Ben Bernanke is standing in his kitchen one morning in Washington, DC, drinking a glass of lightly flavored water. He is wearing a gray suit, button-down shirt, no tie and a pair of Brooks running shoes. He seems a long way from his days at the Federal Reserve, where he served as chairman for eight years in what was – until recently – considered the most precarious financial moment of the last half century.
But the coronavirus pandemic and its economic fallout – the overnight drop in jobs, coupled with an unprecedented cash injection and now seemingly runaway inflation – have got Mr Bernanke thinking. And write. Mr Bernanke was in a form of self-imposed quarantine, writing a book called 21st Century Monetary Policy: The Federal Reserve From the Great Inflation to Covid-19, which will be released on Tuesday.
Mr. Bernanke describes the book as “academic,” but at this particular moment it can be a uniquely practical book as the public seeks to better understand the powers of the Federal Reserve and Congress to relieve or to relieve our economy in the midst of a supply chain slowing crunch and sky-high demand. The former chairman’s book itself is an example of the cross-currents at play in our economy: “Faced with disruptions in the supply chain, it took this book six months to go from final manuscript to in-store release,” he said.
Mr. Bernanke, who wrote the book “when it became apparent that I wasn’t going to be traveling much and that we were going to be home for a while” in the early days of the pandemic, provides a history of the Federal Reserve — his own thesis covered his thesis with the 1929 crash and its aftermath, which he says provided valuable lessons for his response to the 2008 recession. However, his focus this time isn’t on 2008, but on the 1970s, which he feels is the closest analogy to what’s happening in today’s economy and what might happen next.
He hopes Jay Powell, the current Federal Reserve Chairman, can help tame inflation without having to take the extreme measures that former Fed Chairman Paul Volcker took in the 1970s, or turn the economy into one to send recession.
But he also cautions that it’s possible the nation could face a period of “stagflation,” a word Mr Bernanke says was invented in the 1970s.
“Even under the favorable scenario, we should have a slowing economy,” he said. “And inflation is still too high, but it’s coming down. So there should be a period over the next year or two when growth is low, unemployment is up at least a little bit, and inflation is still high,” he predicted. “So you could call that stagflation.”
He is particularly aware that runaway inflation can quickly become a political issue – possibly putting the Federal Reserve in the public eye – in a way that does not even create unemployment. “The difference between inflation and unemployment is that inflation affects everyone,” he said. “Unemployment affects some people a lot, but most people don’t react too much to unemployment because they’re not personally unemployed. Inflation has a society-wide impact.”
His focus this time, however, is not on 2008 but on how the Federal Reserve has responded to various economic scenarios over more than a century, and takes readers through the reins of various Fed Chairmen such as Alan Greenspan. Readers are likely to pay particular attention to Mr. Bernake’s analysis of the 1970s, which may be closest to what is happening in the economy today.
Mr. Bernanke seems somewhat concerned about the credibility of the Federal Reserve in the public mind, particularly given the aggressive approach he took in 2008 and that Mr. Powell continued during the pandemic. “I had this fantasy conversation in my head between Jay Powell and William McChesney Martin where I think Martin probably would have had a stroke or something because the intervening chairs were doing different things,” he said, referring to Mr. Martin Chairman of the Federal Reserve from 1951 to 1970.
updated
May 16, 2022 7:17 am ET
In the book, Mr. Bernanke discusses how he tried to improve the reputation of the Federal Reserve’s independence by making it more transparent, including holding press conferences. “In everyday life, we judge the credibility of promises by the reputation of the promiser rather than the exact words they use,” he said. “The same principle applies to central bank promises. Central bank credibility depends in part on the personal reputation and communication skills of key policymakers, but since policymakers cannot commit themselves or their successors irrevocably, institutional reputation is also important. Because of institutional reputation concerns, policymakers have an incentive to deliver on promises, even those of their predecessors.”
Mr. Bernanke left the Fed as chairman in 2014 but has remained in Washington, where he is a fellow at the Brookings Institution and a senior advisor to the investment firm Pimco. He said he prefers not to have to make the decisions Mr. Powell now faces or endure the hours of testimony before Congress challenging his decisions.
Instead, he prefers to approach the role with a slight detachment and the ability to talk about political issues, which he used to shun.
When asked if he thinks student debt should be forgiven, his trademark pause is gone: “It would be very unfair to take it out. Many of the people who have large amounts of student debt are professionals who will make a lot of money in their lifetime. For example, why would we choose her over someone who didn’t go to college?”
Or what if the Federal Reserve changes its inflation target? Also no break. “Inflation targets shouldn’t be used as a short-term tool, you know? If you raise the inflation target to 3 percent for short-term purposes, why not 4 percent, or why not 3.5 percent, or why not create a range or whatever?”
The good news is that Mr. Bernanke isn’t worried about a 2008-style crisis. He is concerned about house prices, saying they have “risen a lot in the last two years, by about 30 percent”.
“It needs to be watched,” he said, but unlike in 2008, “the mortgages being made to buy these homes are generally much better quality than the subprime mortgages of 15 years ago.”
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