"And there but for the grace of Bernanke go we."
That is Paul Krugman's reaction to the ECB's surprise moves this week to combat what the NY Times columnist and Nobel-winner calls the "deflationary vortex" gripping Europe.
An open question is whether the European Central Bank's announcement of rate cuts, charging banks for deposits and a new program to buy asset-backed securities is too little; pretty much everyone agrees it's too late. Saturday marks the 6th anniversary of the U.S. government's takeover of Fannie Mae and Freddie Mac, a major milestone in the financial crisis that hit its apex with Lehman Brother's bankruptcy filing on Sept. 15, 2008.
Based on the economic performance of the U.S. vs. Europe, it seems pretty clear six years later that Ben Bernanke was right to act aggressively and hastily, in contrast to his counterparts in Brussels. America's economy isn't exactly going gangbusters but it's going a whole lot better than the EU's right now and Bernanke deserves a lot of credit for standing up to the "hard money" crowd, who persistently declared that the Fed's easy money policies would lead America to ruin.
So did Ben Bernanke "save" the U.S. economy? You can never prove a counterfactual -- i.e. what would have happened if the Fed hadn't acted -- but the doomsayers were dead wrong, or at least dreadfully early in their prognostications, as Henry Blodget and I discuss in the accompanying video. Most notably, the Dollar Index is up about 16% from its lows of June 2008 rather than having turned into toilet paper, as Bernanke's biggest critics warned (and many still do). And foreigners haven't "dumped" U.S. Treasuries en masse sending rates skyward as, again, so many predicted.
After praising Bernanke, Krugman's column wanders into the political debate, as his wont: "Inflation paranoia has, to a remarkable extent, become a matter of conservative political correctness," he writes.
The corollary, of course, is that left-leaning politicians prefer easy monetary policies because they make government spending easier and inflation is a debtor's best friend.
Left out of this partisan discussion, unfortunately, is the more fundamental issue for economic policymakers: It's pretty clear the Fed's uber-easy policies are distorting the financial markets, and could lead to more bubbles -- if they haven't already. So if America's economy really is on the mend, do we really still need monetary policies that were designed to address what Bernanke himself recently called "the worst financial crisis in global history, including the Great Depression”?