Ben Bernanke’s Legacy: Great Recession and Quantitative Easing

One of outgoing Federal Reserve Chairman Ben Bernanke’s first official acts as the world’s most powerful banker was ceasing publication of the M3 monetary aggregate in 2006. Though mainstream media paid little attention to it, the policy forever shielded the Fed from ever having to disclose an accurate measure of total money supply. Despite this fact, many economists claim Bernanke made the Fed more transparent than it has ever been.

Fair or not, Bernanke will forever be tied to America’s subsequent eight years of economic uncertainty and turmoil.

Great Recession

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The Federal Reserve, for the first time in its now 100-year existence, began to muddy the lines of fiscal policy vs. monetary policy under Bernanke. The previous is left to elected officials, while the latter is the statutory obligation of the Fed and its appointed governors. Politics and partisan bickering limit the power of the legislature, while the FOMC, the Fed’s policy-making arm, can get sweeping initiatives through via 12 voting members.

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The housing market was well on its way to complete collapse in September 2007 when Bernanke decided to lower the Fed Fund interest rate for the first time. The rate would be lowered nine more times in the next 16 months, dropping from 5.25 percent to zero by December of 2008.

Moody’s Analytics, a global leader in economic forecasting and bank stress testing, accurately predicted the results of this policy. The firm released a study in 2009 on the relationship between interest rates and default rates from 1982 to 2008. It found “negative contemporaneous correlations” between changes in the two variables. The lower interest rates dropped, the higher defaults (foreclosures) rose.

Quantitative Easing

Bernanke, knowing he had to do something to avoid the complete collapse of the dollar, employed unorthodox and unprecedented measures to put out the wildfires that spread from the housing market. Congress passed and President George Bush signed into law the Troubled Asset Relief Program (aka “TARP” bailouts) in October of 2008. The Fed lent the Treasury $700 billion (or so) to distribute between failed private sector corporations.

The Fed knew that in order to keep financial recovery on the upswing, it had to continue this policy of monetizing debt for the federal government. QE1 began one month later, with the Fed announcing it would buy $600 billion in mortgage-backed securities (MBS), mostly from Fannie Mae and Freddie Mac.

QE2 commenced in November 2010 when the Fed announced it would buy $900 billion in U.S. Treasurys by mid-2011. QE3 began in September 2012 when the Fed announced it would buy $85 billion per month in both MBS and Treasurys indefinitely. The FOMC announced in December that the program finally begin tapering by $10 billion per month beginning in January 2014. The Fed’s balance sheet has more than quadrupled since QE1, from a relatively-paltry $700 billion to well over $4 trillion today.

Mixed Opinions

The legacy of Bernanke varies depending on who you ask. Victor Li, writing for US News and World Report, called him a bold, courageous leader who saved the U.S. from a Great Depression. Former Congressman Ron Paul, R-Texas, called Bernanke “the great enabler” of irresponsible government.

Only time will tell how Bernanke will be remembered.

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