The Prospector had an in-depth chat with leading economist and author George Magnus on a wide range of domestic and global economic issues. This is the third of four parts of the interview which will be published here in the coming days.
Jay Elwes: In the US, Ben Bernanke is stepping down as Chair of the Federal Reserve at the end of this month. He has had to deal with the most extraordinary of circumstances—do you think he did well?
George Magnus: Yes. Well it’s always a balance sheet approach: on this side of the ledger on the other side of the ledger. All things considered, he was the right man in the right position at the time that wasn’t of his choosing.
However, I think we can fault Bernanke in a couple of ways. The first was he was one of the people that articulated the wonderfulness of the period called the “Great Moderation” which we now know was a complete figment of everyone’s imagination. It was just a temporary period of economic stability which was doomed to fail. He wasn’t the only one that didn’t see the crash coming—but if history is going to be a judge, it will be judged that he didn’t see it coming and he was in a very prominent position as the Chairman of the Federal Reserve and was certainly aware of problems in the banking industry and in mortgage lending, sub prime loans and structured credit. But he didn’t join the dots. So in that sense he probably gets marked down on his performance pre-2008-9.
But once the crash happened I think his leadership was exemplary and a lot of the reason why America began to come out of the slump and perform better than a lot of other countries—and earlier—was because the frailties and problems of the financial system were addressed robustly and forcefully. He wasn’t the only character here, the Treasury Secretary, Hank Paulson deserves some credit for this as well. But Bernanke was the continuity and on his watch the financial system was fixed as far as it needed to be, in terms of recapitalising and getting lending flowing again. And he should take a lot of credit for that. He experimented with what we now call "unusual monetary policies", such as quantitative easing, the purchases of assets, both mortgage assets and treasury bonds. He initiated the policy of “Forward Guidance” which has probably had a better run than in the UK under Carney’s short term of office so far.
So his track record post-2008—people may say or exaggerate and say that he was the man that saved the world, but he had a lot to do with it for sure in my view.
JE: And you think QE was the right thing to do and that it has not left the US with a unique and rather difficult problem?
That’s a good question. I think when quantitative easing was introduced at the very beginning when the credit system had frozen up and the arteries through which credit flowed had clogged up, the introduction of QE at that time was unquestionably the right thing to do. It worked very successfully in re-liquefying the financial system. Things began to change in 2009-2010 and Ben Bernanke at the Federal Reserve and other central banks, began to look at QE not just as something that you could do, or you should do to try and address the freezing up of credit, but also to promote economic growth.
At that point, and subsequently, it becomes a little bit more contentious. On the one hand, you could say the central banks had to do this because governments decided—a lot of us would say wrongly—that their mission was: to slash budget deficit; fiscal restraint; austerity. Given that they were doing that, there was no option maybe other than for monetary policy to be much more expansionary than otherwise it might’ve been.
At the same time, we know that QE has had unintended consequences: it keeps zombie borrowers alive, keeps zombie banks alive, it distorts the price of capital, slashes interest income in the economy—so that’s another drag on economy activity—and it creates asset price inflation, which we have to subsequently try to control. So having decided at the time that Quantitative Easing was just something for which there was no other policy option available, it was always going to be a difficult time to come when the right time came for Quantitative Easing to be withdrawn. It’s kind of apt now that Bernanke is bowing out, having done his bit as it were, at a time when the Federal Reserve is now gingerly moving, or has just started to adopt policies which will taper or unwind some of these asset purchase programmes, and their programme such as it is at the moment should be pretty much completed after the summer or later this year.
So I welcome that personally. It’s a good idea that we should end the policy of QE as soon as it’s reasonable to do so and for interest rates to gradually go back to whatever we think normal is. It’s a difficult transition and we don’t know how this will end up. It’s not something that we can lay at Bernake’s door, I think on his watch he did the right thing and he’s done his bit.
JE: So how do you view the Greenspan legacy in the light of Bernanke and his achievements?
I worry now how enthusiastic I was during some of those years that we called the “Great Moderation”, about the power of the Federal Reserve, central banks and Alan Greenspan and so on. And it strikes me even with what he’s said and written since his retirement that he’s slightly unrepentant about what happened.
I do see his legacy as an important part of why finance ran amok during—certainly during the 1990s—but it became particularly acute in the 2000s. Bernanke came into the Federal Reserve in 2002 and assumed chairmanship in 2006. But by then it was too late. All the damage had been done and was waiting to manifest itself. I don’t see how you can not lay that at Alan Greenspan’s door. On his watch, he was responsible for financial stability, he was responsible for regulation by the Federal Reserve, which included mortgage lending and activities of banks for retail and investment banking. He was responsible for the singular focus on consumer price inflation rather than a wider definition of inflation, which would incorporate asset prices. He made all sorts of very well-argued cases at the time about why interest rates were so low and that this was part of a new structure of the world economy and global capital flows and so on.
