Ben Bernanke could still cause an economic crash

When Ben Bernanke steps down as chairperson of the United States Federal Reserve this week, having presided over his final committee meeting, the sniping might stop.

Every time he makes a public appearance in his Fed role, there are dozens of pundits and politicians waiting to pour vitriol on his head.

Critics of his eight-year stint give vent at the mention of his name, such is their anger at his concern for the unemployed and families threatened with the loss of their homes.

His rescue of the US financial system in 2008, and his part in defeating a global banking collapse, is put to one side by those who argue that his policies since the dicey moments before and after the collapse of Lehman Brothers have undermined the dollar and slowed the recovery.

Like a patient given a strong dose of antibiotics, the US economy is considered by this vociferous group of right-wingers to be hooked on powerful drugs that, as time goes on, make it weaker, not stronger.

A measure of the criticism is former presidential candidate Mitt Romney's threat to sack him for the crime of zealously and recklessly printing money. Texas governor Rick Perry warned Bernanke against pursuing a monetary policy that would be "treasonous". A South Carolina state senator called him a "traitor" bent on "rotting out our republic".

Bring back the gold standard, sound money and an end to excessive borrowing, they said, and still do.

On the left, he is accused of rescuing the banks without strings attached. It may have been then-treasury secretary Tim Geithner's decision to underwrite the banking sector, but Bernanke is regularly branded lord protector of Wall Street and its bonus culture. In a few days he will step down with the thanks of his president, who has relied on cheap central bank funds to lubricate the economy in his battle with a cost-cutting Congress.

Bernanke has embraced a new role for the world's central banks – to be the canary signalling not just inflationary pressures but also potential asset bubbles. This dual role was one he rejected in his early years at the Fed, which dates back to his appointment to its board of governors in 2002 and elevation to the chair in 2006.

Before the crash he was an inflation watcher. Like his counterparts in the eurozone and Britain, he was deaf to fears that ballooning house prices and rocketing share values were bubbles ready to burst.

Dangerous thinking
It ranks as the chief criticism of his early years in the post and reflects the dangers of group-think among those who sit at the policymakers' top table.

When trouble started to brew, he joined Geithner in the failed tactic of bolting together failed banks.

But once they had been rescued, banks still needed help to perform their basic function. Lending was their stock in trade and needed to be supplemented by central bank funds.

Quickly Bernanke adopted quantitative easing (QE), which saw the Fed entering the market to buy up US government and mortgage debt, hoping financial institutions would then convert the proceeds into additional loans to households and businesses. In the intervening five years he has thrown about $3-trillion at the US economy to maintain a flow of credit.

In the 1990s, while an economics professor at Princeton, Bernanke blasted the Japanese central bank for its timidity after the Tokyo property crash. He acquired the nickname Helicopter Ben for recommending it offset a large tax cut by buying an equivalent amount of government debt, a plan that he described as a "helicopter drop of newly printed money".

Timid route
A right-wing Congress was never going to allow it and it was never formally proposed, leaving Bernanke to steer a course between right-wing accusations of profligacy and charges from the Keynesian left that his timidity restricted growth and depressed the jobs market.

Through it all he has refused to take on his critics in anything other than measured tones. As he leaves, the US is recovering strongly and the pace of QE expansion has slowed from $85-billion a month. His successor, Janet Yellen, is expected to bring QE expansion to an end and hand responsibility for expanding credit back to the private sector.

But Geithner's tactic of letting bankers resume business in a largely unreconstructed financial system – while asking the Fed to keep a watchful eye – is risky when banks refuse to adopt conservative strategies and workers rely on assets such as shares and property to pay the bills. The Bernanke years could lead inexorably to another crash. – © Guardian News & Media 2014

Subscribe to the M&G

These are unprecedented times, and the role of media to tell and record the story of South Africa as it develops is more important than ever.

The Mail & Guardian is a proud news publisher with roots stretching back 35 years, and we’ve survived right from day one thanks to the support of readers who value fiercely independent journalism that is beholden to no-one. To help us continue for another 35 future years with the same proud values, please consider taking out a subscription.

Related stories

Reserve Bank leaves repo rate unchanged, warns of risks to the rand

The MPC decided unanimously to leave the benchmark repurchase rate at 7%.

More pain in store for SA with US Fed rate hike

South Africa is among the developing nations who will be worse affected by the US tightening - the first rate hike in seven years.

Mario Draghi unleashes fresh wave of monetary stimulus

Fed chair Janet Yellen's raising of US interest rates has prompted the European banker to loosen monetary policy to stimulate consumer prices.

US Fed walks tightrope on rate hike

The Great Depression is on people's minds as the US weighs the risk of premature policy tightening.

Yellen’s over, now the work begins

Reversing QE has begun and the challenge now is for the Fed's new chairperson to keep it in check.

Dollar strengthens as emerging market selloff deepens

Further tapering of monetary stimulus, announced by the US Federal Reserve, has seen the dollar climb while other currencies feel the pressure.

Treasury presents Covid-19 corruption action plan

Reports of corruption, over-pricing and the delivery of sub-standard PPE have become the norm over the past five months as the country grapples with the Covid-19 pandemic

Metro cops, SAPS clash over control

Tensions between the City of Cape Town and the police service over responsibilities mirrors the strain between national and local government

press releases

Loading latest Press Releases…

The best local and international journalism

handpicked and in your inbox every weekday