After eight turbulent years, Ben Bernanke’s term as Chairman of the Federal Reserve has finally come to an end. According to the Wall Street Journal, “[Bernanke’s term] spanned the tail end of a boom, a bust that threatened to rival the Great Depression and a weak recovery”. I think this is quite an accurate summary of the past eight years, however, it glances over the tough decisions Bernanke had to make. As Fed Chairman, Bernanke was in charge of determining the appropriate monetary policies for each of these situations.
Although Bernanke’s legacy will be better assessed a few years down the road, there are some interesting statistics we can consider from during his tenure. The first statistic is that of stock market returns. According to the Wall Street Journal, “The S&P 500 gained about 39%. An average annual return of 4.2% is nothing to sneeze at given the roughly 2,000-point swing in the index from peak to trough to recent peak”. The stock market was able to rally to new heights following a dramatic collapse during the financial crisis of 2008-2009. The volatility of the S&P 500 is representative of the business cycle from the perspective of financial markets.
Another important statistic from Bernanke’s tenure is regarding the Fed’s swelling balance sheet. According to the Wall Street Journal, “When Mr. Bernanke became chairman, it was $863 billion. Upon his leaving, it was $4.14 trillion”. The expanding of the Fed’s balance sheet can be primarily contributed to large-scale asset purchases (known as quantitative easing). Quantitative easing, however, is a large source of controversy. Despite his intentions to flatten the yield curve, Bernanke’s decision to conduct unconventional monetary policy caused the Fed’s balance sheet to become larger than ever. Bernanke was forced to take this route because he could not make interest rates negative. A large reason for the disapproval of Bernanke is probably due to quantitative easing, which I think this is reflected in a Gallup poll of 1,020 adults taken January 25-26. According to the Wall Street Journal, “Democrats, Republicans and independents all liked Mr. Greenspan in 2006. This time around, Gallup found, opinions of Mr. Bernanke split along party lines: Democrats approve of him, Republicans don’t and independents are divided. Households making $90,000 or more a year tend to approve of the job Mr. Bernanke’s done, 54% to 35%, while lower-income families are more even equally divided on his performance”. I think the disapproval by Republicans is due to their preference of smaller government. The Fed’s massive balance sheet is a risk to the taxpayer and the large-scale asset purchases represents significant government intervention into the economy. I think the approval by households making $90,000 or more a year is because wealthier families have felt more of the recovery (especially if they have been invested in financial markets).
Alan Greenspan, who was Fed Chairman before Bernanke, was more popular than Bernanke when he left office. Greenspan’s Fed did not experience anything remotely like the financial crisis of 2008-2009. Thus, Greenspan’s Fed was able to stick to conventional monetary policy. Unlike Greenspan, Bernanke’s Fed undertook a number of controversial and unorthodox policies in order to prevent another Great Depression. Looking back, it seems that Bernanke should be credited with saving the U.S. economy. If he was, then his approval rating would likely rise.
Regardless, I think it is way to early to assess Bernanke’s legacy. We must watch and see how the economy performs and how the Fed unwinds its massive balance sheet. For example, soon after Greenspan left office the housing bubble exploded. The calm years of his tenure culminated in the financial crisis. Although it is hard to identify the exact source of the housing bubble, there are a few reasons to place some fault on Greenspan’s Fed. Greenspan kept interest rates low for an extended period, which some believe allowed the housing bubble to form. In conclusion, time will play a vital component in Bernanke’s legacy.