The tragedy of Ben Bernanke By J. Bradford DeLong October 29, 2015 – Project Syndicate

It is difficult to read former US Federal Reserve and that a temporary savings glut has Chair Ben Bernanke’s new memoir, The artificially lengthened the time it takes for Courage to Act, as anything other than a aggressive monetary expansion to restore full tragedy. It is the story of a man who may have prosperity. Loss-adverse sovereign wealth been the best-prepared person in the world for funds, emerging-market millionaires parking the job he was given, but who soon found their money in the US and Europe, and himself outmatched by its challenges, quickly governments seeking to ensure freedom of falling behind the curve and never quite action have pushed full-prosperity interest rates managing to catch up. down substantially and extended the time it takes for shocks to dissipate. It is to Bernanke’s great credit that the shock of 2007-2008 did not trigger another Great Harvard’s Kenneth Rogoff holds a different Depression. But his response to its aftermath view: Bernanke’s cardinal error was to focus was unexpectedly disappointing. In 2000, too narrowly on the money supply. According Bernanke had argued that a central bank with to simple economic models, when the money sufficient will could “always,” in the medium market is in full-prosperity equilibrium, the term at least, restore full prosperity via debt market is too. But in the real world, it quantitative easing. If a central bank printed might have been more effective for money and bought financial assets on a large- governments to buy back risky debts and enough scale, people would begin to step up induce lenders to write off losses. This, more their spending. Even if people believed that than loose monetary policy, would have only a fraction of quantitative easing was boosted private spending and rapidly restored permanent, and even if the incentive to spend full prosperity. was low, the central bank could restart the Still others would make the case that monetary economy. action would have been enough, if only the Fed In the end however, Bernanke did not deliver. had committed to a target for annual inflation Even though the Fed and many other central that was higher than 2% and vowed to do as banks printed much more money than much quantitative easing as necessary to reach economists would have thought necessary to that goal. This simple promise – were it to be offset the impact of the financial crisis, full made credible – would have been far more prosperity has yet to be restored. Bernanke effective than much larger amounts of increased the US monetary base five-fold, from quantitative easing. $800 billion to $4 trillion. But it wasn’t enough. Finally, there is a fourth view, championed And then, his courage failing, he balked at most prominently by Larry Summers and Paul taking the next leap: more than doubling the Krugman. They argue that there is little monetary base to $9 trillion. In his last years in evidence that monetary policy will ever restore office, Bernanke was reduced to begging in full prosperity. In this view, Milton Friedman’s vain for Congress to institute fiscal expansion. dream of using strategic monetary So what went wrong? The answer, as is often interventions to offset economic shocks the case, depends on which economist you ask. remains just that: a dream. It was only the If I understand Bernanke correctly, he would unique circumstance in Europe and the US over argue that nothing fundamental went wrong, the last half-century – most notably rapid demographic and productivity growth – that conclusions are what transformed him from a made his ideas seem plausible. “If nobody monetarist into a Keynesian. believes that inflation will rise, it won’t,” is “It seems unlikely that the influence of how Krugman put it. “The only way to be at all [monetary] policy on the rate of interest will be sure of raising inflation is to accompany a sufficient by itself,” Keynes wrote in 1936. “I changed monetary regime with a burst of fiscal conceive, therefore, that a somewhat stimulus.” comprehensive socialization of investment will I do not claim to know which of these views is prove the only means of securing an the correct one. But I do think that this approximation to full employment.” Those are discussion is the most important debate in the words worth considering the next time we find field of macroeconomics since John Maynard ourselves needing the courage to act. Keynes wrestled with similar questions in the J. Bradford DeLong is Professor of Economics at the 1930s. For Keynes, the answer was clear, and it University of California at Berkeley and a research was something close to what is being argued by associate at the National Bureau of Economic Research. Summers and Krugman; indeed, his