America has paid dearly for Nobel winner Ben Bernanke’s many mistakes

George Bernard Shaw famously mentioned that there are three kinds of economists. There are those that are brilliantly proper. There are those that are brilliantly fallacious. After which there are those that educate.

Judging by his time at Princeton, there could be no query that Ben Bernanke is a superb educational economist. His pioneering work on the banking system taught us how financial institution failures deepened and extended the Thirties Nice Despair. It was in recognition of this work that the Swedish central financial institution simply awarded Bernanke, together with Douglas Diamond and Philip Dybvig, this 12 months’s Nobel Prize in Economics.

Judging by Bernanke’s coverage document throughout his lengthy tenure on the Federal Reserve, although, one has to wonder if he may not fall into Shaw’s class of brilliantly fallacious economists. Whereas on the central financial institution, first between 2002 and 2005 when he served on Alan Greenspan’s Fed board after which as Fed chair between 2006 and 2014, Bernanke made critical coverage errors for which the nation has paid dearly.

In his time on Greenspan’s Fed, Ben Bernanke was not recognized for voicing objections to the creation of the nation’s biggest housing market and credit score bubble on document by years of unduly straightforward financial coverage and regulatory neglect. The bursting of that bubble finally led to the 2008-2009 Nice Recession that noticed unemployment attain 14%.

In March 2006, when issues got here to the floor within the sub-prime mortgage market, Bernanke confidently assured us that this was a minor downside of no nice consequence. Equally troubling, as minutes of the Fed’s August 2008 coverage assembly reveal, the financial institution was blissfully unaware of the probably financial penalties of the upcoming September 2008 Lehman Brothers chapter. That chapter was to plunge the US and world economies into their worst postwar recession up till then.

An much more troubling legacy of Bernanke’s tenure on the Fed was the huge resort to quantitative easing (QE) as an unorthodox solution to jumpstart the economic system as soon as rates of interest had reached their zero lower-bound. Underneath Bernanke’s management, the Fed engaged in three rounds of ultra-large-scale purchases of US Treasury Bonds and mortgage-backed securities. The online consequence was that whereas it took the Federal Reserve round 100 years after its creation to extend the dimensions of the Fed’s steadiness sheet by $800 billion, it took Bernanke’s Fed barely six years to extend the Fed’s steadiness sheet by virtually $4 trillion.

To be truthful, within the depths of the Lehman disaster, Bernanke’s first spherical of QE most probably was the precise coverage response. It’s doubtful, nevertheless, whether or not the nation wanted one other two rounds of QE on something like their precise scale when the economic system was effectively on its solution to restoration. This might appear to be particularly the case when one considers how large-scale QE distorts asset and credit score market costs.

Since Bernanke left the financial institution, the Jerome Powell Fed has taken QE to new heights. In only 18 months after the March 2020 COVID financial recession, Powell elevated the Fed’s steadiness sheet by one more staggering $5 trillion. Within the course of, he, together with the world’s different main central banks, helped create as we speak’s world of multi-decade-high inflation and a worldwide “every little thing” asset and credit score market bubble.

The jury continues to be out as to how badly this can finish for the US and world economies, when central banks now must aggressively elevate rates of interest to regain management over inflation.

Since its institution in 1968, with seemingly good motive the Nobel Prize in Economics had not been awarded to an financial policymaker. It’s unlucky that the Swedish central financial institution has chosen to depart from that custom and make somebody with as questionable an financial coverage document as Ben Bernanke this 12 months’s winner of the prize. It might be much more unlucky if this award is seen as a ringing endorsement by the Nobel Committee of large-scale QE as an ordinary instrument of financial coverage.

Desmond Lachman is a senior fellow on the American Enterprise Institute. He was a deputy director within the Worldwide Financial Fund’s Coverage Improvement and Overview Division and the chief rising market financial strategist at Salomon Smith Barney.