The idea that Ben Bernanke deserves credit for saving the nation from an economic catastrophe omits two possibilities: that we haven’t really recovered from anything, and that his policies have laid the foundation for even bigger problems ahead.
The actions taken by the Bernanke Fed have no precedent, and he has admitted to flying blind. But the bond buying (known as quantitative easing, or QE for short) that created feel-good asset bubbles in stocks, bonds and real estate was the easy part. To complete the process, the Fed must conjure an exit strategy to dispose of the nearly $4 trillion of assets that it now holds without puncturing any of the bubbles that its buying spree created.
Bernanke is like a novice airline pilot who has managed to take off and fly steady. The passengers celebrate the smooth ride, but he (or, more accurately, Janet Yellen) still has to land the plane. On that front the Fed remains clueless.
QE has provided the ultra-low interest rates that juice corporate profits, push up stock prices and lower the cost of debt finance for highly leveraged corporations, overstretched home owners and a hopelessly indebted federal government. These stimulants masquerade as real economic heath but have created a dangerous dependency.
The Fed is the biggest buyer of mortgages and Treasury debt, yet no one questions the likely outcome when the Fed stops buying. With no entity capable of matching the Fed’s buying power, interest rates will surely rise. But our bubble-dependent economy can no longer tolerate such headwinds.
While many speak about how Bernanke engineered the apparent turnaround, in reality he only had one tool, the printing press. And when the going got rough, Ben started printing … and printing.
He was lucky that the inflation he unleashed pushed up asset prices far more noticeably than it did consumer prices. But eventually, the inflation the Fed so eagerly seeks will hit consumers hard.
When it does, Bernanke’s successor will be powerless to fight it without sparking a financial crisis that is even more severe than the one he supposedly defeated.