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Originally published January 30, 2014 at 6:48 PM | Page modified January 31, 2014 at 11:23 AM

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Bernanke leaves legacy of stimulus, stagnant wages

The just-departed Fed chairman’s efforts to drive down interest rates and stimulate the economy are widely credited with saving the nation from a second Great Depression and leaving the nation’s financial condition poised to take off. His detractors are not so impressed.

McClatchy Washington Bureau

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As Ben Bernanke prepared to lead the Federal Reserve in January 2006, the former Princeton University professor and economic historian confided to colleagues that he hoped he’d be one of the least-remembered chairmen of the Federal Reserve.

Eight years later, he’s leaving the post likely to be the most remembered.

Bernanke ended his second four-year term as Fed chairman Friday, a stretch that to him might have felt like it was measured in dog years. Two years into his tenure, the financial system unraveled in a near-collapse in the summer of 2008.

Already the nation’s leading expert on the Great Depression, Bernanke was determined not to repeat the Fed’s passive response of the 1930s. Instead, he attacked the crisis with aggressive and creative moves designed to keep the economy moving forward at all cost.

“He kept us out of Great Depression II,” said Dean Croushore, an economics professor at the University of Richmond and co-author of a textbook with Bernanke. “What the Fed did at that time (in the 1930s) was follow standard practice in the face of this massive shock to the economy.

“I think Ben’s greatest contribution is ... that he was creative, that he thought about the impact of the shock across many dimensions.”

In his memoir, “Decision Points,” former President George W. Bush recalled how Bernanke convinced him that bold steps were needed to arrest an unfolding financial crisis of epic proportions.

“The market had ceased to function. And as Ben had explained, the consequences of inaction would be catastrophic,” Bush wrote. “As unfair as it was to use the American people’s money to prevent a collapse for which they weren’t responsible, it would be even more unfair to do nothing and leave them to suffer the consequences.”

Notwithstanding the bold moves, the financial crisis caught Bernanke and the rest of the economic profession by surprise, no doubt something that’ll remain part of his legacy, too. Bernanke later admitted he regretted thinking that the housing crisis was an isolated, contained event.

During his confirmation process in 2005, there wasn’t talk of a looming housing crisis or that Wall Street banks had taken on unsafe amounts of risk. The closest issue to controversy was if Bernanke’s committing to a published inflation target of 2 percent would threaten the Fed’s credibility.

“Before he took the job, I think Ben was really looking to continue the (Alan) Greenspan years. Things looked like they were in pretty good shape,” said Croushore, who maintains a friendship with Bernanke.

“He wanted to be one of the least-remembered Fed chairs in history. I think the opposite happened and events thrust him into the spotlight, where he did not want to be. Talk about being out of your comfort zone.”

In March 2008, Bernanke helped broker an unprecedented fire sale of investment bank Bear Stearns to JPMorgan Chase. Months later, attempts to do the same with Lehman Brothers failed, and crisis ensued with a vengeance.

Little-used powers

The Fed used powers few knew it had to rescue global insurance giant American International Group. It used those powers to provide short-term financing to a number of U.S. corporations to keep the so-called commercial paper markets afloat. And investment banks changed their legal status to holding companies to get Fed life support.

When the panic finally calmed, the Fed on three separate occasions turned to quantitative easing. That practice, never tried before, involved purchasing government and housing bonds to drive investors out of safe returns and into risk-taking such as stocks, which supported economic activity.

The efforts swelled the Fed’s holdings to above $3 trillion, and in December, Bernanke announced that the Fed would taper back on what had been $85 billion in monthly bond purchases.

Critics contend the purchases distort the value of stocks and bonds and may lead to a persistently high rate of inflation as the Fed gradually ends its economic support. That could dent Bernanke’s legacy.

“We don’t know and won’t know whether this unconventional policy has created a serious risk until we see how it plays out,” said Martin Feldstein, a prominent conservative economist and Harvard University professor who was on the short list for the Fed chairmanship in 2005.

Feldstein is among those who think Bernanke’s rescue efforts will be his legacy, but that the bond-buying threatens it.

“It’s really created more increased risk than increased aggregate demand” for goods and services, he said, adding that it “may have helped in 2010” but serves to muddy the outlook today.

