Ben Bernanke is expected to step down at the end of his second full term as chairman of the Federal Reserve and there is already rampant speculation as to who will be his successor. Top contenders include Fed insiders Janet Yellen and Donald Kohn, as well as former Treasury Secretary Lawrence Summers. The end of Bernanke's tenure will be a milestone for both the Federal Reserve and the nation. What will history eventually say about the man who presided over the worst economic crisis America has faced since the Great Depression and where will he be placed among his influential predecessors?
Ben Bernanke was already a household name when I was a first year graduate student at Northwestern University, 20 years before his appointment as Fed chairman. His seminal research on macroeconomics and, in particular, the nature and causes of the Great Depression were required reading at many universities. Years later I had the opportunity to be Bernanke's colleague when he hired me as a visiting professor at Princeton. As department chairman, he guided me on the finer points of instructing Princeton students and trusted me to teach their course in Money and Banking. Bernanke had spent most of his career as an academic and many, including me, had no idea that he would become the "second most powerful person in the country."
During Bernanke's tenure, we have seen the largest increase in the unemployment rate under any single Fed Chairman since Great Depression. He will also be the first to leave with a higher unemployment rate than when he took office since Arthur Burns 35 years ago. But these facts do not do justice to his record any more than defining Lincoln or FDR's presidency by the number of wartime causalities that occurred during their terms. Like those leaders who were forced into action by a national crisis, Ben Bernanke will be indelibly tied to a nation on the brink of economic collapse.
In the midst of this perfect storm, it is hard to imagine anyone other than Ben Bernanke at the helm of the Federal Reserve. He was simply the right person at the right time for the job.
And this is high praise in light of Fed giants Paul Volker, the inflation hawk who steered the economy out of the stagflation of the 1970s and the last great recession, and Alan Greenspan, who presided over the 1987 market crash, two economic recessions, and the 9-11 terrorist attacks. With the daily movement of financial markets hinging on the parsing of his every word, Greenspan wielded more influence than any of his predecessors and attained celebrity-like status in financial and political circles. While Volker and Greenspan utilized the federal funds rate as their instrument of monetary policy, Bernanke found that these traditional weapons were ineffective against the impending economic disaster. Forced to use methods unheard of in the history of the Fed, he was the first chairman to implement quantitative easing, the unprecedented Fed purchase of billions of dollars of mortgage-backed securities and long term treasuries.
Bernanke showed true leadership through these very bold and courageous acts at a time when many on Capitol Hill, accusing him of falling asleep at the wheel by not foreseeing the sub-prime mortgage crisis and exacerbating a "too big to fail policy" by bailing out Wall Street, demanded his resignation.
Of course, the wisdom of these policies will ultimately rest on how the U.S. economy has and will respond to the drastic measures taken by Bernanke and the Fed. Where would we be today without these aggressive and unconventional monetary policies? Would the unemployment rate have reached 25 percent or stay above 10 percent for a decade, as it did during the Great Depression? Would the housing market have come back so resiliently without the historically low mortgage rates attained by quantitative easing? Counterfactual questions like these are always difficult to answer but I think it is fair to say that economic conditions would most certainly be much worse without these innovative and historic actions.
However, these policies have also more than tripled the Federal Reserve's balance sheet and Bernanke has faced more dissension among his own ranks than any previous Fed chairman, with at least one dissenting vote cast at more than half of the Federal Open Market Committee meetings that he has presided over. To quote renowned economist Milton Freidman, inflation is almost everywhere a monetary phenomena. Without an appropriate exit strategy rising prices will be a severe problem that could jeopardize the economic recovery and unravel all that Bernanke has worked so hard to accomplish.