I think that’s all been proven to be a fantasy and we know how it all ended up. In my view, he has to take a large share of the blame.
Jay Elwes: In the US, Ben Bernanke is stepping down as Chair of the Federal Reserve at the end of this month. He has had to deal with the most extraordinary of circumstances—do you think he did well?
George Magnus: Yes. Well it’s always a balance sheet approach: on this side of the ledger on the other side of the ledger. All things considered, he was the right man in the right position at the time that wasn’t of his choosing.
However, I think we can fault Bernanke in a couple of ways. The first was he was one of the people that articulated the wonderfulness of the period called the “Great Moderation” which we now know was a complete figment of everyone’s imagination. It was just a temporary period of economic stability which was doomed to fail. He wasn’t the only one that didn’t see the crash coming—but if history is going to be a judge, it will be judged that he didn’t see it coming and he was in a very prominent position as the Chairman of the Federal Reserve and was certainly aware of problems in the banking industry and in mortgage lending, sub prime loans and structured credit. But he didn’t join the dots. So in that sense he probably gets marked down on his performance pre-2008-9.
But once the crash happened I think his leadership was exemplary and a lot of the reason why America began to come out of the slump and perform better than a lot of other countries—and earlier—was because the frailties and problems of the financial system were addressed robustly and forcefully. He wasn’t the only character here, the Treasury Secretary, Hank Paulson deserves some credit for this as well. But Bernanke was the continuity and on his watch the financial system was fixed as far as it needed to be, in terms of recapitalising and getting lending flowing again. And he should take a lot of credit for that. He experimented with what we now call "unusual monetary policies", such as quantitative easing, the purchases of assets, both mortgage assets and treasury bonds. He initiated the policy of “Forward Guidance” which has probably had a better run than in the UK under Carney’s short term of office so far.
So his track record post-2008—people may say or exaggerate and say that he was the man that saved the world, but he had a lot to do with it for sure in my view.
JE: And you think QE was the right thing to do and that it has not left the US with a unique and rather difficult problem?
That’s a good question. I think when quantitative easing was introduced at the very beginning when the credit system had frozen up and the arteries through which credit flowed had clogged up, the introduction of QE at that time was unquestionably the right thing to do. It worked very successfully in re-liquefying the financial system. Things began to change in 2009-2010 and Ben Bernanke at the Federal Reserve and other central banks, began to look at QE not just as something that you could do, or you should do to try and address the freezing up of credit, but also to promote economic growth.
At that point, and subsequently, it becomes a little bit more contentious. On the one hand, you could say the central banks had to do this because governments decided—a lot of us would say wrongly—that their mission was: to slash budget deficit; fiscal restraint; austerity. Given that they were doing that, there was no option maybe other than for monetary policy to be much more expansionary than otherwise it might’ve been.
At the same time, we know that QE has had unintended consequences: it keeps zombie borrowers alive, keeps zombie banks alive, it distorts the price of capital, slashes interest income in the economy—so that’s another drag on economy activity—and it creates asset price inflation, which we have to subsequently try to control. So having decided at the time that Quantitative Easing was just something for which there was no other policy option available, it was always going to be a difficult time to come when the right time came for Quantitative Easing to be withdrawn. It’s kind of apt now that Bernanke is bowing out, having done his bit as it were, at a time when the Federal Reserve is now gingerly moving, or has just started to adopt policies which will taper or unwind some of these asset purchase programmes, and their programme such as it is at the moment should be pretty much completed after the summer or later this year.
So I welcome that personally. It’s a good idea that we should end the policy of QE as soon as it’s reasonable to do so and for interest rates to gradually go back to whatever we think normal is. It’s a difficult transition and we don’t know how this will end up. It’s not something that we can lay at Bernake’s door, I think on his watch he did the right thing and he’s done his bit.
JE: So how do you view the Greenspan legacy in the light of Bernanke and his achievements?
I worry now how enthusiastic I was during some of those years that we called the “Great Moderation”, about the power of the Federal Reserve, central banks and Alan Greenspan and so on. And it strikes me even with what he’s said and written since his retirement that he’s slightly unrepentant about what happened.
I do see his legacy as an important part of why finance ran amok during—certainly during the 1990s—but it became particularly acute in the 2000s. Bernanke came into the Federal Reserve in 2002 and assumed chairmanship in 2006. But by then it was too late. All the damage had been done and was waiting to manifest itself. I don’t see how you can not lay that at Alan Greenspan’s door. On his watch, he was responsible for financial stability, he was responsible for regulation by the Federal Reserve, which included mortgage lending and activities of banks for retail and investment banking. He was responsible for the singular focus on consumer price inflation rather than a wider definition of inflation, which would incorporate asset prices. He made all sorts of very well-argued cases at the time about why interest rates were so low and that this was part of a new structure of the world economy and global capital flows and so on.
I think that’s all been proven to be a fantasy and we know how it all ended up. In my view, he has to take a large share of the blame.
