As the year draws to a close, so too does the career of Ben Bernanke, the soon-to-be retired Chair of the Federal Reserve. Given the power, authority, and prestige of the office, the Fed Chair is often a lightening rod for criticism. Add in conspiracy theories, economic cycles, a Congress often out of touch, and it’s easy to see that working as the Federal Chair will result in more than a few frayed nerves and grayed hairs. Yet when the economy is booming, the Fed Chairman can assume a new celebrity status, as was evident with Alan Greenspan. So what legacy will Ben Bernanke leave behind?
When Bernanke came into office in 2006, the United States was at the tail end of one of the longest periods of prosperity and economic growth in its history. The roaring 1990’s’s enjoyed a massive economic expansion fueled by advances in technology and the end of the Cold War. The early 2000’s proved to be more turbulent, but in reality they were the calm before the storm. Bernanke and other political leaders, however, did not see the brewing storm.
Bernanke helped world avoid financial meltdown
Bernanke, along with others, was confident that the mounting problems in the United States housing market would fix themselves, and that the fallout would not be severe. The United States had been enjoying 15 years of economic expansion, so perhaps housing prices had gone too high, but the market could moderate the issue. What Bernanke failed to see was the extent of the mounting losses, the depths of illegal acts and moves on the part of financial institutions, and how the derivatives market had tied numerous companies together and set them up to fail.
The markets didn’t correct themselves, but what could have been Bernanke’s moment of defeat, turned out instead to be perhaps his greatest triumph. With financial markets around the world on the verge of collapse, Bernanke and others acted quickly to inject liquidity into markets, prop up failing financial institutions, and most importantly, proved to traders and governments around the world that the United States was ready to step up and confront the crisis.
David Einhorn's Greenlight Capital returned -2.9% in the second quarter of 2021 compared to 8.5% for the S&P 500. According to a copy of the fund's letter, which ValueWalk has reviewed, longs contributed 5.2% in the quarter while short positions detracted 4.6%. Q2 2021 hedge fund letters, conferences and more Macro positions detracted 3.3% from Read More
Bernanke couldn’t the revive economy
Despite his success in averting a financial meltdown, many members of Congress and various pundits have slammed Bernanke for acting too slow, or else not doing enough, or conversely for interfering with markets at all. Stuck in a “damned if you do, damned if you don’t” conundrum, Bernanke continued to try to engineer an economic recovery. Using a new technique, quantitative easing, Bernanke manged to unlock liquidity and to get money flowing again. The economy began to stage a slow recovery, but the hoped for economic surge never materialized.
The biggest knock against Bernanke may be that he has as of yet failed to solve the myriad of problems facing the United States and the global economy. Undoubtedly, Bernanke averted disaster and a full-on financial meltdown that could have literally destroyed the world economy. Yet unemployment remains high, economic growth has been sluggish, consumer spending is stagnant, and a host of other factors suggest that while the United States averted disaster, challenges remain.
Further, many of the laws and policies that helped create the last economic disaster are still on the books. The Chairperson of the Fed cannot write laws, but his/her voice and opinion can weigh in heavily on the shaping of public policies in Congress and the White House. While Greenspan was known for being vocal in shaping policy, Bernanke appeared more willing to leave the task to Congress.
Bernanke’s take on world economic theories
Bernanke’s struggles also suggest that the world’s economic theories may not be close to being complete. Time and time again, markets and economies have proven to be unresponsive or unpredictable, defying what economies theories predict that they would do. With countries across the West struggling to spur economic growth, and many emerging markets still suffering setbacks, it seems that so far no one has yet unlocked all of the secrets of the global economy.
Bernanke will likely be remembered for averting the financial crisis, but perhaps not much else. An adroit scholar on the Great Depression, Bernanke knew what needed to be done to avoid a financial collapse. What he didn’t know, and perhaps no one else knows, is how to engineer a sustained economic recovery.