Ben Bernanke’s 21st Century Monetary Policy

I think the verdict on Bernanke’s achievements is already in. As Fed chairman, he steered us through the era of the financial crisis and created the policy tools of the modern central bank. At the same time, he is both an economist and a historian. Therefore, the modern economic history he has compiled is not merely a reference for guessing the Fed’s future moves, but also carries great significance as a primary source. How wonderful it is that a historian himself becomes history, and writes history too.

If his earlier work, “The Courage to Act,” was Bernanke’s autobiography, this book deals with modern economic history and the Fed. Of course, it is not a particularly objective work of history. It is a history written entirely from the standpoint of defending Bernanke himself and the Fed’s policies. He praises and honors the Fed’s achievements in overcoming the stagflation of the 1970s and the Great Recession of the 2000s. In an age when large financial firms were collapsing one after another, how could today’s American economy exist had the Fed not boldly taken on the role of lender of last resort? Had it not been for the three major policies that Bernanke himself implemented and that have now become the basic tools of every central bank—inflation targeting, QE, and forward guidance—how could the constraint of the zero lower bound have been overcome? How much more chaotic would the world have been had the Fed failed to preserve its credibility as a crisis manager? How could trust have been earned had Bernanke and Volcker not maintained the Fed’s political neutrality? In particular, regarding the much-debated QE and forward guidance, he strongly argues that they had the effect of an additional 3 percentage-point rate cut.

On the other hand, he acknowledges the Fed’s limits and frankly admits the confusion of the financial-crisis years and the Fed’s incompetence. Even right after letting Lehman Brothers go bankrupt and bailing out AIG, the Fed forecast that it could avoid a recession. This was because subprime MBS amounted to less than 1% of the bond market, and the U.S. economy at the time was still growing. This was the case even though the credit market and the real estate market had been ruined. And it was so even though Bernanke himself was an expert on the Great Depression and the scholar who illuminated the modern understanding of it. But now he admits his misjudgment. The simultaneous collapse of the credit market and the asset market has a devastating impact on the economy. In some respects, the book is even more self-critical than his earlier work, which was an autobiography.

All of these reflections are aimed at responding to future crises through the lessons drawn from history and experience. Even though this book was written in 2022, at the very onset of the COVID inflation, his insight is trustworthy in that he foresaw it would soon subside because it was supply-driven inflation. His most striking argument is this: if the credit market and the asset market surge for three years, the likelihood of a financial crisis over the following three years rises. This is especially true of the real estate market. All of this applies to Korea as well.

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