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How economists grade Ben Bernanke’s Federal Reserve tenure

January 31, 2014 at 6:13 PM EDT
After eight years, a financial crisis, a Great Recession and an economic recovery, it is Federal Reserve chairman Ben Bernanke’s final day on the job. Economics correspondent Paul Solman looks back at Bernanke’s performance for an assessment of his legacy by two economists.

JUDY WOODRUFF: Part of the turmoil in the markets of late, especially emerging ones overseas, has to do with the Federal Reserve’s decision to start pulling back on its stimulus. That’s led to worries about what may happen to capital and investment in some countries.

But the Fed’s decision comes after years of unprecedented moves to prop up the economy. The man at the center of that action, chairman Ben Bernanke, is ending his term today.

NewsHour economics correspondent Paul Solman looks at his legacy and the questions awaiting his successor. It’s part of his reporting on Making Sense of financial news.

PAUL SOLMAN: Ben Bernanke, TIME’s 2009 person of the year for saving the U.S. economy, in 2012, still a hero on the cover of The Atlantic.

But as that magazines cover also asked: Why does everyone hate him? So, hero or zero? Rather than trawl the darker corners of the Internet, we thought we’d ask two professional economists, on the right and left, to grade Bernanke’s performance.

ALAN BLINDER, Princeton University: I give him for his whole tenure an A-minus.

PAUL SOLMAN: Economics professor Alan Blinder, a past vice chairman of the Fed, hired Ben Bernanke at Princeton, so, of course, he’s biased. But in his post-crash bestseller, “After The Music Stopped,” even Blinder takes Bernanke to task for letting Lehman Brothers fail, freezing credit worldwide. That lowers the grade from a straight A. or A-plus.

ALAN BLINDER: The Lehman episode just sticks in my craw, not to save Lehman or put them to bed in a more gentle way. This is a joint mistake of Ben Bernanke and Hank Paulson, who was secretary of the Treasury, but it was very consequential. I mean, as you know, all hell broke loose the very next day.

PAUL SOLMAN: But at a televised town hall in 2009, Bernanke told Jim Lehrer that the Fed didn’t have the legal authority to intervene in an investment bank like Lehman.

BEN BERNANKE, Federal Reserve Chairman: In the case of Lehman Brothers, there was just a huge $40 billion, $50 billion hole that we had no way to fill and no money, no authorization, no way to do it, so we had to let it fail. We had no choice.

PAUL SOLMAN: To Blinder, though, the government made up all sorts of tools during the crash.

ALAN BLINDER: Guess what? They had the legal authority to save the money market mutual funds by using something called the Exchange Stabilization Fund, which is supposed to be to support the dollar. Now, how did that work? But somehow the Treasury’s lawyers koshered that, when just a few days before nobody was koshering a saving of Lehman, so I count that as a mistake.

PAUL SOLMAN: But the rest of his tenure, you give him an A.?

ALAN BLINDER: My grading system says let’s take Lehman day plus three or something, just a few days after Lehman. Grade him from that point forward, yes, I give A-plus.

PAUL SOLMAN: And that’s pretty much the mainstream opinion of Bernanke’s role in saving our economic bacon.

FILM: “I spent my entire academic career studying the Great Depression.”

PAUL SOLMAN: The closest thing to fly-on-the-wall footage of the Crash: Paul Giamatti’s portrayal of Bernanke in the HBO film, “Too Big to Fail.”

FILM: “If we do not act boldly and immediately we will replay the depression of the 1930s. Only this time it will be far, far worse. If we don’t do this now we won’t have an economy on Monday.”

PAUL SOLMAN: And so, starting that weekend, the Fed, in conjunction with the Treasury Department, took historically unprecedented action.

It bailed out the insurance giant AIG, slashed short-term interest rates to zero, used its emergency powers to launch a passel of programs that rescued key markets in short-term lending, mortgages, student loans, pumped a trillion new dollars into the economy.

When push came to collapse, even conservative economist Charles Calomiris thinks Bernanke saved the day. But how does he grade Bernanke’s entire chairmanship, which kicked off exactly eight years ago tomorrow?

CHARLES CALOMIRIS, Columbia University: Let’s take it as three semesters. The semester that begins in September of 2008 and ends middle of 2009, I would say he gets very high grades, maybe even a straight A., but the semester before that, I would give him maybe a C-minus. And the semester since 2010, let’s say, I would say incomplete.

PAUL SOLMAN: The C-minus is for Bernanke’s stint pre-crisis. Calomiris points out that he joined the Fed’s Board of Governors back in 2002, became chairman in 2006, and yet never in all that time pushed to clamp down on the promiscuous lending that helped cause the crash.

CHARLES CALOMIRIS: I think that the Fed was far too late in recognizing problems after 2006 and doing something about them. The banking crisis wasn’t a surprise. The banking crisis was the culmination of that erosion in the creditworthiness of the banks.

PAUL SOLMAN: So we asked Alan Blinder, what about the charge that before the crisis, when the housing bubble was obvious to a lot of people, and the Fed did absolutely nothing about it?

ALAN BLINDER: Bernanke becomes chairman of the Fed February 1, 2006. So this process had gone pretty far by then.

In addition, try to put yourself in his shoes. And I have thought about this a lot. You’re taking over from a person, Alan Greenspan, who has been deified. You become chairman of the Fed. Are you going to walk in the office and say, OK, now everything’s different, right? I’m taking over from God and I’m changing everything. I think that would have been asking too much of anybody. I don’t think anybody would have done that.

PAUL SOLMAN: So, mixed grades before the crisis, high grades during, but what about the Fed’s policy ever since, so-called quantitative easing, in which the Fed continued the expansion of the nation’s money supply begun during the crash, an expansion that the Fed is only now gradually tapering off?

Might not all that new money lead to inflation and then another crash landing, risks that the Fed’s new chair, Janet Yellen, would have to contend with?

Has expansionary policy since the crisis, as many critics allege…


PAUL SOLMAN: … set us up for another fall?

Again, conservative economist Charles Calomiris:

CHARLES CALOMIRIS: The Fed under Bernanke in the last two years has created inflationary risk that could be hard for his successors to manage. What he created was a risk of inflation over the next five years, in exchange for getting very small potatoes in terms of improvement in the economy over the past two years.

PAUL SOLMAN: That risk is why Calomiris gives Bernanke a post-crash grade of incomplete.

But Alan Blinder calls inflation fears baseless.

ALAN BLINDER: For years, there was going to be inflation next year, inflation next year. Wrong, wrong, wrong, wrong. We haven’t had any inflation. Lately, since there’s no inflation, often, it’s the same people have started this, it’s causing speculative bubbles.

So let’s see, where? House prices? I don’t think so. They have recovered about one-third of what they lost, and it looks like they’re kind of leveling off. Can’t tell. Stock prices? Well, maybe, but, you know, we have extraordinarily high profits. We have extraordinarily low interest rates. On basic fundamentals, stock prices should be high. I don’t stay awake worrying about bubbles now.

PAUL SOLMAN: At her confirmation hearings, Janet Yellen didn’t seem overly concerned about bubbles either. She testified that she wants to see stronger job growth, making sure that the Fed doesn’t withdraw its stimulus too rapidly.

As for Bernanke, he says he’s confident the Fed can continue safely pulling back.

BEN BERNANKE: I think we have plenty of tools now at this point. We have developed all the tools we need to manage interest rates, to tighten monetary policy.

PAUL SOLMAN: And so, as Ben Bernanke leaves office after what everyone agrees is an unforgettable eight years on the job, his final grade probably won’t come for years, during the tenure of successor Janet Yellen, or maybe even later than that.