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Ben Bernanke: Silent hero or the devil of monetary policy?

Commentators weigh in

January 2, 2014
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In the coming weeks, Federal Reserve Chairman Ben Bernanke will move on from the Fed to presumably greener pastures, waiting for his legacy to be written by economists and pounded and praised by lawmakers for years to come. 

Unlike his predecessor — Alan Greenspan — who developed a reputation for being humorously opaque in his market and economic predictions — Bernanke had a different leadership style and a more challenging Fed to lead from almost day one. He also introduced Fed transparency to try and ease monetary policy fears during several years of economic free fall, which were followed by malaise.

The former Princeton professor stepped into his role in 2006 only to watch the housing market and financial system crumble right before his eyes. His eight years at the helm of the Fed ended up tapping into every skill set Bernanke built from the time he was studying the Great Depression as a student to his days under Greenspan's leadership.

Despite all the hammering the Federal Reserve took over its multiple extensions of the quantitative easing program and its long-term commitment to maintaining a zero federal funds rate, Bernanke is often seen as either part hero or part villain in his own narrative. So which is it?

It depends on whom you ask.

"He had concluded from studying the Great Depression that it was caused by a lack of liquidity in the banking system,” said Anthony Sanders, a professor of real estate finance at George Mason University when remembering the 2008 financial meltdown. "So he turned on the first hoses ... and then failed to turn them off. We now have The Great Flood instead of The Great Depression."

But Ed Mills, an analyst with FBR Capital Markets, gives Bernanke credit for playing Superman early on. In 2008, he says, Bernanke stepped up to the plate, bailing out banks and recognizing a liquidity freeze as a “Great Depression” risk factor. Saying he’s no longer Superman is a harder call for Mills to make since the Fed is just now getting around to tapering its massive Treasury and MBS purchase program. The taper, at times, has been described as hawkishly dovish for only including a mere $10B cutback in purchases, but it's a start.

The unwinding of that aggressive Fed program still has markets concerned, leaving Bernanke’s legend somewhat unfinished — an appropriate end for a man who always conveyed a quiet calm before panicked markets.

"The first chapter of his response wins great credit and even his detractors will say overall his response was needed and appropriate and well done," Mills told HousingWire. "It’s this later part that is going to draw the most amount of criticism as we are still living through it."

But Mills acknowledges two things: D.C. policymakers love beating up on regulators, and Bernanke himself has often suggested the Fed’s hands were tied as flare-ups among Congressional members made it difficult for elected officials to move the economy from their own chambers. In other words, with no one else stepping up, Bernanke and the Fed jumped in. Whether America in the future thanks him for manning the parachute is another story. It's a well-known fact based on public opinion polls that Americans have no confidence in Congress, so the last five years of "economic leadership" belonged to Bernanke and the Fed alone.

"Frankly, he was the only adult in the room," Mills recalled. The FBR Capital analyst clearly remembers the Fed entering another round of bond purchases right after it realized Congress in 2011 was botching a major fiscal cliff deal. The Fed also wanted to taper MBS and Treasury acquisitions last fall, but that move was delayed by a government shutdown, he points out. 

"What he has been trying to do is explain both to the markets and Congress about how impactful their decisions and non-decisions are on the economy," according to Mills. The Fed, he suggests, acted where Congress chose not to.

But Sanders is not convinced the amount of fuel used was sufficient. In fact, if the Fed's goal was to move the unemployment rate down to at least 6.5%, it's troubling that Bernanke is walking away with unemployment still at 7%.

"The Fed has not improved labor force participation or the employment to population ratio," Sanders said. "Those are structural economic problems that are seemingly impervious to monetary policy. Bernanke will be remembered for an incredible rise in the stock market and the rise in house prices since 2012. He will also be remembered for pushing savings rates to near zero, forcing retirees and salaried workers into more risky investments."

While Sanders sees Bernanke as “The Crown Prince of Market Distortions," Mills sees him as the well-prepared, quiet hero. However, the verdict is still out on his QE policies, which ended up generating a great deal of controversy.

"I think most people looking at it say they have done a very good job … a great job," he notes. " But, it's hard to convince the person who still doesn’t have a job.”

And from Mills' viewpoint, the true discovery of Bernanke's success — or lack thereof — is years away. Policymakers are still backing away from QE, and the trajectory of the market in 2014 remains a big unknown.

"It is really hard when the economy is still not great,” Mills noted.

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