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."
But no one actually thought that Helicopter Ben would take flight – not once, not twice, but three times between 2008 and 2012. The third sortie continues. The Fed in September, 2012, said it would create $85-billion a month to buy bonds until it detected a substantial improvement in the labour market. In December, the central bank surprised Wall Street by announcing that its conditions for tapering or reducing its asset purchases had been met. If all goes according to script, the Fed will create its last extraordinary dollar some time this fall, by which point its balance sheet would exceed $4.4-trillion, compared with $870-billion in August, 2007.
The December announcement wasn't exactly a triumph, however. The unemployment rate, at 6.7 per cent, still is considerably higher than the Fed's unofficial target of something closer to 5.5 per cent. The Fed characterizes the pace of economic growth only as "moderate." More than four years removed from the end of the recession, one would have expected better.
It's wrong to conclude that lacklustre growth means QE doesn't work. John Williams, the president of the San Francisco Fed, last week published a paper listing more than a dozen academic studies that show QE lowers borrowing costs. The impact on U.S. stock markets also is evidence of the central bank's power: A stronger equity market was an intended consequence of the policy in the hope that healthier stock portfolios would give a lift to consumer confidence and that companies would raise cash to hire and invest.
The problem is that the real world makes for a poor laboratory. Mr. Bernanke constantly was pushing against serious headwinds. The European debt crisis derailed the global economic recovery in 2010, just when things in the United States were starting to look up. And unlike previous recessions, the Fed got little help with the recovery from governments, which slashed spending and fired tens of thousands of people. The sight of politicians embracing austerity in the aftermath of a recession was virtually unprecedented. It left the Fed no choice but to go it alone.
"History will always remember that he stood up at a very difficult time," said Anil Makhija, academic director at the National Center for the Middle Market, a group housed at Ohio State University that conducts research on companies with revenue of between $10-million and $1-billion.
Into the unknown
To avoid Mr. Greenspan's fate, Mr. Bernanke needs two things to happen: His successor, Janet Yellen, must unwind the Fed's extraordinary stimulus without losing its grip on inflation; and Mr. Bernanke must cross his fingers that his fight against the fallout from the U.S. housing bust hasn't created a new asset-price bubble.
Some economists remain wary about inflation because they doubt the central bank's ability to catch it in time to rein it in. Bank of Canada Governor Stephen Poloz acknowledged this week that predicting when a sluggish economy will take off is especially difficult. Deutsche Bank's Mr. LaVorgna is convinced the Fed is going to miss the turn.
Policy makers currently predict inflation won't be an issue until at least 2016. Yet, at the same time, the Fed's latest economic projections say economic growth will accelerate to a pace of about 3 per cent this year, even faster in 2015. Some find the outlook that inflation will remain tame as economic growth finally takes off hard to believe.
"It certainly is possible that over the next two, three, four years that measures of inflation could move significantly above what the Fed is forecasting," Mr. LaVorgna said. "Growth is accelerating. My guess is it will be better than what the Fed is targeting. But to keep inflation where it is given the amount of accommodation in the system? That just seems incongruous. That just doesn't make sense to me."
Mr. Bernanke's response to those who taunt him as being soft on inflation is akin to the classic sports put-down of players on the winning side: He points at the scoreboard.
Last week, Mr. Bernanke was at an event in Washington at the Brookings Institution on the same day the U.S. Labour Department published its consumer price index for December. Annual inflation was 1.5 per cent, safely below the Fed's 2-per-cent target.
"Some of the costs [of QE] that people talk about are really not costs," Mr. Bernanke said. "Those who have been saying for five years that we are on the brink of hyperinflation, I think I would just point them to this morning's CPI number and suggest that inflation is just not a significant risk of this policy."
Mr. Bernanke is less dismissive of bubbles. "Given what we've been through the last five years, we are sensitive to those risks," he said at Brookings.
Demand for bonds forces their prices up and their yields down. So by buying hundreds of billions of dollars of U.S. Treasuries, the Fed shoves borrowing costs lower because credit prices tend to be marked against the cost of U.S. debt. But QE also is an attempt to bully private investors into spreading their money around.
When times are uncertain, there is a natural attraction to buy Treasuries, the safest asset on the market. Through QE, the Fed effectively blocks that option, forcing profit seekers to look elsewhere.
After five years of QE, no one is quite sure how out of sync financial markets might be. Some see bubbles everywhere, others see none at all. The "reach for yield" could explain some of the current turmoil in emerging markets.When the Fed was buying bonds indefinitely, investors sought profits in the stocks and bonds of countries such as Brazil and Turkey. But once it became clear the Fed was preparing to end QE, investors recalculated. Many rushed home to the United States, causing volatility in the markets they left behind.
Mr. Bernanke said the Fed has staffed up with economists whose job it is to be on guard for bubbles. For now, he insists risks are low. But he also knows the lesson of the financial crisis is that it is entirely possible that no one will see the threat until it is too late.
In March, 2012, Mr. Bernanke went back to school.
The former Princeton University professor gave four lectures at George Washington University on the origins of the Fed and its response to the financial crisis. Thirty undergraduate students were chosen from more than 80 applicants. Thousands more watched the sessions online and Mr. Bernanke's notes were made into a book by Princeton University Press.
Timothy Fort, who organized the lectures, said Mr. Bernanke wanted to demystify the Fed. Besides the lectures, he attended a reception with the students and invited them to take a tour of the Fed. When they asked to see his office, he agreed. Yuqi Wu, a Chinese student who attended the lectures, said she was touched that Mr. Bernanke made an effort to learn everyone's name.
"Every student I talked to said it was the most amazing experience of their academic career," said Prof. Fort, who left George Washington University in 2013 to teach business ethics at Indiana University.
For now, the first thing people think of when they think of Mr. Bernanke is the money: $4-trillion is hard to ignore. Yet his determination to lead the Fed out of the shadows could be his most important contribution – and possibly the thing that keeps his grand experiment from going off the rails.
Monetary policy works only if the public trusts the central bank behind it. Mr. Bernanke realized that the Fed's tradition of a limited public interaction and coded language was ill-suited for the Internet age. He did away with the mystery and instituted a clear inflation target. He became the first Fed chairman to hold press conferences after policy decisions. He pushed his colleagues to give more explicit guidance about the Fed's intentions.
There are doubters about Mr. Bernanke's commitment to transparency, too. They say all the talk only causes confusion. Perhaps on occasion. But if Mr. Bernanke's George Washington class is a guide, Mr. Bernanke's openness also is making believers out of the people who will inherit the economy he tried to save.
"There has to be some radical change to occur for there to be progress," said Smita Trivedi, who was Prof. Fort's teaching assistant. "Maybe I'm a sucker for smart professors, but I was left with the impression that [Mr. Bernanke] really knew what he was doing."
THE BERNANKE YEARS