Christina Romer, I think, gets it right:
Christina Romer: Summerlin Lecture:
Let me close with a final, more general lesson for monetary policy from history. That lesson is: Don’t fight the last war. Just as generals sometimes go very wrong by focusing too strongly on not repeating past mistakes, so do monetary policymakers…. Monetary policymakers in 2009 and 2010 were so worried about not repeating the inflation of the 1970s, that they almost repeated the 1930s.
The current generation of policymakers came of age when inflation was the greatest problem. Though central bankers throughout the world took dramatic action in 2008 to stop the financial panic, by the summer of 2009, they were ready to be done.
I remember vividly being at a meeting of central bankers at the Jackson Hole Symposium in September 2009. All of the talk was:
We have stopped the crisis. Now what we need to do is go back to prudent monetary and fiscal policy, and to worrying about inflation.
Yet unemployment was still rising—it would hit 10% in October of 2009. Every inch of my body wanted to scream to the monetary policymakers at the symposium: “Oh no, you are not done!” Monetary policymakers, unfortunately, did take a break from aggressive action in 2010 and 2011. And this likely slowed the economy’s return to normal.
Today, I worry that guilt over letting asset prices reach the stratosphere in 2006 and 2007 has made some policymakers irrationally afraid of bubbles. As a result, they focus on the slim chance that another bubble may be brewing, rather than on the problems we know we face—like slow recovery, falling inflation, and hesitancy on the part of firms to borrow and invest…
Jon Hilsenrath and Victoria McCrane: Bernanke: Successes, Yet Frustrations:
Meltdown Averted, Bernanke Struggled to Stoke Growth
Fed Chairman Fails to Engineer Robust Recovery, Even With Extraordinary Measures: After a financial crisis he didn’t see coming, Ben Bernanke steered the U.S. away from a potentially devastating panic. Yet five years later, the recovery he helped engineer with extraordinary policies remains frustratingly weak. As Mr. Bernanke prepares for his final days as Federal Reserve chairman, that legacy—a mix of failings, boldness, persistence and frustration—is coming into sharper focus, and with it a clearer picture of the power and limitations of modern central banking….
“I will make continuity with the policies and policy strategies of the Greenspan Fed a top priority,” Mr. Bernanke said at his first confirmation hearing in November 2005…. Mr. Bernanke’s first steps in office were to continue a succession of small interest-rate increases that some economists say were too late, and too timid, to curb a badly swollen housing bubble. Mr. Bernanke has disputed that analysis, but acknowledged that the Fed failed to adequately supervise banks before the crisis or to see danger to the broader financial system—mistakes that have since led Congress to revamp Washington’s approach to financial supervision.
Early on, Mr. Bernanke embraced only reluctantly the interventionist stance that has come to define his stewardship. In December 2007, for example, he said he was “quite conflicted” about whether to cut interest rates sharply, according to transcripts of Fed’s meetings. That turned out the be the month the recession began. At other times, he talked about wanting to avoid bailing out financial markets, institutions or people….
The economy has grown at an average annual rate of just 2.3% since the recession ended in mid-2009, versus a 4.1% average for the first four years of other expansions since World War II. Had it grown at that rate, today’s $15.8 trillion U.S. economy would be larger by $1.25 trillion, about the total annual output of Mexico. The explanations for slow growth are complex: lingering effects of a run-up in household debt; a turn toward tighter fiscal policy at the state, local and federal levels; damage to the financial system from the crisis; structural changes in the economy such as slowing population growth; business and household risk aversion; and the limitations of the central bank’s tool kit….
Mr. Bernanke labored to forge consensus even among Fed officials for his complex and untested easy-money policies. He spent much of the past four years wooing support, working most Saturday and Sunday mornings, sometimes direct-dialing other officials at home….
Mr. Bernanke’s supporters note that the U.S. has fared far better than advanced economies with less-aggressive central banks. The unemployment rate in the euro area was 9.4% in June 2009 and 9.5% in the U.S. Since then, the rate has climbed to 12.1% in the euro area while falling in the U.S. If gains from the Fed’s bond programs are small, so are some of the drawbacks so far. Critics warned the programs could trigger much higher inflation, but it has averaged 2% since the crisis, as measured by the consumer-price index. That is right at the Fed’s long-run goal, and other measures of inflation show it well below 2%. Some critics said the dollar’s value against other currencies would tumble as the Fed printed more money to buy bonds. Instead, the dollar strengthened during the crisis, softened in 2010 and has risen since mid-2011. In all, it is little changed since 2007…
The first huge–and understudied–possible black mark against Bernanke was the decision to let Lehman Brothers go into uncontrolled bankruptcy in the fall of 2008, which itself followed the decision not to force Lehman into liquidation when it went over the edge into insolvency in the summer of 2008.
The second possible black mark against Bernanke was the failure to grasp in 2009 that the situation was of the same order of magnitude as that facing Roosevelt in 1933 or Volcker in 1979, and failing to assemble the FOMC behind a policy of “regime change”.
We are going to be arguing over these two for quite a while to come…