Ben Bernanke's Monetary Policy and the 2008 Credit Crisis

Introduction: Time Magazine's Controversial Choice

Difficult economic circumstances bring forth passionate opinions. Recently, Time Magazine lauded Federal Reserve Chairman Ben Bernanke with the coveted title of Person of the Year, a move that created a great deal of controversy among economists, politicians, and the public. Time credited Bernanke with pulling the American economy back from the brink of recession. The magazine stated that the most critical of Bernanke's actions was the freeing up of the panicked, frozen credit market through government intervention. After the failure of the investment banking firm Lehman Brothers, investors refused to extend even the temporary, overnight courtesy loans that banks and firms require for daily functioning. In an unprecedented move, the Fed assumed this role.

Time vehemently denied that only the wealthy reaped the benefits of the Bernanke recovery. The Fed's actions also facilitated household, small business, and credit card loans: "Bernanke took heat for substituting public for private credit, but it worked, because most of those private markets are functioning again. The emergency programs are all scheduled to wind down by June, and more than 80% of the loans have already been repaid, quietly returning billions of dollars in profits to taxpayers" (Grunwald, 2010, p. 5). The fact that many of the loans to large corporations were repaid specifically because those firms wished to escape government oversight goes unmentioned by Time.

Bernanke's Actions and the Case in His Favor

Time expressed gratitude for having a man with the unique experience and vantage point of Bernanke: while a professor of economics at Princeton, his scholarly specialty was the Great Depression. At first, Bernanke merely tried reducing the interest rate to nearly zero, but when that failed he pursued a far more aggressive strategy — unlike the Fed of the 1920s and 1930s. This is why "it's Bernanke's economy," proclaimed Time (Grunwald, 2010, p. 1).

Although admitting that Bernanke offered a Keynesian critique of the Hoover Administration's tight-money policy during the early days of the Depression, Time cites monetary rather than fiscal policy as the most effective tool to combat the effects of a recession. This stands in contrast to Keynes himself, who believed that government spending was more critical than monetary policy in overcoming consumer fears. Bernanke, in his writings on the Great Depression, emphasized the need for a flexible monetary policy to circumvent a recession (Grunwald, 2010, p. 3). Time agrees: more so than any government program, Bernanke's monetary policy spared the economy from ruin.

Criticism of Bernanke's Pre-Crisis Oversight

Criticism of Time's decision was swift. The first and most obvious objection is that, when reviewing Bernanke's financial policy from the beginning of the crisis through early 2010, his initial efforts to help the economy recover appear anemic. Bernanke himself "concedes that he failed to anticipate how fragile such an overleveraged and interconnected system could be, how fear about a $1 trillion subprime mess could paralyze a $60 trillion global economy, how overnight-lending markets that got banks and corporations through the day could seize up overnight" (Grunwald, 2010, p. 4).

While his defenders argue that he could not have predicted the crisis, others point to the fact that the collapse of the housing market had been forecast several years earlier by many economists. Although it is unfair to blame Bernanke for the follies of bargain-basement interest rates during Alan Greenspan's tenure as Fed Chairman, or for Greenspan's fixation on deregulation at all costs, Bernanke's apparent lack of damage control until the crisis actually struck remains questionable.