By Praveen Chunduru
I can almost hear people say one or more of four things:
a. “He didn’t do nearly a good enough job – there was still a widespread recession.”
b. “He still failed to rein in banks, which are now larger than ever and thus pose increased systemic risk.”
c. “His ‘Quantitative Easing’ policies, in which he printed a lot of money to buy US Treasury bills, helped facilitate the mushrooming of US debt.”
d) “He was merely doing his job.”
By no means do I claim that I am an expert in monetary policy, but I have followed the Federal Reserve’s actions closely since the onset of the financial crisis in 2008 and I do understand the fundamentals of monetary policy fairly well.
My problem with the above criticisms is that they are unavoidable. Take statement (a) for example. There were people in 1930s who blamed Franklin D Roosevelt for not quickly fixing the Great Depression, and people in 1860s who blamed Abraham Lincoln for letting thousands of soldiers die in an attempt to save the Union. The point is – men in these positions hold incredibly tough jobs, in which the complexity of the job isn’t appreciated and the benefits of their actions are often not immediately clear to the general public. Further, the public finds it easier to assign blame for a smaller cost without acknowledging the bigger gains. For example, while people vehemently protest the expansion of the activities of the National Surveillance Agency, the intelligence agency of the United States of America that monitors, gathers, stores, processes data, they fail to acknowledge that it does save people’s lives. A tradeoff needs to be achieved.
Composure amidst storm
Here is what Bernanke did do:
- He deflated the bubble that was created during Greenspan’s time, by raising interest rates every quarter from the time he took office in mid-2006 till end-2007.
- When the housing crisis did come about in late 2007,
- He slashed discount window rates (effectively knocking down Fed funds rate to below 1%), giving much needed liquidity to the economy.
- By December, he created the ‘Term Auction Facility’ to auction off loans to sound depository institutions to give financially strained banks some liquidity.
- Finally, by March 2008, he created the Term Securities Lending Facility, allowing firms to borrow against their bond holdings, again increasing liquidity.
- After the collapse of Lehman Brothers,
- On Sep 17, 2008, he stopped financial contagion by lending $85 billion to AIG to avoid losses of several hundreds of billions of dollars to depositors worldwide.
- He extended loans at very low interest rates to many financial institutions that encouraged them to hold more reserves and continue extending credit to the economy.
- He influenced a slew of acquisitions of troubled banks (Bear Sterns, Merril Lynch) by bigger banks (JP Morgan, Bank of America) that eventually provided confidence to depositors that their money is safe.
- To give assurance to depositors that their funds were safe, he started paying interest on reserves that banks held with the Fed, incentivizing banks to hold more reserves and thus be better capitalized.
He soon faced a ‘Zero lower bound’, a situation in which short-term interest rates (what the Fed controls) are near 0 and the economy faces deflation. Deflation refers to a situation where people stop spending and investing unless absolutely necessary because the currency they hold in hand will be worth more in the future than it is worth today. In extreme cases, the economy may even come to a standstill. This zero lower bound implied that the Fed technically had no room to reduce interest rates to boost the economy. This sort of a liquidity trap (deflation amidst low interest rates) was what had plagued Japan’s economy in the 1990s.
- In line with his 2004 work, “Conducting Monetary Policy at Very Low Short Term Interest Rates”, Bernanke introduced three measures that helped revive the American economy:
o Forward Guidance: Keeping in mind the hesitation of the public to increase spending and investment in such a situation, he assured the economy that the interest rates would remain low for a prolonged period of time, making it easy expenditure and investment fairly cheap for the public.
o Credit Easing: To further knock down long-term interest rates, he exchanged short-term securities in the Fed’s balance sheet for long-term ones, increasing their prices and thereby knocking down their yields.
o Quantitative Easing: He tripled the size of the Fed’s balance sheet from 2008 to 2011 (from $0.9 trillion to $2.9 trillion) by printing money and buying government securities and long -term mortgage backed securities (which were troubled).
Are banks larger now? Yes, and maybe Bernanke could have done more to split banks. Did America face a recession? Yes. But he provided the world with decisive and innovative monetary policies to save the global financial system from a complete meltdown, and prevented the recession from being a depression. The American economy, while by no means in a spectacular boom today, is growing at a modest rate and low inflation. That is a scenario that people would have not even dreamt of in September 2008.
Saying that Ben Bernanke simply did his job as the Chairman of the Fed is like saying Michael Jordan simply did his job as a basketball player. The excellence of Ben Bernanke needs to be lauded. If Jordan got his MVP titles, it’s time we give the man, who saved the livelihoods of millions, the credit he deserves. The Nobel Peace Prize is a fitting recognition.
[author_info]Praveen Chunduru is a 2017 MBA Candidate at Wharton Business School, has worked with S&P and IFC – World Bank and is a Co-Founder of VideosForKnowledge, an NGO in the Indian affordable education space.[/author_info]