Farewell, Ben

12.19.13

Bernanke Drop the Mic as He Exits the Fed

The charisma-free Federal Reserve chief looks a little wearier after a tumultuous term. But he’s offering his successor, Janet Yellen—and the markets—a going-away present.

Not with a whimper but a bang.

That’s how the tenure of Ben Bernanke at the helm of the Federal Reserve effectively ended Wednesday.

The unassuming, charisma-free central banker never set out to be a player the way his predecessor Alan Greenspan did. But the strange circumstances of Bernanke’s era—the insane financial crisis, the deep recession, an expansion plagued by fiscal shenanigans—forced him to push the Federal Reserve into markets, the economy, and into the public consciousness in unprecedented ways.

Because of the unorthodox measures the Fed took—putting short-term interest rates at zero and leaving them there for years, bailing out the insurance company AIG, purchasing massive quantities of bonds and mortgage-backed securities in an effort to keep long-term interest rates low—Bernanke was compelled to explain to the public why the central bank was doing what it was doing. That’s why he began the new tradition of holding press conferences to coincide with meetings of the Federal Open Market Committee in the spring of 2011.

The Bernanke who sat on the dais on the third floor conference room of the William McChesney Martin Building on Wednesday was a little wearier than the one who took the helm of the Fed in 2006. His beard is now white. But he delivered his remarks in the same low-affect, wobbly-voiced delivery to which Fed watchers have become accustomed. “Good afternoon,” he said. “The economy is continuing to make progress, but it has much farther to travel before conditions can be judged normal.”

Bernanke didn’t offer a valedictory or any deep personal reflections on his tempestuous tenure. He offered a few regrets. “Obviously, we were slow to recognize the crisis,” he said. “I was slow to recognize the crisis.” Looking back, he said, it was difficult “for a historian like me to see” the ways in which newfangled instruments and institutions might affect the economy.

But he did present the markets—and his successor, Janet Yellen—with a going-away present. The Federal Open Market Committee announced that starting in January, the Fed will scale back, or taper, its program of bond-buying from $85 billion a month to $75 billion a month. This slight easing of the gas pedal is a sign the economy is finally responding to the Fed’s ministrations with sufficient vigor. And it paves the way for the Fed to begin to extract itself from the massive interventions.

After four years of a halting recovery, Bernanke said, things are looking up. Unemployment is down, business investment and household spending are rising. Inflation remains completely under control. The markets and the financial system are in very good shape indeed. Given where we were, and how similar countries are doing, things are not bad—with the exception of the employment picture.

When he fielded the last question and walked off the stage, there was no applause from the press corps. But in the markets, traders clapped loudly.

Beyond the stubbornly high rate of unemployment, Bernanke’s major complaint—made a little more explicitly on Wednesday, perhaps because he’s just about done—is with fiscal policy. Bernanke had the misfortune to run the Fed at a particular economic and political moment. Because the recession was preceded by a reckless accumulation of debt and a financial crisis, it took a long time for the economy to dig out. And even as conditions improved, consumers and companies continued to reduce debt—thus reducing demand and the overall level of economic activity.

At the same time, the government—which is supposed to counteract the contractionary tendencies of the private sector and work in tandem with the Federal Reserve to goose the economy—has been acting as a drag on growth. Yes, President Obama and Congress passed a large stimulus bill in 2009. But by 2010, it was effectively done. And since then, relentless cuts at the state and local level, federal budget cuts, the sequester, the debt brinksmanship, the shutdown, and the tax increases associated with the fiscal cliff have helped stymie the Fed’s efforts.

The Fed’s statements in recent years have generally included anodyne language about “fiscal headwinds.” But Bernanke was more explicit than usual in his criticism of Congress and governments. “People don’t appreciate how tight fiscal policy has been,” he said. At this point in the post-2001 economic expansion, government had added 400,000 positions. But in the current expansion, government employment is down 600,000. “So that’s a difference of 1 million jobs,” he said.

Bernanke also took a few swipes at his vocal Republican critics. Bernanke served in the Bush White House and was first named to the Fed by Bush. But once Obama came into office, Bernanke became something of a villain to many on the right. The gold bugs and hard money types hated him because they believed the vast expansion in the money supply would ignite inflation. (It didn’t.) The regulars came to loathe him because Obama reappointed him, and his efforts to bolster economic growth would inevitably benefit the president. During the 2012 campaign, Mitt Romney vowed he would replace Bernanke. On Wednesday, Bernanke threw some shade at the libertarian critics. “There’s this notion that the Fed isn’t audited and that we have secret books and this kind of thing,” he said dismissively. He noted that the Fed had turned over well over $300 billion in profits to the Treasury since 2009, which has helped bring the deficit down. And he reiterated a plea for congressional leaders to work on more constructive fiscal policy.

Bernanke used all the tools at his disposal and invented some new ones. But they were confined within a relatively narrow sphere—lowering interest rates on fixed-income assets as a way of pushing up the prices of other assets such as stocks, houses, and commodities. Those reflation efforts worked extremely well. But they mostly benefited those who already owned assets and those who were able to borrow lots of money for very little. To a degree, then, the Bernanke years were ones in which asset inequality helped produce greater income inequality. But the Fed couldn’t do much to get companies to hire more people and pay them better wages. And Bernanke was generally powerless to get Congress to throw its weight full-square behind the recovery efforts.

When he fielded the last question and walked off the stage, there was no applause from the press corps. But in the markets, traders clapped loudly. They took the tapering announcement as a sign that the economic expansion is getting its legs under it and that it will be supported more by real demand than by the Fed’s artificial support. The Dow Jones Industrial Average soared nearly 200 points, closing above 16,000.