The Double Legacy of Dr. Ben and Mr. Bernanke

No one was better qualified than Ben Bernanke to guide the central bank of the United States during the crisis. Nevertheless, his salvaging action could weigh heavily on the future.

An indefinite chance, an unknown risk. As he leaves his posh office in the Eccles Building, where the U.S. Federal Reserve is, Ben Bernanke leaves a double legacy over a two-term period. Never in economic and financial history has one man played such a crucial role in avoiding the fall into an abyss. Neither has one man ever left behind such a debt. In a certain way, his legacy resembles his predecessor Alan Greenspan’s, but to the tenth power.

From the beginning, “the right man in the right place at the right time.” This expression seems to apply to Greenspan. Nominated Fed chief in August 1987, from his arrival he asked his team to explore the scenario of a stock market crash. On Oct. 19, the Wall Street stock exchange plunged by 23 percent. Greenspan turned on a great stream of oxygen to avoid a financial suffocation. The crash did not leave a single mark on an American economy on the rise by 4 percent in 1988.

However, Ben Bernanke was much better prepared to live the unimaginable. He had spent his whole life as a researcher working on great financial crises. This economics professor graduated from Stanford before being named professor at Princeton and spent two decades studying the policies of the Fed following the 1929 crash and one decade examining those of Japan after the crash of 1989. He knew then that he must conduct action forcefully, quickly and creatively. In November 2002, he said as much during his speech “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” Therefore, he ended up coming to the Fed as a “governor.” At the beginning of 2006, when he became chief, he knew all the cogs in its machinery. No one was better qualified than he was to guide the U.S. central bank through the craziest of financial storms.

From the moment Lehman Brothers declared bankruptcy on Sept. 15, 2008, Bernanke jumped to the fore. On [Sept.] 16, the Fed loaned $85 billion to the U.S. government to bail out the insurance company AIG. It turned on the liquidity stream for banks. Three weeks later, it lowered its guiding interest rate from 2 percent to 1.5 percent — in December, it would reduce it to 0 percent — and bought treasury bonds from companies. Through a forced step, it guided the restructuring of the banking scene. Reflecting the audacity of its directors through a policy that had become “unconventional,” new terms enriched the lexicon of the central bank: ZIRP, QE, twist …. The Fed bought stocks, private as well as public options. Print money to finance the government! This is the last taboo of central banks; it is prohibited in the euro zone. With his expertise, Bernanke managed to convince the committee that oversaw monetary policy.

The basics of his program were sketched out in 2002, for it was never finished to have been put into action, with the exception of two measures: a 40 percent devaluation of the dollar and the famous dropping off of banknotes by helicopter, which the economist Milton Friedman proposed not too long ago and earned Bernanke the nickname “Helicopter Ben.” And this never happened. Activity picked up again in summer 2009. Prices went back to rising at the end of the year. Having peaked at 10 percent, unemployment ended up going back to below 7 percent, as opposed to 20 percent during the Great Depression of the 1930s. Ben, the unconventional, managed to thwart the crisis as it was understood. And exactly at the end of his term, he lifted the roof tile covering his remarkable edifice of measures.

Ben Bernanke’s nomination to the Fed will maybe go down in history as the best decision by George W. Bush — even more so because he survived. The U.S. did not have this luck in the 1920s. The strongman of the Fed during this era was Benjamin Strong, chief of the New York Federal Reserve. One of the architects of the central bank created in the previous decade, he was very concerned about the liquidity of the banks and price stability. However, tuberculosis took him in 1928. Monetary power tipped over to Washington, where the leaders of the Fed had no knowledge of markets or banks. After having turned on the stream of liquidity after the crash of 1929, they shut it down again to fight off speculation in order to keep gold within the United States, causing a terrible crisis.

However, Bernanke’s remarkable action has also left behind a debt without precedent. Before him, Alan Greenspan had also certainly left behind a major problem. While significantly lowering interest rates to fight off the damages caused by the explosion of the 2000 Internet bubble, he had launched the inflation of the next bubble, in real estate and in banking. However, Bernanke was not satisfied just lowering interest rates. The Fed holds more than $3.8 trillion in financial assets. The U.S. economy, which experienced a crisis of overindebtedness, started up again thanks to a pick up in indebtedness. Several indicators point to a stock bubble. No one can seriously say what will happen when the Fed sells its assets, or if the activity can sustain higher interest rates. While fighting the crisis with new tools, Bernanke has created the conditions for a new bubble that risks popping sooner or later. Like Greenspan, he played at sorcerer’s apprentice, with two major differences nonetheless: At the beginning, he put into action much more powerful means, risking causing much greater imbalances. Then, Greenspan acted according to ideology. He was convinced that markets would reach equilibrium. Bernanke, on the other hand, acted out of pragmatism to avoid the worst. In the event of a new explosion, it is up to history to grant him his forgiveness.