buy treasury bonds and mortgages as a way of manipulating prices and investor behavior.

Early in his crisis-management mode, and with the honesty and openness that have characterized the entirety of his remarkable tenure at the Fed, Bernanke warned that the potential benefits of such an unconventional policy stance came with "costs and risks." The longer the Fed persisted, the trickier it would get to strike a balance, and the harder the potential return to normalcy, he acknowledged.

Now, three years after pivoting from saving the imploding financial markets to explicitly targeting employment and economic growth, the Fed is no closer to winding down its experiments. The U.S. economy has yet to attain escape velocity and return to predictable, stable growth. Joblessness remains too high, at 7.5 percent as of this writing, a problem aggravated by millions of young and long-term unemployed, threatening to create a new lost generation.

All these problems have major international consequences too, given that the Fed issues the dollar, the world’s reserve currency, and thus its actions resonate around the globe. In effect, Bernanke’s policies have pushed other central banks to pursue more expansionary and experimental policy approaches — in some cases, even regardless of the intrinsic needs of their domestic economies.

Few doubt, for instance, that Bernanke’s unusual activism contributed to Japan’s remarkable policy U-turn, which, with its massive injections of yen into the system, constitutes the country’s biggest postwar economic policy experiment. He has also influenced monetary policy from Brazil to South Korea, Mexico to Chile. And it has made the United States a few enemies: The Fed has been accused in some quarters of fueling the fires of a potential "currency war" around the world. Unsurprisingly, this mix of hyperactive leadership yet disappointing economic and job growth has resulted in a robust debate.

I firmly believe that Bernanke saved the global economy from a depression in 2008 and 2009, yet I still have many questions about how we’ll come out the other side. Are the as-yet-elusive benefits of Bernanke’s unconventional policies worth the costs and risks? Is the Fed just blowing financial bubbles that will burst down the road? Has Bernanke unduly threatened the institution’s public standing and the political autonomy that it needs to support high, noninflationary growth? When will the Fed allow markets to function normally again? How close are we to international currency wars
and beggar-thy-neighbor threats? And what if this huge monetary experiment ends up failing — could the Fed after Bernanke end up a significantly weaker institution?

Of course, much of how this plays out lies well outside the control of Bernanke — or his successor — and will depend on the actions of others, from bickering politicians on Capitol Hill to central bankers in other countries. No doubt, Bernanke deserves much praise for his brave risk-taking. And he will go down in history as the Federal Reserve chairman who successfully steered the global economy away from the edge of disaster. But let’s hope that he is also remembered for having built the foundation that enabled his successor, working with a more functional political system, to guide the United States back to the path of high economic growth, robust job creation, low inflation, and greater wealth equality. That would be a new normal we could all get behind.