At the end of January, 2014, Ben Bernanke’s term as Chairman of the United State Federal Reserve Board comes to a formal conclusion. More colloquially he is known simply as Governor of the US Central Bank and this week his successor, Janet Yellen is likely to be confirmed by the US Senate.
Bernanke’s eight years at the helm of the Federal Reserve have also been a tumultuous period in the economic history of the United States. His immediate predecessor Alan Greenspan was ideologically predisposed not to see developing financial bubbles, nor even the possibility of systemic risk problems, anywhere on his personal horizon though many believe he should have done and that warning signs were there.
Ben Bernanke however ended up right in the middle of one that had been building for some years, and then burst with a vengeance during his first term in office, and was in the forefront of the battles to deal with its consequences, which nearly led to a melt down, Chernobyl like, of the entire financial system.
Appointed by President George Bush he continued to serve under President Barrack Obama, and was re-appointed by President Obama to a second term four years ago.
On Friday Ben Bernanke gave a farewell speech at the Annual Meeting of the prestigious American Economic Association in Philadelphia. The US Federal Reserve has posted the contents of his speech in full at their web site, and those interested in the whole transcript can find it here: http://www.federalreserve.gov/newsevents/speech/bernanke20140103a.htm. It is very well worth reading in full.
In his remarks Governor Bernanke surveyed the territory he had covered during his tenure, with particular focus on, transparency and accountability; the general subject of financial stability and financial reforms; and, monetary policy itself. Afterwards he concluded his survey by giving some thoughts on the current general economic prospects for the United States and global economies.
With respect to the subject of transparency, Bernanke noted that during his term the Fed now publicly identifies its policy goals and has raised its level of communications of its policy discussiosn and explanations, in order to have as fully explored a level of discourse as possible.
Concerning financial stability the most important event of the past eight years was for him, of course, the global financial crisis and the deep recession that it triggered. Bernanke observed that the crisis bore a strong resemblance to a classic financial panic, except that it took place in the complex environment of the 21st century global financial system.
He also confirmed that the tools used to fight the panic, though adapted to the modern context, were analogous to those that would have been used a hundred years ago too, including liquidity provision by the central bank, liability guarantees, recapitalization, and the provision of assurances and information to the public.
With respect to monetary policy itself Bernanke speaks very articulately about a very arcane subject, pointing out that in response to the crisis the Fed reduced the target federal funds rate from 5-1/4 percent in the summer of 2007 to a range of zero to 1/4 percent by the end of 2008.
Once you hit zero, monetary policy becomes constrained by what is known as the “zero lower bound”, with the potential for a liquidity trap as Keynesian economists put it, and who have seen their “brand” of economics resurgent again as a result of this crisis.
Bernanke’s own response to this constraint however has been innovative, pushing the Federal Reserve towards two alternative tools: enhanced forward guidance regarding the likely path of the federal funds short term interest rate and large-scale purchases of longer-term securities for the Federal Reserve’s own portfolio.
He points out that other major central banks responded to the crisis in roughly similar ways, including both the Bank of England and the Bank of Japan, who have employed detailed forward guidance and conducted large-scale asset purchases.
According to Bernanke, with short-term rates near zero, expanded guidance about intentions for future policy has helped to shape market expectations, which in turn has eased financial conditions by putting downward pressure on longer-term interest rates and helped support economic activity.
There are of course limits on the role of expectations about monetary policy and their impact on behaviours by market participants, but there is no doubt the policy of Bernanke has played an important role.
Bernanke was upbeat about what has already been accomplished, with some caveats that more could have been done, and he is optimistic about the future as well.
He points to the 7½ million jobs that have been recovered in the United States since the trough of the recession, and the restoration of Gross Domestic product (GDP) already to 5½ percentage points above its pre-recession peak. He points to the fall in the unemployment rate from 10% to 7% that goes with those numbers.
Bernanke also notes that industrial production and capital investment by firms in new equipment have matched or exceeded pre-recession peaks as well. Finally he notes that the banking system has been recapitalized, and the financial system is safer than before.
To cap the achievements during his watch, for that is what these statistics all reflect after all, though he is much too modest to directly so aver himself, Bernanke points out with a good deal of understatement that when the economy was completely falling apart in late 2008 and early 2009, such improvement was far from certain. At that time stock prices were nearly 60 percent below current levels and there were much wider spreads in credit and derivatives markets.
Even so Bernanke quickly goes on to point out that at 7% unemployment is still too high and there are, as well, far too many long term unemployed. Furthermore a lower current labour force participation rate, which skews the statistics to an extent, reflects the fact that some people have simply withdrawn from the labour market itself, completely discouraged.
So for Bernanke there is plenty of work yet for economic policy makers to do, before the economy can achieve its human potential, even recognizing the complexity of the impact of difficult recessions on subsequent recoveries.
However here he is also quite critical of the role of policy makers in his own government, for reversing direction in fiscal policy too early. This criticism has also been laid by several liberal economists, notably including Nobel prize winning economist Paul Krugman. This is how Bernanke put it, directly in his own words on Friday:
“ Federal fiscal policy was expansionary in 2009 and 2010. Since that time, however, federal fiscal policy has turned quite restrictive; according to the Congressional Budget Office, tax increases and spending cuts likely lowered output growth in 2013 by as much as 1-1/2 percentage points. In addition, throughout much of the recovery, state and local government budgets have been highly contractionary, reflecting their adjustment to sharply declining tax revenues…”
And again here:
“Although long-term fiscal sustainability is a critical objective, excessively tight near-term fiscal policies have likely been counterproductive. Most importantly, with fiscal and monetary policy working in opposite directions, the recovery is weaker than it otherwise would be. But the current policy mix is particularly problematic when interest rates are very low, as is the case today. Monetary policy has less room to maneuver when interest rates are close to zero, while expansionary fiscal policy is likely both more effective and less costly in terms of increased debt burden when interest rates are pinned at low levels.”
In the polite language of high level bureaucrats that is a direct salvo aimed at the United States Congress, though one delivered more in sadness than in anger given all the political complexities of which he is well aware.
Even so, when he moved to speak of the future in his speech Bernanke believes the outlook for the US economy in 2014 and 2015 should continue to be an improving one, though he recommends an extra dose of prudence in belief in forecasts is required, given the recent past. He believes there are also signs of positive momentum in other advanced economies as well, including Japan and within the European Union.
Finally in his speech Bernanke notes the recent centennial of the Federal Reserve system itself and paid tribute to all the brilliant men and women who have served the institution throughout its history.
A formidable farewell speech, given by a formidable Governor of the US Central Bank. Janet Yellen clearly has big shoes to fill now, though most observers indeed seem to believe she will do so with distinction.