Ben Bernanke was nominated as Chairman of the Federal Reserve System (Fed) in October 2005 by President George W. Bush.  He succeeded Alan Greenspan, taking office in 2006 during a period of relatively strong economic growth.  After serving two full terms as Chairman, Bernanke left office on January 31, 2014.

During Bernanke’s 8-year reign, the domestic economy experienced a burst bubble in the housing market, a spectacular financial crash and the most severe recession in the United States since the Great Depression.  These events occasioned a markedly aggressive response by the Fed and United States Treasury Department.  In 2008, amidst the failure of major financial institutions, Bernanke orchestrated the takeover of Bear Stearns by JPMorgan Chase as well as the $85 billion bailout of AIG.  In addition to stabilizing financial markets, Bernanke pursued notably innovative monetary policies such as quantitative easing and Operation Twist, in addition to increasing transparency and improving communication between the Federal Open Market Committee (FOMC) and the public.

Bernanke’s 8 years at the helm were far from quiet, and economics students will undoubtedly be studying this period of economic history for decades to come.  After playing such a significant role in these affairs, how will Ben Bernanke be remembered?  How will the history books judge his actions?

The Great Recession: Who is to blame?

When the housing bubble burst, many people lost significant amounts of wealth as the values of their homes plummeted.  Much has been said by way of assigning blame for this debacle, which precipitated the Great Recession.  To what extent should the Fed share that blame?

Christopher Waller, Professor of Economics at Notre Dame and Senior Vice President and Director of Research at the Federal Reserve Bank of St. Louis, believes that Fed monetary policy contributed little to this bubble.  Low mortgage rates did not shift when the Fed raised the federal funds rate in 2006.  “This puzzled everyone and led to Bernanke talking about the global saving glut that kept longer term interest rates from moving with short term policy rates,” Waller commented to the Rover.  “As for seeing the housing bubble…everyone saw it.”  The question was whether housing prices would drop sharply or level off.  The consensus was that prices would plateau.

Eric Sims, Michael P. Grace II Assistant Professor of Economics at Notre Dame, believes that even if the funds rate was relatively low in the early 2000s, it would not explain a large share of the housing bubble: “I think that had more to do with mortgage market innovations (e.g. increasing securitization) and lax lending standards.”

Bubbles are unpredictable, and it is difficult to pin down a single cause in medias res.  Michael Pries, Associate Professor and Director of Graduate Studies in Economics at Notre Dame, explained, “In general, these ‘bubbles’ are very hard to identify ex ante—there is always some other plausible explanation that cannot be easily ruled out.  Economists like John Taylor argue that it was clear that rates in the middle of the last decade were low relative to what the ‘Taylor Rule’ would have mandated, and thus it should have been clear that monetary policy was too loose, but it is still always possible to argue that the Taylor Rule cannot account for everything, and that ‘this time, it’s different.’”

Timothy Fuerst, William and Dorothy O’Neill Professor of Economics at Notre Dame and Senior Economic Advisor at the Federal Reserve Bank of Cleveland, raised three further points that indicate that the Fed’s monetary policy was not responsible for the housing bubble: “(1) The inflation-adjusted mortgage rate is the key driver for housing, and this rate the Fed has much less control over, (2) the housing bubble was a global phenomenon, so it is hard to look for ‘made in America’ explanations, and (3) if easy money was the culprit, there is no logical reason to think that this would lead to a bubble in one particular asset but not in others.

The housing bubble resulted more from lax regulatory standards and an overwhelmingly complex system of securitization that obscured the risk involved in holding mortgage-backed securities than from loose monetary policy.

Monetary policy response

The Fed’s response to the recession was two-fold.  First, it acted to rescue some financial institutions by providing emergency loans and liquidity.  Second, it lowered the federal funds rate all the way to zero.  Stuck at the zero-lower bound, Bernanke and the Fed were forced to get creative in their policies.  This led to three rounds of quantitative easing (QE), designed to provide liquidity to financial institutions and lower interest rates while controlling inflation expectations; and Operation Twist, designed specifically to bring down longer-term interest rates.

What were the effects of these policies?  Did they achieve their stated goals?

With regards to the Fed’s initial actions following the financial crash, Fuerst said, “The professional consensus is that the Bernanke Fed acted splendidly during the financial crisis by providing an unprecedented level of liquidity to a financial system facing a 21st century ‘bank run.’  These liquidity facilities were largely eliminated within one year of the crisis.”

