As Federal Reserve Chairman Ben Bernanke shut the door to his office for a final time Friday, he could say he took actions that were the first or the biggest of their kind in the central bank’s 100-year history.
Some will probably also be the last.
Bernanke was the first to devise a monetary policy that focused on lowering credit costs by suppressing longer-term interest rates after the short-term policy rate hit zero.
His strategy, involving direct purchases of agency mortgage-backed securities and longer-term Treasury debt, left the Fed with the biggest balance sheet in its history, $4.1 trillion.
He was the first chairman since the Great Depression to use emergency lending powers to rescue businesses in almost every corner of the financial system — from banks to corporations to bond dealers.
And he might be the last: Congress, leery of the Fed’s sweeping powers, removed the central bank’s ability to loan to individuals, partnerships and nonbank companies.
“He was incredibly creative in the different steps and programs he took to prevent a free fall of the global economy,” said Kristin Forbes, a professor at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge and a member of the White House Council of Economic Advisers under President George W. Bush. “During a crisis, you have to make decisions with highly imperfect information. He was willing to do that.”
Bernanke, 60, leaves to successor Janet Yellen a Fed vastly different from the institution he took charge of on Feb. 1, 2006. At that time, the former Princeton University professor had a few goals. He said naming an inflation target would help boost accountability and policy effectiveness.
He also wanted to push power out of the chairman’s office down into the policy-making Federal Open Market Committee, in effect, to dilute some of the mystique his predecessor, Alan Greenspan, created.
Eight years later, Bernanke achieved those goals. The Fed declared an inflation target of 2 percent in 2012, and the committee is more democratic. The Fed chairman encouraged more open debate at policy meetings, allowing colleagues to interrupt the format if they wanted to make a point. Unlike Greenspan, Bernanke voices his policy view last.
Among other Bernanke innovations, central bankers publish their economic forecasts four times a year. The chairman holds a press conference quarterly.
The Feds crisis response transformed the institution in ways that defy any near-term conclusion because nobody knows whether extraordinary actions, like purchasing $1.5 trillion in mortgage debt or creating $2.4 trillion in excess bank reserves, can be retracted, shrunk and unwound successfully.
The Fed is more extended politically as it engages in policies such as suppressing mortgage rates, and the size and influence of its open-market operations have involved it in financial markets as never before.
“The legacy is still open,” said Vincent Reinhart, a former top Fed official and now chief U.S. economist at Morgan Stanley in New York. “We survived. The question is, what are the consequences?”
Of the Fed’s operations under Bernanke, Tad Rivelle, chief investment officer for U.S. fixed-income securities at TCW Group in Los Angeles, said, “I think it is very intrusive.” The outgoing chairman’s legacy “will ultimately be negative” as policies used during the crisis and slow recovery lead to future instability, he said.
That instability may be social and political as well as financial, he said. Banks are still wary lenders, so the Fed’s low-rate policies are providing what Rivelle calls “preferential access” to a privileged group of borrowers: the government, corporations and consumers with the highest credit scores.
Fed officials, such as Richmond Fed President Jeffrey Lacker, warn that if the perception of government guarantees against financial risk isn’t reduced, it will set the stage for another crisis. Richmond Fed economists estimate that the proportion of the total liabilities of U.S. financial firms covered by an implicit or explicit federal safety net increased by 27 percent over the past 12 years.
Bernanke helped increase the perception of government support by rescuing Bear Stearns Cos. and American International Group Inc. during the crisis. He further contributed to that notion when Goldman Sachs Group Inc. and Morgan Stanley came under speculative attack and he let them convert into banks, which granted them access to backstop credit from the Fed.
The bailouts triggered a backlash, stiffening resolve on Capitol Hill to prevent taxpayer support from helping Wall Street again.
Former Fed Chairman Paul Volcker was surprised by the actions, which, he said in 2008, took the Fed “to the very edge of its lawful and implied powers.”
Among the unresolved questions as Bernanke exits: Can the Fed operate indefinitely with a multitrillion-dollar balance sheet? Is the flow of credit to the economy constricted with the banking system under intense regulatory scrutiny? Has the economy downshifted to some slower pace of growth that the Fed can’t change?
“The book is still open, the last chapters have yet to be written, and it’s way too soon to say, ‘Ah, this is his legacy,’ because history is the judge, and there’s still a lot of risk,” said Julia Coronado, a former Fed board staff economist who is now chief economist for North America at BNP Paribas in New York.