Three Reasons to Salute Ben Bernanke

It’s time to give Ben Bernanke some credit. Under attack from the left and right for much of the past year, the mild-mannered former Princeton prof has shown some leadership and pushed through a major policy shift. In committing the Fed to buying tens of billions of dollars worth of mortgage bonds every month until the jobless rate, currently 8.1 per cent, falls markedly, Bernanke and his colleagues on the Fed’s policy-making committee have finally demonstrated that they won’t stand aside as tens of millions of Americans suffer the harsh consequences of a recession that was largely made on Wall Street.

I’ve had my ups and downs with Bernanke, whom I profiled at length back in 2008. At the start of the year, I thought critics were giving him a raw deal. With short-term interest rates close to zero (where they’ve been since December, 2008), and with job growth seemingly picking up, the calls for more Fed action seemed overstated. But over the past six months, as the recovery sputtered and Bernanke dithered, I too, ran out of patience with him. In a column in Fortune last month, I even suggested that Barack Obama should have replaced him when he had the chance, back in 2010.

It turns out that Bernanke was merely biding his time. I still think the Fed should have moved earlier. Once it became clear that slower G.D.P. growth, rather than some statistical aberration, was generating the big falloff in job creation we saw from March onwards, there was no justification for inaction. But Bernanke has now rectified the error—and then some. For at least three reasons, Thursday’s move was a historic one, which merits a loud salute:

1. Bernanke exceeded expectations. For several months now, he has been saying that the Fed would eventually act if the labor market didn’t improve of its own accord. In Jackson Hole last month, at the Fed’s annual policy gathering, he strongly hinted at another round of quantitative easing—the practice of exploiting the Fed’s capacity to create money and making large-scale purchases of bonds, which puts downward pressure on interest rates, which, in turn, spurs spending and job creation—at least in theory.

The Fed has tried this policy twice before, in 2009/10 (QE1) and 2010/11 (QE2). In retrospect, it was a big mistake to abandon QE2 just as the Obama Administration’s fiscal stimulus, which had provided support to the economy from 2009 to 2011, was running down. The experience of Japan demonstrates that in the aftermath of asset-price busts, when households and firms are seeking to pay down their debts, the prolonged maintenance of monetary and fiscal stimulus is necessary to prevent a semi-permanent slump.

Bernanke didn’t publicly concede on Thursday that he had blundered—that would be asking too much. But in announcing the terms of QE3, he went considerably further than most observers had been expecting. The two previous rounds of quantitative easing were term limited: this one isn’t. Rather, its duration will be directly linked to the jobs picture. “(I)f the outlook in the labor market for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other tools as appropriate such improvement is achieved…” the Fed said in a statement.

by John Cassidy, New Yorker |  Read more:

Photo: Platon