Two Cheers for The Bernank
Bernanke's days are numbered and Janet Yellen is primed and ready to take over the Fed.
People, she has big shoes to fill.
Bernanke did exactly what he told Milton Friedman the Fed would do in the next crisis. He remembered the lessons from the Great Depression and made sure the Fed would not make the same mistakes.
Bernanke threw the kitchen sink at the problem in 2008 and it worked. The money supply did not fall, the banking system did not fail, we made it through.
And the extraordinary/unconventional policy actions of the Fed did not unleash the inflationary genies we were warned would follow.
As the recovery "progressed" in its halting and unsatisfactory manner, Bernanke undertook additional unconventional policy actions. Three round of quantitative easing. Time based forward guidance. Outcome based forward guidance. And while these policies produced no great stimulative effects for GDP or employment, neither did they create inflation.
The worst we can say is that maybe all the QE has helped to spark bubbles in asset markets here and abroad, but really is anyone unhappy that the Dow is over 16,000? I for one am not. And if we were seriously worried about the developing world, our immigration, trade and farm policies would be diametrically different than they currently are.
I know that it is hard to think of Bernanke as even mediocre, let alone exceptional, because of the massive strident criticism he's faced from an array of monetary cranks all convinced that they have the magic bullet to achieve prosperity and only Bernanke's stupidity or cowardice kept him from firing it.
If only he'd target nominal GDP! If only he'd raise the inflation target to 4%, If only he'd promise to keep inflation above its 2% target for years after the economy has fully recovered.
It is true ladies and gentlemen that if the Bernank had wheels, he'd be a bicycle. But he's not a bike, he's an economist and the Fed is not so powerful as to be able to fix our economy with a new nominal target or a new promise.
People take as given that monetary policy can hit any output target it wants to and use the failure of the economy to perform satisfactorily as prima facie evidence of Fed incompetence.
But it's just not true. It's a bureaucracy, not a bicycle! The illusion that the Fed can finely control the economy was borne from the "great moderation" a tiny blip on the time scale that managed to validate the Fed's awesome powers at the expense of all the rest of its history.
The Fed can avoid screw ups. It can prevent rampant inflation and it can stand as a supplier of liquidity and a lender of last resort in a crisis. But the notion that monetary policy can hit any desired output target in normal times or abnormal times is a foolish and dangerous notion, sadly often promulgated by macroeconomists in the Fed's employ.
So as you leave Great Bernank, I salute you for a job well done. Your biggest mistake was allowing your minions to over-promise what the Fed can actually do.