'Helicopter Ben' Flies Away

NEW YORK (TheStreet) -- During the worst years of the Bush Administration, Stephen Colbert would ask the same question of every liberal guest. "George W. Bush. Great president or greatest president?"

It always got a laugh.

The fact is that a Federal Reserve chairman, like a president, is measured by the times. Elect Abraham Lincoln in the 1920s and you might get Calvin Coolidge.

Ben Bernanke came to the Federal Reserve in a Coolidge-like era but was forced, once in office, to become the Fed's Lincoln, facing down the gravest economic crisis the U.S. had faced since the Great Depression.

Fortunately for us, his academic life had told him what to do.

He is called "Helicopter Ben" because he really believes, like the great monetarist Milton Friedman, that deflation is the great enemy in a downturn, and that it can be prevented if enough new money is pumped into the economy. 

Before becoming Fed chair in February 2006, Bernanke was best known as a student of the Great Depression, publishing an important paper on it in 1994, a book of essays on it in 2004 and delivering a lecture shortly that same year, which concluded with these words:

By allowing persistent declines in the money supply and in the price level, the Federal Reserve of the late 1920s and 1930s greatly destabilized the U.S. economy and, through the workings of the gold standard, the economies of many other nations as well.

When the crisis hit, Bernanke applied these lessons. But the head of the Fed is a bank regulator. He can't throw money out of helicopters onto ordinary people. Government spending is a function of fiscal policy, controlled by the President and the Congress.

When what I call the "money strike" hit, Bernanke responded by throwing money at it, resulting in the policy called "Quantitative Easing (QE)," in which the central bank buys long-term financial assets to increase the money supply and reduce borrowing costs, even when nominal rates are near zero. QE will be Bernanke's legacy.

Has QE worked? It has worked for the bankers. It has worked for investors. It has worked for the stock market. For most readers of TheStreet.com, it has worked a treat. But giving money to corporate treasurers, to bankers and to investors is no guarantee this money will go into creating jobs. It's a limited tool.

What we now call the "Great Recession" is lifting, but only at a rate we apply to the later years of an economic recovery. The usual fast acceleration of past recoveries hasn't taken place and unemployment remains at 7% -- far above where it should be.

Not everyone is a Bernanke fan. Investment strategist Michael Gayed has called QE a "House Of Cards." Global investor Jim Rogers believes all this will end in tears and the Federal Reserve should be closed.

Since the expiration of the 2009 stimulus, which only halted the economy's slide because the depth of that slide was underestimated, fiscal policymakers have emphasized austerity.

Increasing taxes and lowering spending takes money out of the economy, just as monetary policy is putting money into it. The annual government deficit has been cut in half but poor people are suffering, and those in the middle class are more squeezed than ever.

Some critics would like to blame "Helicopter Ben" for this, but it's not his job to give people jobs. It's the Fed's job to create money or destroy it -- not to decide where it goes. Ben Bernanke has shown both the strengths and the limits of monetary policy. He could free the money but not direct reconstruction.

Putting fiscal policy in harness to monetary policy might have brought us to a better place by now. Maybe, in retirement, Ben Bernanke might give us the seminal paper on that. I hope politicians read that one carefully.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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