Wednesday, August 26, 2009

Critically Assessing Bernanke's Record

Now that Bernanke has been renominated to lead U.S. monetary policy his time at the Fed is being critically assessed by a number of observers. Here are five assessments:
(1) Simon Johnson says there are multiple versions of Bernanke--the one that saved the financial system after the Lehman-AIG collapse, the one that intellectually justified Greenspan's low interest rate policy and indifference to asset bubbles, and the one that has pushed for reform of the financial system--and would like to know which one we are going to get in his second term. He also is resigned to the fact that the current Fed policies will most likely lead to another bubble and financial crash.

(2) Stephen Roach highlights three critical mistakes Bernanke made: (i) he saw no need for the Fed to preempt asset bubbles, (ii) he was the intellectual architect of the saving glut view that allowed the Fed to turn the other way when housing boom was taking off, and (iii) he failed to take seriously the need to get a handle on the seriousness of the derivative explosion, the shadow banking system, and the extent of leverage in the U.S. economy.

(3) Ambrose Evans-Pritchard notes that it was Bernanke who provided "academic cover" for (i) Greenspan's view that asset bubbles do not matter and for (ii) holding down interest rates for so long below their neutral level.

(4) Desmond Lachman believes Bernanke's heroic efforts over the past nine months must not overshadow the indifference Bernanke's Fed had toward the housing boom in 2006 and 2007 leading up to the crisis nor his role in the Lehman debacle.

(5) Barry Ritholtz acknowledges that Bernanke's endorsement of Greenspan's interest rate policies were problematic and that his views on asset bubbles and the saving glut gave credence to the Fed's indifference to the housing boom. However, Ritholtz ultimately holds Greenspan accountable for the policies of that time.

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