Charts the course of the US Federal Reserve since the 1970s, highlight refinements prompted by the difficulties of operating at the lower bound of interest rates. Bernanke underlines the benefits of signaling and also macroprudential policy to address systemic instability. The celebrated economist seems not to have considered that his own successes may not be repeated by successors. Further, there is no principled assessment of where technocracy stops and democratic accountability takes over.
The Fed exists largely as founded in 1913 and reformed in 1935; it had failed to address the monetary side of financial stability, worsening the Depression. (Bernanke does not address Roosevelt’s fiscal policies). The 1951 Treasury-Fed Accord freed the latter of any financing responsibilities). The heart of the book focuses on inflation as it relates to unemployment (i.e., the Phillips curve), long-term decline in normal rate of interest (there is no natural rate of inflation since it reflects fiscal policy), and increased systemic instability.
In the 1970s, the Phillips curve was refined to segregate supply and demand shocks. Inflations having been tamed in the 1980s, financial disruption has since caused the major downturns, with credit-market failures generally worse than stock-market collapses.
Greenspan succeeded in risk management but was too involved in fiscal policy. The Global Financial Crisis was a classic bubble: a buildup in risky lending; loss of investor confidence in loans; runs on lenders by short-term funders; fire sales of trouble assets; and procyclical insolvencies. The difficulties of working at the lower bound of interest rates – a 1% reduction in the 10-year yield is equivalent to a 3% reduction in the Federal funds rate, thereby magnifying its stimulus – prompted the Fed to become lender of last resort: asset purchasing (quantitative easing) and related maneuvers.
Bernanke adjudges his own term as successful for introducing transparency and steerage (i.e., communications), paying closer attention to systemic stability, and introducing new policy tools (e.g., apart from purchasing assets, the need for ample lending reserves). The US entered the 2020 pandemic better prepared than 2008. Somewhat blithely, he rates Yellen highly.
The final quarter is given to emerging policy tools as well as the threats of populism (i.e., Trump), inequality, and so on. Apropos of the Fed’s cherished independence, Congressional oversight is hazing even though elsewhere the Fed is said to work for Congress and the president –mainly Trump – is the institution’s foe. Modern Monetary Theory is problematic not because ‘deficits aren’t important’ but as government spending crowds out private use of productive resources, productivity being limited: fiscal policy is responsive to politics whereas monetary policy, though blunt, is better insulated. Does risk taking always migrates to the least regulated part of the system?