21st CENTURY MONETARY POLICY
The Federal Reserve From the Great Inflation to Covid-19
By Ben S. Bernanke
The world has confronted two acute crises in the past 15 years. In 2007, a housing bubble in the United States brought on the worst financial panic since the Great Depression. In 2019, a novel coronavirus in China set off the deadliest pandemic in a century.
During the first of these crises, Ben S. Bernanke was the primary policymaker overseeing the United States government’s emergency response. Shortly before the panic began, President George W. Bush appointed Bernanke to be the chair of the Federal Reserve, a job he would hold for the next eight years, through the end of Bush’s presidency and most of Barack Obama’s. Bernanke ran the Fed as it made decisions about how to prevent a new depression.
He and his colleagues largely succeeded. In the early month of the crisis, economic activity deteriorated even more rapidly than it had in 1929 and 1930. Yet neither the United States nor the world fell into a depression: The unemployment rate peaked at 10 percent in 2009, compared with 25 percent in 1933.
Bernanke’s success sprang from a few core causes. He came to the job with decades of preparation. He started studying the Fed when he was an economics graduate student in the 1970s, after Stanley Fischer, a distinguished professor, encouraged Bernanke to read a history of monetary policy and see if it intrigued him. He rose to become one of the field’s leading scholars as a professor at Princeton. In 2002, he left Princeton to become a Fed official and then spent seven months as an economic adviser in Bush’s White House, which gave him a firsthand view of the executive branch’s operations. By the time the financial crisis began, he had both a rigorous knowledge of Fed history and theory and a grasp of real-world politics.
In public, Bernanke has always resembled a professor more than a powerful political leader. He is bearded and soft-spoken. He speaks carefully, giving the impression of thinking through an issue while he is talking about it. Yet his style can be misleading. He proved to be a daring Fed chair, willing to take unparalleled steps during the crisis, acting decisively and operating in the gray areas of the Fed’s authority. In doing so, he was following an American tradition of experimentation during an emergency that is most associated with President Franklin D. Roosevelt.
Bernanke has now published “21st Century Monetary Policy,” a history of the Fed over roughly the past century. (Despite the title, he devotes considerable space to the 20th century.) It comes after a personal memoir, published seven years ago. In this new book, he considers both his own tenure and those of his predecessors and successors. It is light on personal anecdotes and devoted to substantive judgments. This exercise of historical assessment from a central participant is one that more policymakers should probably try. It allows readers to make judgments along with Bernanke and think about what lessons today’s policymakers — who are once again battling inflation — might take.
Even in his restrained style, Bernanke offers criticisms. The book’s antiheroes are Arthur F. Burns (the Fed chair who did not confront rising inflation in the 1970s); Donald J. Trump and Richard Nixon (presidents who tried to intimidate Fed leaders); and modern-day congressional Republicans (some of whom he views as more concerned with partisan advantage than the country’s well-being). Bernanke offers a mixed judgment on Alan Greenspan, who presided over a 1990s boom but also missed the gathering signs of crisis in the early 2000s and, unlike Bernanke, aggressively pushed his personal preference for low taxes. The policymakers who come off best are Paul A. Volcker, the Fed chair who crushed inflation after Burns, as well as Obama and Janet Yellen, Bernanke’s successor and the current Treasury secretary. That these three all are or were Democrats (Volcker is deceased) is a sign of how far today’s Republican Party has moved from restrained conservatives like Bernanke.
Bernanke also offers some self-criticisms, including an acknowledgment that he failed to recognize how slowly the economy was emerging from recession after the emergency. Had he read the situation correctly, Bernanke says, the recovery probably would have been stronger.
The one area where the book would have benefited from more introspection is economic inequality, which Bernanke largely dismisses as beyond the Fed’s mandate. Although he is correct that the central bank cannot solve the problem, it does have relevant tools, like its influence over financial markets, bank regulation and the housing sector. Instead, by treating stagnant working-class living standards as a sideshow, the Fed has contributed to the rise of populist anger that Bernanke laments.
Even with these caveats, “21st Century Monetary Policy” tells a success story, and deservedly so. Bernanke’s Fed performed far better than the institution had during previous economic crises, like the Great Depression and the 1970s oil shocks. It did so because Bernanke and his colleagues learned from the mistakes of their predecessors and were willing to overcome the torpor that can afflict large bureaucracies. They asked themselves what they could plausibly do to help — like purchasing mortgage-backed securities to halt a financial panic — and they did it. The title of his 2015 memoir was apt: “The Courage to Act.”
Bernanke did not always find this approach comfortable. “In my time as chair of the Princeton economics department, I had led with a deliberative, consensus-building style, and I had tried to bring that approach to the Fed,” he writes. “But, with markets in disarray and every economic indicator pointing down, that approach fell by the wayside, at least for a time.” Bernanke understood that deliberative caution during a crisis could lead to more human suffering.
In a more lasting change, and a break with Greenspan’s Fed, Bernanke also pushed the Fed to explain its actions more clearly to the public. He began holding regular news conferences and released more information about Fed deliberations. He tried to explain decisions in plainer English.
Anybody reading his book today, during the Covid-19 pandemic, may notice that its message applies to more than monetary policy. The Centers for Disease Control, the Food and Drug Administration and other agencies have often failed to act decisively or to speak clearly over the past two and a half years. Their advice — on masking, quarantines, booster shots, at-home tests and more — can be impossible for ordinary people to understand. And at important moments, federal agencies have followed bureaucratic traditions unsuited for a crisis. The clearest contrast to the Bernanke Fed is probably the F.D.A.’s hewing to a version of its lengthy, prepandemic process for vaccine review, which created the jarring contrast of government officials urging Americans to take a vaccine although those same officials had refused to grant the vaccines formal approval. Evidently, they did not have the courage to act.
When explaining the Fed’s failures during the Great Depression, Bernanke writes of “its decentralized structure and lack of effective leadership.” Those failures led to a 1935 federal law that created a clearer structure for the Fed, which in turn helped Bernanke to act boldly and creatively. His book is intended to help future generations of economic policymakers, and it probably will. But they are not the only ones who would benefit from thinking about its lessons.
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