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Bernanke rides off into the sunset but his legacy is still up in the air


After 8 years as Chairman of the Federal Reserve even Ben Bernanke’s sharpest critics have to agree the man has earned a rest. When Bernanke took over for the then-revered Alan Greenspan in February of 2006 the unemployment rate was below 5% and housing prices at an all-time high. Unbeknownst to most, the entire thing was a house of cards. Within two years the stock market had been cut in half, unemployment soared over 10% and more than one of every five Americans was underwater on their mortgage. The global financial system was all but shutdown and there seemed to be nothing Wall Street or politicians could do to help.

Into the void stepped an unassuming former Princeton economics professor. Bernanke had spent his career studying the Great Depression and now, as leader of the world’s largest central bank, the burden of saving the world from a repeat of the 1930s fell largely to him. Only in hindsight does Bernanke’s pre-Fed experience seem like a stroke of good fortune rather than dark irony.

Right man at the right time

“He gets credit, and quite rightly so, for steering us clear of a depression back in 2008,” says Bankrate.com’s Greg McBride. “He was making up the rules as he went along in order to steer us away from that situation.” To McBride’s point, Bernanke along with then Treasury Secretary Hank Paulson, as well as Presidents Bush and Obama, resorted to drastic, often controversial measures during the crisis. To the horror of free-market advocates and “pure” capitalists everywhere the government bailed-out many financial institutions with easy money loans and backstoped investments in companies like insurer AIG (AIG) and General Motors (GM).

These measures may have saved the companies from failure but they also created a moral hazard risk. Without the threat of bankruptcy to keep it in check a bank is encouraged to take risks it otherwise wouldn’t. The economy may have been saved in 2008 but critics maintain that all the government did was replace one potential meltdown with an even bigger crisis down the road.

By keeping interest rates at nearly zero and pushing money into the economy, Bernanke’s Federal Reserve accomplished Bernanke’s goal of avoiding a repeat of the ‘30s. It’s easy to think of the Great Depression as a single event but most economists draw a distinction between the original crash that bottomed in 1933 and a second plunge in 1937. Avoiding the dreaded “double-dip” recession is the purpose of the so-called Quantitative Easing programs that are still being unwound as Bernanke leaves office. Until the economy proves itself capable of growing without this artificial stimulus it will be too early to declare Bernanke’s time at the Fed an unqualified success. By way of example McBride reminds us, "they don’t call Greenspan the maestro anymore. Not because of what happened when he was there but what happened after he left."

Whatever his legacy, the fact is Ben Bernanke is a major player in Washington DC and the latest to exit the stage in the post-crisis period. As he looks forward to the relative tranquility of the lecture circuit, books, and perhaps even a return to academia, even his critics have to acknowledge that Bernanke was instrumental in preventing the 2008 meltdown from spinning out of control. If the actions he took trigger another disaster it will happen on another Fed Chairperson’s watch and remains to be seen who's legacy such a collapse would tarnish.