Federal Reserve Saved Economy with Quantitative Easing
Student of History, Fed Chairman Bernanke Avoided Mistakes of Great Depression
By Derek Handova
With the Federal Reserve’s Quantitative Easing policy ending, members of the Federal Open Market Committee are finally speaking of normalizing interest rate policy for the first time since the 2008 Financial Crisis, including San Francisco Federal Reserve President John Williams. What he does not say is that the Federal Reserve under Chairman Ben Bernanke saved the world economy during the financial crisis with its unusual and drastic set of never-tried-before monetary policies.
Before 2008, who ever would have thought the Fed could finance 71 percent of total federal debt issuance such as it did in 2013? Such unorthodox thinking could not and would not stop Bernanke from taking quick action to avert complete disaster. Bernanke’s long scholarly interest in the Great Depression informed him as to the mistakes the Fed made in the 1930s to not stem and later exacerbate the underlying causes of the problem.
When Bernanke saw the danger signals flash in 2008 he took immediate, decisive steps that his predecessors would not. Not only did he slash interest rates to virtually zero and began wholesale buying of U.S. Treasuries he also opened up the so-called discount window to the last big investment banks, Goldman Sachs and Morgan Stanley, so they could get easy access to cheap capital rather than fall prey to financial schemes of sovereign wealth funds or opaque holding company patterns of foreign banks. With this last change, all the Wall Street titans that engineered the crisis were either dead (Lehman Brothers), merged (Merrill Lynch, Bear Stearns) or under tight Fed control (Goldman, Morgan).
Secretary Paulson deserves equal credit for 2008 While Bernanke can take a great deal of the credit for averting a sequel to the Great Depression, he is not the only one responsible. An equal amount or even greater tip of the hat of history needs to go to Secretary of the Treasury Henry (Hank) Paulson. Though some fault former Secretary Paulson for the ongoing distrust and resentment of Wall Street that average run-of-the-mill Americans feel, the fact is in the middle of the crisis, no one stood taller — figuratively or literally — than the nearly 6-foot-6 ex investment banker.
When Paulson delivered his infamous “ransom note” to Congress for $700 billion even though it was dead on arrival, it nonetheless drove home the enormity of the calamity facing the interconnected financial system of the early 21st century. Through the interlocking mortgage security-backed credit default swaps that the investment banks had sold to each other and the insurance backing up those securities sold primarily by AIG, the international monetary regime began to resemble a house of cards. One wrong move and the entire deck would collapse. Only in this case, the collapse would take the life savings and 401(k) retirement accounts of an entire nation down the proverbial drain.
Much has been made of these two men. Some call them saviors of the capitalist tradition. Others have demonized them as socialists comparable to Karl Marx. But now both have retired and have issued memoirs or will issue memoirs of their time in office. You can decide for yourself if their versions match up to the long judgment of history.
Background image: “ Federal Reserve Building in Washington D.C. — Illustration.” Photo credit: DonkeyHotey / Foter / CC BY
