The Real Tragedy of the Crisis was Congress, not the Federal Reserve

Brad Delong has written a piece in Project Syndicate that I find to be unfairly critical of Ben Bernanke.  Specifically, Delong writes:

“In 2000, Bernanke had argued that a central bank with sufficient will could “always,” in the medium term at least, restore full prosperity via quantitative easing. If a central bank printed money and bought financial assets on a large-enough scale, people would begin to step up their spending. “

I don’t think this is quite true though.  In a 2002 speech, Bernanke was very specific about this view here:

“Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.”

The key line there is “in cooperation with other agencies”.  Bernanke was very clear when implementing QE that it wouldn’t be enough.  He even explicitly stated that it wouldn’t cause high inflation.  He said he “hoped” it would be stimulative.  And in 2010 he explicitly said fiscal policy was needed to complement QE:

“However, in general terms, a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.”

We have to remember that the Fed is fairly limited in what they can do thanks to the laws Congress imposes on it. They can’t even just “print money” in the sense that many think.  They are highly limited in the assets they can buy which means they basically just have to swap the composition of current private sector financial assets.  Bernanke understood this long ago and knew it wouldn’t be enough on its own.  He asked Congress for more help and instead what we got was further fiscal retrenchment and lots of bickering that resulted in no additional fiscal stimulus of any type.

And let’s not forget the most important part here.  The Fed is really just a big clearinghouse.  It gets all of its attention for QE and interest rate changes, but 99% of what the Fed does is just automated clearing of payments which is why our banking system runs smoothly.  They are an intermediary between banks and their primary responsibility is to ensure that the banking system doesn’t shut down when panics occur.  In this regard they weren’t just a success in 2008.  The Fed was instrumental in keeping the economy alive at a time when banks didn’t even want to lend to one another.  It might be an exaggeration to say Bernanke “saved the world” in 2008, but he certainly ensured that the Fed helped continue operating as a clearinghouse and that was vital to the stability of the financial system.

Yes, it’s true that the the Fed deserves plenty of criticism and perhaps Bernanke believed too ardently in the theories of Milton Friedman and Monetarism prior to the crisis.  But he was very fiscally oriented in his views during the crisis.  And Congress failed to heed his wise advice.  That doesn’t fall on Ben Bernanke’s shoulders.  It falls on the shoulders of a Congress that has repeatedly failed its citizenry for the last 7 years.