Robert Samuelson January 27, 2014

As Ben Bernanke, the outgoing chairman of the Federal Reserve, mustrecognize, he is the victim of the law of diminishing returns. In theinitial days of the 2008-09 financial crisis, he mobilized the Fed asthe lender of last resort. This helped quell an intensifying financialpanic and, arguably, averted a second Great Depression. Bernanke’s rolehas been much praised and deserves the nation’s gratitude. It isdoubtful that anyone else would have done better.

But Bernanke’s ambition transcended calamity prevention. He soughtto kick-start the economy by keeping short-term interest rates low (effectively zero since late 2008) and through massive bond-buying (called “quantitative easing”). The strategy was to reduce long-term interest rates, strengthen ahousing revival, boost stock prices and stimulate corporate investmentin plants and equipment. Here, his success is scant. Since mid-2009, the economy has grown at an anemic annual rate of 2.4 percent. Payroll jobs are still 1.2 million below their 2007 peak, and 7 million Americans have left the labor force — some retired butperhaps half, by some estimates, quit because they were discouragedabout finding work.

What we ought to have learned is that the Fed lacks the sort of economic control that was, after Alan Greenspan’s run as chairman (1987-2006), taken for granted. The Fed was cast then asnearly omnipotent. By slight shifts in short-term interest rates, itcould sustain economic expansions and cushion recessions. Or so itseemed. Some Bernanke critics say he should have done more. Whatexactly? Since 2008, the Fed has purchased roughly $3 trillion inTreasury and mortgage bonds. Would $5 trillion have saved the world?

As it was, interest rates fell below 2 percent on 10-year Treasury bonds and below 4 percent on 30-year mortgages. The stock market recovered, nearly tripling since its March 2009 low. But the connections between these financial events and the “real”economy of spending, production and jobs have proved frustratingly weak. Higher stock prices should cause consumer-investors to spend more, butmemories of the Great Recession may limit this “wealth effect.” Mortgage lending has suffered from tougher credit standards, imposed in part by stricter government regulation. Meanwhile, in a 2012 survey of 517 chief financial officers, 68 percent said that lowerinterest rates wouldn’t increase their plant and equipment spending.Some chief financial officers said they financed investment from internal funds, not borrowing; others said investment was tied more to demand than to interest rates.

So Bernanke’s weapons were less powerful than assumed or hoped. Whatsubverted their effectiveness was shifting public psychology. Thefinancial crisis and Great Recession changed the way consumers, bankers, business managers and regulators thought and behaved. Before, a general belief in the economy’s resilience encouraged spending, borrowing andlending. People unconsciously assumed basic economic stability. After,there was a residue of fear and caution. Gone was the faith in automatic stability. The first mind-set aided the Greenspan Fed. The second weakened the Bernanke Fed.

This explains why Bernanke’s massive exertions to improve the recovery haveso far yielded paltry returns. Monetary policy (the influencing ofinterest rates, credit conditions and the money supply) is powerful, but it is not some potion that, taken in the right doses, can magicallycalm the business cycle and mechanically restore full employment. We are hostage to economic, psychological and geopolitical forces that cannotbe completely or easily manipulated.

It is premature to judgeBernanke’s legacy. His policies will have ongoing consequences that, for good or ill, will shape his ultimate reputation. He was hindered inpart by the high expectations set in the Greenspan years. As the economy weakened, so did public trust. In 2007, half of Americ
ans expressedconfidence in the Fed; by 2012, only 39 percent did. Bernanke struggledto make the unpopular case — which is correct — that the Fed’s effortsto prop up the banking and financial systems (a.k.a. “Wall Street”)protected average Americans (a.k.a. “Main Street”) from greater harm.

The fate of Bernanke’s easy-money policies is also uncertain. Through thebond-buying and “forward guidance” — a loose commitment to keepshort-term interest rates near zero until the job market strengthensconvincingly — he has tried to instill confidence. Perhaps the laggedeffects of these policies will soon boost growth. He has also arguedthat these policies can be withdrawn without disruption. As an academicexercise, this seems true. The real question is what happens if thereare further surprises, from unanticipated inflation to another financial crisis (just last week, stocks tumbled worldwide). The Fed and othershave repeatedly erred in their economic forecasts.

Still,Bernanke’s record suggests a tentative verdict. Facing turmoil anddanger, he helped stabilize the economy and reassure the public. Hishallmarks have been competence, candor, decency and dignity. He was theright man at a fateful juncture.

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