America has paid dearly for Nobel winner Ben Bernanke’s many mistakes

George Bernard Shaw famously said that there are three types of economists. There are those who are brilliantly right. There are those who are brilliantly wrong. And then there are those who teach.

Judging by his time at Princeton, there can be no question that Ben Bernanke is a brilliant academic economist. His pioneering work on the banking system taught us how bank failures deepened and prolonged the 1930s Great Depression. It was in recognition of this work that the Swedish central bank just awarded Bernanke, along with Douglas Diamond and Philip Dybvig, this year’s Nobel Prize in Economics.

Judging by Bernanke’s policy record during his long tenure at the Federal Reserve, though, one has to wonder whether he might not fall into Shaw’s category of brilliantly wrong economists. While at the central bank, first between 2002 and 2005 when he served on Alan Greenspan’s Fed board and then as Fed chair between 2006 and 2014, Bernanke made serious policy mistakes for which the country has paid dearly.

In his time on Greenspan’s Fed, Ben Bernanke was not known for voicing objections to the creation of the country’s greatest housing market and credit bubble on record by years of unduly easy monetary policy and regulatory neglect. The bursting of that bubble eventually led to the 2008-2009 Great Recession that saw unemployment reach 14%.

Bernanke’s tenure at the Federal Reserve was filled with mistakes that cost the country’s economy.
REUTERS/Jonathan Ernst/File Photo/File Photo

In March 2006, when problems came to the surface in the sub-prime mortgage market, Bernanke confidently assured us that this was a minor problem of no great consequence. Equally troubling, as minutes of the Fed’s August 2008 policy meeting reveal, the bank was blissfully unaware of the likely economic consequences of the imminent September 2008 Lehman Brothers bankruptcy. That bankruptcy was to plunge the US and world economies into their worst postwar recession up until then.

An even more troubling legacy of Bernanke’s tenure at the Fed was the massive resort to quantitative easing (QE) as an unorthodox way to jumpstart the economy once interest rates had reached their zero lower-bound. Under Bernanke’s leadership, the Fed engaged in three rounds of ultra-large-scale purchases of US Treasury Bonds and mortgage-backed securities. The net result was that whereas it took the Federal Reserve around 100 years after its creation to increase the size of the Fed’s balance sheet by $800 billion, it took Bernanke’s Fed barely six years to increase the Fed’s balance sheet by almost $4 trillion.

To be fair, in the depths of the Lehman crisis, Bernanke’s first round of QE most likely was the right policy response. It is dubious, however, whether the country needed another two rounds of QE on anything like their actual scale when the economy was well on its way to recovery. This would seem to be especially the case when one considers how large-scale QE distorts asset and credit market prices.

Since Bernanke left the bank, the Jerome Powell Fed has taken QE to new heights. In barely 18 months after the March 2020 COVID economic recession, Powell increased the Fed’s balance sheet by yet another staggering $5 trillion. In the process, he, along with the world’s other major central banks, helped create today’s world of multi-decade-high inflation and a global “everything” asset and credit market bubble.

The jury is still out as to how badly this will end for the US and world economies, when central banks now have to aggressively raise interest rates to regain control over inflation.

Since its establishment in 1968, with seemingly good reason the Nobel Prize in Economics had not been awarded to an economic policymaker. It is unfortunate that the Swedish central bank has chosen to depart from that tradition and make someone with as questionable an economic policy record as Ben Bernanke this year’s winner of the prize. It would be even more unfortunate if this award is seen as a ringing endorsement by the Nobel Committee of large-scale QE as a standard instrument of monetary policy.

Desmond Lachman is a senior fellow at the American Enterprise Institute. He was a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

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