Waller believes that the Fed’s unconventional policies have mostly served their purpose.  “QE1 clearly had an effect of stopping the heart attack that the economy was undergoing.  QE2 was intended to get inflation and inflation expectations up in 2010 and it did.  QE3 has been somewhat more mixed in its effects but in some sense one could argue that diminishing returns have set in as to the effectiveness of QE.”

Pries believes the jury is still out on the Fed’s unconventional policies.  “On the one hand, the Fed has been in somewhat uncharted territories since the Fed Funds Rate hit against the lower bound, leaving little choice but to seek other ways to achieve more stimulative monetary policy.  What’s not clear is whether these unorthodox policies have really had much effect.  And if they have had questionable impact, then they start to look rather unwise, because they do come with costs.

In addition to sharing similar doubts as to the overall efficacy of the Fed’s unconventional policies, Sims added: “Another broader concern that I have is that these interventions have perhaps created the impression that the Fed is more powerful than it really is.  Monetary policy can only go so far in healing a wounded economy.  In the short run, monetary policy can influence real output and employment, but most economists agree that it cannot over longer time periods.  I worry that the perception that monetary policy is a panacea to real economic difficulties (1) removes responsibility from the fiscal authority to get their house in order and (2) may perhaps erode the perception of central bank independence, which could create inflationary expectations in the future.”

Nelson Mark, Alfred C. DeCrane Jr. Professor of Economics at Notre Dame, said that Bernanke did as well as he could have, given the limitations he faced.  “Give Bernanke credit for pulling all the levers available to monetary policy.  The guy has guts.  Monetary policy is not a magic bullet that can solve all the macro economy’s problems…Better and more sensible things could and should have been done on the fiscal side.  The pre-crisis economy was distorted with too many resources in the housing sector (construction and financing).  That distortion has to be unwound, which takes time.  Monetary policy is a poor instrument for executing this sort of sectoral adjustment.

Increased transparency

In addition to aggressive policy responses to financial crisis, Bernanke will be remembered for changing the way in which the Fed made itself accountable to the public.  Bernanke began holding press conferences following FOMC meetings, answering questions from reporters and generally explaining in more detail the reasoning behind the FOMC’s decisions.  He even appeared on 60 Minutes.  What are the consequences of this transparent approach to policy-making?

Fuerst sees many good reasons behind Bernanke’s drive towards more transparency.  “I think the most important reason relates to democratic principles.  The Fed is run by non-elected officials that need to be held accountable for their behavior.  The only way this is possible is if their actions are transparent.”

Waller agrees and, having worked personally with Bernanke, noted, “Ben has been phenomenal in making the FOMC a more democratic body with deliberation of ideas and policies.  There are very smart people on the FOMC and a dictator model would not work with the number of highly published, visible PhD economists as Presidents and Governors.  This is the hallmark of good policy… We are no longer the ‘Temple’ where secrets are kept and central bankers are the high priests.  Ben has done a great job in my opinion at press conferences explaining what we did and why we did it.  He is also unbelievably good at Q&A.  People can argue as to how much public discussion of policy there should be but I believe it is what should be done in a democracy.”

While agreeing that transparency is important, both Mark and Sims expressed concerns with the transmission of information.  Mark believes that people in general do not understand Fed communications.  For example, he said that “the Fed tells us explicitly that it will begin to taper its asset purchase program.  Then when it actually does it and reduces monthly purchases by $10 billion, the markets drop massively.  Do market participants not understand that the Fed continues to buy $70 billion in assets, that the taper does not mean asset purchases have stopped?  Did they not understand the Fed’s forward guidance? The taper should have been anticipated and capitalized into the market in advance.  The volatility we’ve seen is not what one would expect if people were processing the information correctly.”

Sims cautioned, “There is a sense in which too much information can be a bad thing, with markets reacting to every minutia that comes out.  This particularly becomes problematic if the Fed is perceived as changing its mind—if it announces in one year that it plans to keep rates low for three years, but then reneges on that promise before three years are up, then private sector agents may begin to doubt that the Fed means what it says.  Transparency in a vacuum is good, so long as it doesn’t create uncertainty and doubt.”

What does the future hold?

