This research is important and could be useful to central bankers, except it didn’t help Mr. Bernanke when he was at the Federal Reserve in the 2000s and 2010s. It may have done the opposite. We’d argue now, as we argued at the time, that Mr. Bernanke and the Fed created the monetary conditions that led to the worst financial panic in 80 years.
As a Fed governor in 2002-2005, Mr. Bernanke made news by claiming the biggest economic risk was deflation. He persuaded his colleagues and Chairman Alan Greenspan to keep interest rates unusually low in spring 2003 even as a tax cut passed and the economy boomed. Asset prices soared, especially the housing market, but the Fed kept supplying a subsidy for credit with negative real interest rates.
As Mr. Bernanke’s research showed, the financial panic and crash that followed the asset mania sent the economy into recession. Mr. Bernanke took over as Fed chairman from 2006-2014. Yet the Fed failed to anticipate the financial panic and crash. Like many economists and most politicians, the Fed viewed financial stability as a matter of regulation while ignoring the incentives created by monetary policy.
Join the conversation as a VIP Member