On Tuesday, for the 72nd and final time, Ben Bernanke will convene a meeting of the Federal Open Market Committee, the group of men and women from the U.S. Federal Reserve System that determines the cost of money.
They’ve been through a lot together. Their last piece of business will be directing the Federal Reserve Bank of New York to once again create tens of billions of dollars – probably $65-billion (U.S.), down from $75-billion this month – for the purchase of separate tranches of Treasury debt and mortgage-backed securities. The only question in the minds of professional Fed watchers is whether the central bank might trim its monthly asset purchases a little faster. But that’s mostly trivial. Whether it’s $65-billion or $55-billion, it’s still a lot of money.
Perhaps historians one day will pinpoint when extraordinary became routine. Not so long ago – say, about 2008 – the notion of a central bank seeking to stoke the economy in this way was the kind of mad economic doctrine favoured only by the naive and those too young to remember what it took to crush inflation in the early 1980s. Now, quantitative easing is just another tool in the toolbox. The policy even has a nickname: We call it QE.
The mainstreaming of QE will forever be associated with Mr. Bernanke, who began his tenure as Fed chairman with a portfolio of bonds worth about $900-billion, and will end it with a balance sheet of more than $4-trillion.
The creation of money at that scale should have caused all kinds of problems by now: Runaway inflation, asset-price bubbles; name it. But it hasn’t.
Instead, Mr. Bernanke’s Fed appears to have almost singlehandedly prevented the United States from sliding back into another recession.
“Without this guy, we’d be in a lot of trouble,” said Richard Grossman, an economics professor at Wesleyan University in Connecticut and the author of a 2013 book on how policy makers throughout history so often get things tragically wrong.
Yet what if trouble simply hasn’t found us yet? Mr. Bernanke may be leaving the Fed next week, but questions about the ultimate effect of his policies will linger for years. That’s the problem with monetary policy, especially the innovative kind: It works with a lag. Mr. Bernanke will retire a hero of the fight against the financial crisis. But there remain too many uncertainties about some of his decisions to be sure he will be remembered so fondly in the future.
When Mr. Bernanke’s predecessor, Alan Greenspan, gathered with the Federal Open Market Committee for the last time in January, 2006, he was showered with praise.
Mr. Greenspan today is a diminished figure from the one who ruled the global economy at the start of the millennium. He kept interest rates too low for too long; he tragically misjudged the willingness of financial institutions to self-regulate; and he perpetuated a cult of personality that turned the act of monetary policy making into a one-man show.
But all of this is reinterpretation; at the time of his leaving, Mr. Greenspan was beyond criticism. Could the future be similarly unkind to Mr. Bernanke? There are reasonable people who think so.
William Marsh, a former investment banker who now runs a small steel mill outside Philadelphia, says he has little faith in the low interest rates the Fed has engineered because the central bank’s methods were so unorthodox.
Joseph LaVorgna, chief U.S. economist at Deutsche Bank and one of Wall Street’s more accurate forecasters, compared the effects of QE on the economy to the effect of long-term exposure to the sun on the skin: It’s nice to get a little colour, but you don’t realize you have skin cancer until it’s too late.
“We simply don’t know what the effects of these actions have been,” Mr. LaVorgna said.
‘Helicopter Ben’ saves the day
In 2002, when he still was a junior central banker getting used to life outside of academia, Mr. Bernanke made a passing reference to economist Milton Friedman’s famous line about how a government at any time could reverse deflation by dropping money from a helicopter. It didn’t matter that Mr. Bernanke was speaking theoretically or that Mr. Friedman was a Nobel laureate. From that day forward, Mr. Bernanke was “Helicopter Ben.”