Fuerst believes that the major problems the Fed now faces are political rather than economic. “Unwinding the balance sheet at a prolonged zero lower bound is going to be tricky.  There are some economic problems, but the bigger problems are political.  The Fed will need to pay interest on reserves to encourage banks to hold on to the massive level of reserves until the Fed has the time to unwind these balances.  The political problem is that it will be hard for the Fed chairperson to explain to Congress why the Fed is paying $100 billion in interest to banks and remitting no profits to the US Treasury.  This is a political problem of the first order.”

Mark and Sims highlighted various factors in the real economy that are out of the Fed’s hands. “We have serious problems that cannot be fixed by monetary policy.  I’m talking about how wages don’t keep up with labor productivity, quality of education, graduation rates, and income and wealth inequality.  We need thoughtful leaders and policy makers to get serious about fixing them,” said Mark.

Sims added, “Continued weakness in the economy is due to real factors—an aging population, a natural correction due to over-building of houses in the mid-2000s, high uncertainty related to unconventional policies, problems in Europe and elsewhere in the world, and our looming fiscal crisis.”

Bernanke’s Legacy

When judging Bernanke’s time at the Fed, his finest moments may prove to be those at the beginning of the financial crisis.

“It has been said that Ben being a scholar of the Great Depression was one of the great quirks of fate that helped guide his thinking on monetary policy in a way others would not have contemplated,” said Waller.  “Ben was unbelievably innovative in trying anything to stop the collapse of the economy and I think history will reward him for that.”

Pries offered similar praise for Bernanke’s actions early on in the crisis: “There were probably few other potential Fed Chairmen who would have had the knowledge and understanding to deal with the very complicated liquidity problems that arose in the early months of the financial crisis.  Bernanke’s response was very aggressive, and very effective at preventing system-wide runs on banks.”

Fuerst and Sims expressed that the route taken by Bernanke during the crisis was not necessarily ground-breaking.  “I would like to think that most modern economists would have acted similar to Bernanke in 2008-2009 during the crisis.  That is, the provision of liquidity is a textbook response to a financial crisis,” said Fuerst.  “But I’m personally glad that Bernanke was the guy in charge.”  Sims thinks that “most other possible Fed chairpersons would have taken similar actions in a similar situation, though perhaps not as quickly or as aggressively.”

In the end, only time will tell if the innovative policies implemented by the Bernanke Fed achieved their goals. The long-term effects of these policies are unknown.  But as Bernanke rides off into the sunset, what can be said at this juncture about his enduring legacy?

“I believe history will look favorably on Ben’s legacy,” said Waller.  “I believe a lot of what was done during the financial crisis was the right thing to do.  I also believe we made some serious mistakes.  But on net we did the right thing.  One has to get the idea that this was a regular business cycle recession out of their head.  It was not.”

Pries thinks that, “[Bernanke’s] great success is that the financial system didn’t have a complete meltdown in late 2008 and early 2009.  Things could have turned out very differently.  His legacy with regard to the wisdom of QE, Forward Guidance, etc., is yet to be determined.  It will depend on whether the Fed is able to unwind those policies without jeopardizing the Fed’s independence, without spurring excessive inflation, without incurring unmanageable losses on the Fed’s balance sheet, without jeopardizing the Fed’s credibility (which could happen if they end up pursuing a policy at odds with what was promised via Forward Guidance).”

“I think Bernanke will be remembered as the central banker who did the right thing at the right time and thus prevented a serious financial crisis expanding into a much, much worse effect on the nation as a whole,” said Fuerst.

“I do think Bernanke comes out looking very good in the immediate aftermath of 2008—I do think that he had the knowledge, tools, and wherewithal to take decisive action that probably prevented further ruinous financial collapse,” said Sims.  “History will tell what the longer run effects of his some of his subsequent actions will be.  In an obvious sense what the ultimate outcomes will be are now beyond his control—he’s no longer the chairman.  But in another sense the outcome is out of the hands of the Fed altogether.  I think that the future of the US economy in large part hinges on our fiscal imbalances, which could, without central bank independence, lead to a large inflation.”

Bernanke has moved on, and Janet Yellen bears the responsibility of safely unwinding the Fed’s balance sheet and protecting the Fed’s independence from the political game.  There is still much to be said of Bernanke’s tumultuous reign as Chairman of the Federal Reserve.  At the least, the history books will remember him as a man determined save his country from depression, and as a courageous and innovative central banker.  America could hardly have asked for more from a Fed chairman.

Tim Bradley is a sophomore studying economics and theology.  As a member of the Fed Challenge team, he spent two years in high school pretending to be a member of the FOMC.  Contact him at