How should the world outside America view Ben Bernanke’s legacy? Should it lambast the U.S. Federal Reserve chairman, who retires later this week after an eight-year stint, for failing to predict the financial crisis and being slow to react when it hit? Or should it laud him for pulling out the stops to save the financial system and pep up the U.S. economy after Lehman Brothers went bust in 2008? Or should non-Americans be worried that the process of unwinding Bernanke’s unprecedented money-printing policy will deliver a bad case of whiplash?
The answers to the last three questions are “yes, yes and yes.”
Bernanke’s culpability for the global financial crisis is not nearly as great as that of his predecessor, Alan Greenspan. It was, after all, Greenspan who ignored the dangers of financial deregulation, while being ever-too-ready to respond to any sign of market trouble by dropping interest rates – a policy that encouraged banks and investors to run up excessive risks with borrowed money.
By the time Bernanke took over in February 2006, the global credit bubble – and, in particular, the U.S. subprime housing bubble – was already well inflated. There was no way of avoiding trouble. However, the new Fed chairman could have mitigated the damage if he had had more foresight – say, by pushing for tighter regulation of the financial system.
The bigger criticism, though, is that once the subprime bubble burst in mid-2007, Bernanke was slow to appreciate the severity of the situation. True, he did cut interest rates. But he didn’t realise how losses were going to cascade through the global financial system, nor did he push hard enough for financial institutions to increase their capital and liquidity buffers.
What’s more, Bernanke’s Fed did little contingency planning to prepare for a big U.S. financial institution failing. As a result, when Lehman went bust, threatening to drag much of the global financial system down the plughole with it, there was no plan B.