The Bernanke era isn’t over, not by a long shot

This post has been updated.

Ben Bernanke’s term as chairman of the US Federal Reserve is over at the end of the month. Today marks his last monetary policy decision as chairman. (Update: As expected, the Fed further reduced its program of bond-buying.) But make no mistake—we’re going to be living in Bernanke’s world for the foreseeable future.

The Princeton professor-turned-policymaker’s time at the helm deeply altered the world’s most-powerful financial institution. And on his watch the central bank has acquired a raft of new responsibilities, powers and critics.

Bernanke didn’t plan it that way. A Great Depression scholar (paywall) and Republican appointed to the Fed’s top job by president George W. Bush in 2006, his policy stance at the time of his appointment was basically to continue the hands-off style of Alan Greenspan, his predecessor.

Then the financial crisis and Great Recession intervened. Bernanke—once described by a colleague as “libertarian-leaning“—became the most activist Fed chair in history of the bank.

Greenspan might have been the former jazz saxophone player, but during the depths of the banking panic it was Bernanke’s improvisational skills that shone. With the edifice of the financial system crumbling, Bernanke’s Fed acted aggressively using authority to make emergency loans provided by a little-known clause in the Federal Reserve Act.

In a matter of months, the Fed’s traditional roles and responsibilities were a distant memory. The central bank was financing shotgun marriages of failing financial institutions. It started lending to investment banks—instead of the commercial banks who traditionally had access to Fed lending. After the collapse of Lehman Brothers, the central bank began propping up entire markets including commercial paper and money-market mutual funds. It also provided giant loans to stabilize the faltering US insurance giant AIG.

And it worked. These programs kept the US economy alive after what amounted to a financial heart attack.


The patient, however, remained incredibly weak. And since the crisis, the Fed has faced a frustratingly long slog to bring unemployment down. Both businesses and consumers have focused on rebuilding their savings, not investing or spending. The federal government has made half-hearted efforts at fiscal stimulus, but its spending merely offset some of the cuts by state and local government. And because it was already near zero—the dreaded zero lower bound—the federal funds rate, the benchmark interest rate, hasn’t been able to do much to help the economy.

So the Fed had to turn to so-called unconventional monetary policy.

Unconventional policy is basically anything other than moving the funds rate up and down. It includes everything from telling the market clearly what the Fed’s intentions are to buying trillions of dollars worth of US government bonds and mortgages in an attempt to drive interest rates down.

It’s those bond-buying programs that have left some of the most tangible evidence of Bernanke’s tenure. The Fed’s balance sheet has skyrocketed to more than $4 trillion, and counting. And while the Fed has taken the first steps to cut back on its bond-buying—that’s the “taper” that is expected to continue with today’s meeting—Goldman Sachs doesn’t see the size of the Fed’s balance sheet leveling off until sometime later this year.

Which means the chief challenge for Bernanke’s successor, Janet Yellen—the current Fed vice chair—will be that giant balance sheet. The Fed itself estimates that the balance sheet won’t get back to approximately normal until sometime between 2019 and 2021. Some monetary policy geeks argue that this balance sheet—essentially the aftermath from a vast run of reserve-creation—risks setting off an inflationary spiral if not managed correctly. Others say the Fed has the tools it needs to prevent that from happening. (They also point out, correctly, that the inflation-phobes have been issuing such warnings since the financial crisis struck, none of which have come true.)

But the bottom line is that, while Bernanke is leaving, the Bernanke era is far from over.

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