Bernanke boldly went where none had gone

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Bloomberg

Ben Bernanke, the outgoing chairman of the US Federal Reserve. Photo: Bloomberg

Craig Torres Washington

As US Federal Reserve chairman Ben Bernanke shuts the door to his office for a final time tomorrow, he can say he took actions that were the first or the biggest of their kind in the central bank’s 100-year history. Some will probably also be the last.

Bernanke was the first to devise a policy that focused on lowering credit costs by suppressing longer-term interest rates after the short-term policy rate hit zero. His strategy, involving direct purchases of agency mortgage-backed securities and longer-term Treasury debt, left the Fed with the biggest balance sheet in its history, $4.1 trillion (R45 trillion).

He was the first chairman since the Great Depression to use emergency lending powers to rescue businesses in almost every corner of the financial system. And he might be the last: Congress, leery of the Fed’s sweeping powers, removed the central bank’s ability to loan to individuals, partnerships and non-bank companies.

“He was incredibly creative in the different steps and programmes he took to prevent a free fall of the global economy,” said Kristin Forbes, a professor at the Massachusetts Institute of Technology’s Sloan School of Management and a member of the Council of Economic Advisers under former president George W Bush.

“During a crisis, you have to make decisions with highly imperfect information. He was willing to do that.”

Bernanke leaves a Fed vastly different from the institution he took charge of on February 1, 2006. At that time, the former Princeton University professor had a few goals. He said naming an inflation target would help boost accountability and policy effectiveness. He also wanted to push power out of the chairman’s office down into the policy-making Federal Open Market Committee, in effect, to dilute some of the mystique his predecessor Alan Greenspan created.

Eight years later, Bernanke has achieved those goals. The Fed declared an inflation target of 2 percent in 2012, and the committee is more democratic. Unlike Greenspan, Bernanke voices his policy view last.

Among other Bernanke innovations, central bankers publish their economic forecasts, including their outlook for the policy interest rate they set, four times a year.

The crisis response also transformed the Fed in ways that defy any near-term conclusion because nobody knows whether extraordinary actions, such as purchasing $1.5 trillion in mortgage debt or creating $2.4 trillion in excess bank reserves, can be unwound successfully.

The Fed is more extended politically as it engages in policies such as suppressing mortgage rates, and the size and influence of its open market operations have involved it in financial markets as never before.

“The legacy is still open,” said Vincent Reinhart, a former top Fed official and now chief US economist at Morgan Stanley in New York. “We survived. The question is: what are the consequences?”

The Fed meeting yesterday was expected to announce a reduction in the pace of monthly bond purchases to $65 billion. That means Bernanke’s successor, Janet Yellen, will inherit a balance sheet that is still growing.

The outgoing chairman’s legacy “will ultimately be negative” as policies used during the crisis and slow recovery would lead to social, political and financial instability, said Tad Rivelle, the chief investment officer for US fixed-income securities at TCW Group. – Bloomberg


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