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VOL. 38 | NO. 5 | Friday, January 31, 2014

Bernanke legacy: Final chapter yet to be written

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WASHINGTON (AP) — When Ben Bernanke puts on his coat and leaves his office Friday, he will close the door on a precedent-breaking eight years as chairman of the Federal Reserve.

What's next?

Bernanke has said he plans to stay in Washington to write books and give speeches. Liberated from the constraints of the Fed, he'll have more time for his favorite pastime, reading.

He'll even get to drive a car for the first time in eight years.

Bernanke took office on Feb. 1, 2006, more the shy Princeton professor than a likely combatant in Washington's knock-down political culture, though he'd served on the Fed's board and for eight months as head of President George W. Bush's Council of Economic Advisers.

On his watch, the U.S. economy and financial system fell into their gravest crisis since the Great Depression. Suddenly, a quiet academic who had spent years studying the Fed's mistakes in the 1930s faced pressure himself to help save the economy from free-fall.

As a student of the Depression, Bernanke felt policymakers then had been too hesitant to deploy the Fed's powers. Under his leadership, the Fed invoked all its conventional tools. Once those were exhausted, Bernanke turned to extraordinary steps never before tried by the Fed.

Besides cutting a key short-term interest rate to a record low near zero, Bernanke launched a bond buying program that drove the Fed's balance sheet above $4 trillion to try to accelerate growth and shrink high unemployment.

"He turned the Fed into a colossus," said David Jones, a longtime Fed watcher and author of a new book on the Fed.

Bernanke's policies drew praise but also warnings that they injected new risks that will endure beyond his tenure.

Here are highlights of his chairmanship:


Bernanke and other regulators failed to foresee the risks that would flare once the prolonged housing boom went bust. The housing bubble was fueled by subprime mortgages sold to homeowners and then repackaged as securities. Once the bubble burst, those mortgages threatened financial institutions and investors.

Contagion raced through the financial system. The government was forced to seize mortgage giants Fannie Mae and Freddie Mac. It also had to rescue the largest banks and other institutions such as insurer American International Group.

Bernanke had favored free-market solutions over stricter regulation. Yet he tempered his views to back the financial overhaul Congress passed in 2010 to address the regulatory failings that contributed to the crisis. Bernanke also made the Fed a more pro-active regulator. He helped pioneer stress tests, for example, to ensure that large banks hold enough capital to survive a severe recession.


Once the financial crisis erupted in 2008, Bernanke joined with Treasury Secretary Henry Paulson to craft an aggressive multi-pronged response. The Fed created emergency programs to spur lending and restore confidence in banks. These programs aimed to keep credit, the economy's lifeblood, flowing. They soon covered everything from overnight business loans and money-market funds to credit card debt and mortgage bonds.

Bernanke also helped persuade Congress to approve a $700 billion bank bailout fund. He warned lawmakers, in ominous terms, what could befall the economy if they didn't vote to provide support. They did.


Bernanke used the Fed's main policy tool, a short-term bank lending rate, to try to bolster growth. Fed officials cut their target for that rate to near zero in December 2008. They've left it there since. Bernanke also backed novel efforts to keep rates low through detailed guidance of future Fed action.

The Fed began using thresholds to signal how low unemployment would need to fall before short-term rates might rise above record lows. In December, for instance, the Fed said for the first time that it expects to keep short-term rates low "well past" the time unemployment dips below 6.5 percent. The rate is now 6.7 percent.

Critics argue that rather than help markets anticipate Fed action, such efforts have stirred confusion. Still, the Fed will likely keep experimenting with new guidelines to signal future actions. Janet Yellen, who will succeed Bernanke as Fed leader, favors this approach.

Once the Fed had pushed short-term rates as low as they could go, Bernanke broke the mold: Using its power to essentially print money, the Fed bought trillions in Treasury and mortgage bonds to try to drive down long-term rates to stimulate consumer and business borrowing and accelerate growth.

Critics say the Fed's efforts have failed to give the economy a meaningful boost. Worse, they argue that by keeping rates ultra-low and pumping ever-more cash into the system, the Fed risks igniting inflation or creating dangerous bubbles in assets like stocks or housing.

Some also fear that as the Fed unwinds its enormous investment portfolio, it could destabilize markets. Exhibit 1: The current turmoil in emerging economies. Many fear that higher U.S. rates will lead investors to shift cash out of emerging markets and into the United States for higher returns. That fear has squeezed currencies and roiled markets in developing countries.

Bernanke's supporters argue that the Fed's efforts prevented the economy from tumbling into an even worse crisis. And they note that inflation remains, if anything, too low.


Bernanke took office with a goal of lifting the cloak of secrecy that had long shrouded the Fed. Among other things, he held town hall meetings, gave interviews on "60 Minutes" and began holding quarterly news conferences to explain the Fed's thinking. He also won approval for setting a 2 percent inflation target and expanding the Fed's forecasts. Those steps were intended to clarify the Fed's plans and help the public better understand its policies.

The shift toward more openness has Yellen's support. She chaired a committee that crafted many of the policies and will likely continue pushing for less secrecy. One Fed official has called for news conferences after all eight of the Fed's meetings each year instead of just four.


Bernanke, perhaps mindful of the beating the reputation of his predecessor, Alan Greenspan, took after the financial crisis, has sought to downplay what his legacy might be. At his final news conference, he said he hoped to "live long enough to read the textbooks that will be written" about his tenure.

Critics have been less reticent. Conservative Republicans are pushing legislation to rein in some of the Fed's powers. Fed supporters warn that that could undermine the independence the Fed needs to convince investors it will take painful steps, including raising rates, when needed.

Most economists credit Bernanke for using all available tools to fight the financial crisis and recession. Still, some say his legacy could be shaken if the Yellen Fed botches the unwinding of the central bank's investments. In the end, one byproduct of Bernanke's policies could be market turbulence or runaway inflation.

"If the unwinding of all the support does not go well, that could tarnish Bernanke's legacy," said David Wyss, a former Fed economist and now a professor at Brown University.

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