March 10, 2013 7:27 pm
At the start of this century the journalist Bob Woodward anointed Alan Greenspan as “the symbol of American economic pre-eminence”. Ben Bernanke must pray that he never attracts that kind of praise. As a student of business cycles, the current chairman of the US Federal Reserve knows all about reputational bubbles – and few have burst more convincingly than Mr Greenspan’s.
With just seven Fed open market meetings before he completes his second term, Mr Bernanke is in no danger of emulating the maestro’s former heights. Last week, the Dow broke its historical record.
There were no Greenspan-style celebrations. Conservatives dismissed the surge as a “sugar high” caused by quantitative easing. The left saw it as yet more Fed-fuelled froth that was bypassing Main Street.
Both contain some truth. The $85bn a month in QE3 is fuelling a “reach for yield” that is driving a mini equity boom. And America’s wealthiest 10 per cent are its main beneficiaries. But they ignore the big picture. Without the Fed’s easy money, the stock market would be languishing and unemployment would be rising. Instead of “helicopter Ben” dropping reserves from the sky it would be “lawnmower Ben” shredding the green shoots of the recovery.
History is likely to treat Mr Bernanke more kindly. Peter Drucker, the management consultant, once said: “The greatest danger in times of turbulence is to act with yesterday’s logic.” Mr Bernanke’s chief virtue has been to ignore the normal rule book. As a scholar of the Great Depression, he understood its chief cause was the extinction of credit: the US escaped the slump because it went off the gold standard. The New Deal had little to do with it.
Most of the unorthodox steps Mr Bernanke has taken since 2008, such as the galaxy of lending windows he set up after the Lehman bankruptcy, or the various quantitative easings, may seem obvious in retrospect. But it is not clear any of his former rivals for the job would have responded the same way. “Bernanke’s grasp of the Great Depression and also of Japan’s liquidity trap in the 1990s has been a very important element of how the Fed has handled its challenges since 2008,” says Liaquat Ahamed, whose book, Lords of Finance, chronicles the central banking errors of the 1930s.
“There is no doubt he is the right chairman for this kind of crisis.”
Mr Bernanke’s grounding has given him the authority to dismiss those who view the meltdown through a moral lens and want to purge society for its excesses. Had he embraced this popular intuition, the US would now be following the UK into triple-dip recession. As Mr Bernanke noted in Texas shortly after Rick Perry, its governor, had all but threatened him with a lynch mob: “I am not a believer in the Old Testament theory of the business cycle.”
In recent years it has become common to worry about weakening democracies and fraying institutions. Moisés Naím’s new book, The End of Power, crystallises that view well. Since 2008, the Fed has proved a notable exception to the trend. “When the Fed has met a new problem it has usually engineered a new solution,” one of Mr Bernanke’s Group of Seven counterparts told me. “It has used its power effectively.”
For the bulk of the past five years, the Fed has been the only serious economic actor in Washington – and remains so today. With the big exception of President Barack Obama’s 2009 stimulus, it alone has tried to find ways to keep the US economy afloat. Since 2011, fiscal policy has been a drag on the recovery. US growth is expected to hit about 2 per cent in 2013. Were it not for the fiscal cliff and the sequestration, it might be heading for 3 per cent.
Likewise the Fed has stood alone in its attempts to confront America’s jobs and housing crises – albeit with its limited monetary tool kit. Political gridlock has stymied any serious action elsewhere. For the first time in its history the Fed is taking the full employment half of its mission seriously. In December Mr Bernanke broke precedent by pledging to keep zero-bound interest rates until unemployment fell to 6.5 per cent or inflation exceeded 2.5 per cent.
At the open market meeting next week, Mr Bernanke is likely to come under renewed pressure to take his foot off the pedal. Last Friday’s strong jobs report will bolster those arguing that the risks are now tipping towards inflation. But they have been sounding the same alarm for four years. In the last year, US inflation has fallen to 1.6 per cent. And unemployment is still at 7.7 per cent. Mr Bernanke will get to keep QE3.
Perhaps his least appreciated contribution has been to steer well clear of Mr Greenspan’s cult of omniscience. By insisting on the Fed’s limitations, Mr Bernanke has sometimes enraged the staunchest Keynesians, including Paul Krugman, the New York Times columnist, who once depicted him as a “profile in cowardice”. Mr Krugman has recently tempered his criticisms.
But Mr Bernanke misses no opportunity to remind people there is only so much the Fed can do: it can help boost demand but it cannot force banks to lend; it can assist job creation but it cannot reverse the fall in median earnings. Most of America’s challenges are not monetary. Since the Fed is not an orchestra, its chairman can never be a maestro. Posterity should reward Mr Bernanke for having the serenity to know that.