Sen. Rand Paul, R-Ky., a frequent Fed critic, agreed.

“His role with the Federal Reserve’s unprecedented actions, such as printing trillions of dollars to pay for government debt, bailing out Wall Street, and leaving interest rates near zero into perpetuity, may have catastrophic consequences for America’s savings, wealth and standard of living in years to come,” Paul said in an email.

The bond buying coincided with a period of congressionally imposed fiscal austerity, making it hard to determine if Bernanke’s policies failed to spark more growth or conversely kept growth from being even slower.

By driving interest rates down to historic lows, Bernanke helped fuel a huge surge in the stock market, where the top 1 percent of Americans have been far better positioned to take advantage of gains than their fellow citizens.

Those policies have helped those with 401(k) and retirement plans tied to the stock market.

Also, low interest rates have stimulated housing sales and permitted many homeowners to save money by lowering their mortgage costs through refinancing.

But unemployment remains high by historical standards, and the financial strength of many workers has deteriorated. Most economists see little chance of that picture changing radically anytime soon.

Haves vs. have-nots

Fed policy “did a wonderful job of keeping the financial system from falling off the table,” said Jack Ablin, chief investment officer with BMO Private Bank in Chicago. “But as a side effect or consequence, it’s driven a wedge between the haves and have-nots.”

Bernanke has repeatedly rebuffed the notion that his policies have done little for the masses.

“It’s simply not true,” he said in November before rattling off ways the Fed’s low-interest policies have benefited Main Street — enabling Americans to get cheaper car loans, recover home values and enjoy stable consumer prices and greater job creation.

Even so, from mid-2009, when the Great Recession ended, to 2011, the average net worth of the wealthiest 7 percent of households surged 28 percent to $3.2 million, according to Pew Research.

For everybody else, such wealth — assets minus debts — fell 4 percent during that period to $133,817.

Since 2011, the disparity has grown. Stocks have jumped even higher in the last two years, according to data from Swiss financial-services company Credit Suisse Group. And income statistics show a similar, though less dramatic, pattern.

Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York, agreed that the wealthiest 1 percent had reaped the lion’s share of stock-market gains. But he sees signs that the public angst over economic inequality may already be influencing Fed policymaking.

He said Fed officials also are looking at workers’ wages and other labor indicators hinting at economic-distribution issues.

“If employment comes down but wages aren’t going up, that feeds into the thinking that the economy is not in place. ... It argues for the Fed keeping rates lower for longer,” Rupkey said.

“For me, it’s not an appropriate variable for them to target. Central bankers shouldn’t be social workers.”

Bernanke isn’t much worried about what future historians say.

“I hope to live long enough to read the textbooks,” he quipped during a Dec. 18 news conference, likely his final one.


Turning serious, he suggested his is a two-part legacy.

“The first is that the Federal Reserve has rediscovered its roots, in the sense that the Fed was created to stabilize the financial system in times of panic,” Bernanke said.

“The other thing that was ... largely unique about this period was that we were trying to help the economy recover from a deep recession at a time when interest rates were almost or essentially zero, and that required us to use other methods, most prominently forward guidance and asset purchases, neither of which is entirely new.”

Under Bernanke, the Fed has tied future shifts in stimulus and short-term interest rate policies directly to performance in the labor market, particularly jobless trends.

“I salute Bernanke and the rest of the Fed in understanding their obligations to try to reduce unemployment as best as they can,” said Robert Reich, a former Labor secretary and now professor at the University of California, Berkeley. The Fed has a dual mandate from Congress to control inflation and maximize employment.

At the same time, Reich and many analysts wondered just how much monetary policy can bring down unemployment or help lift workers’ incomes, which are related to education and skills, new technologies and globalization — areas that lawmakers typically try to address with fiscal policy.

With so little coming out of Congress, “I’m glad Bernanke and company chose an expansionary monetary policy,” Reich said.

“On the other hand, I think history will show the Fed’s policy fueled widening inequality for the single reason that most average people didn’t have access to low-interest loans,” he said. “Wealthy people and corporations could borrow far more easily.”

This article contains information from a Tribune Washington Bureau report.

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