It is my unbounded delight that Professor Ben Bernanke, the Chair of the United States of America Federal Reserve (USA Fed or US Fed) between February 1, 2006, and January 31, 2014, has been named as one of three winners who will be awarded the Nobel Memorial Prize in economics for the year 2022. My team and I have been beneficiaries of Bernanke’s insights for long. I had written the case in May 2020 for awarding Professor Bernanke the Nobel Memorial Prize in economics.
The past six months have not been good for central banks. Central banks of the world have been castigated for colossal professional indifference, inattentiveness and lack of application. The announcement of the Nobel Memorial Prize in economics in October 2022 is a balm. It brings joy to those who understand and appreciate the complex tasks that central banks perform.
As for Bernanke, he made full use of the monetary freedom that resulted from the death of the gold standard. He steered the economy of the US from the depths of the Great Recession through repair, recovery and rejuvenation. Output had shrunk by 5.1 per cent between December 2007 and June 2009.
My team’s professional association with Bernanke and the US Fed began in July 2007 . The US economy was in big trouble. The misery had begun in 2005. Our job was to understand the causal factors. The wreckage became most evident on September 15, 2007, when Lehman Brothers presented itself for liquidation of its assets. Bernanke made the best use of the full range of monetary tools to accomplish a whole lot in very little time. He could hand the baton over to his successor, Janet Yellen, on January 31, 2014, with his chin up. Yellen is Treasury Secretary in the administration of President Joe Biden.
The US economy had become a victim of a stubborn and vicious flat yield curve from 2005. Flat yield curves are truly venomous. The incumbent US Fed Chairman, Alan Greenspan, did not do anything to avert the impending disaster. The US economy was bleeding. Jobs and demand collapsed. The mortgages market collapsed. The housing market collapsed.
The US Fed did nothing to yank bank the yield curve from flat to normal. On Greenspan’s last day in office, January 31, 2006, the FOMC authorised a hike of 25 basis points in the Federal Funds rate. It rose from 4.25 per cent to 4.5 per cent.
Bernanke — Greenspan’s successor — went for three rate hikes of 25 basis points in his first five months in office as the US Fed Chairman in 2006.
The US Federal Funds rate touched 5.25 per cent on June 29, 2006. Strangely, the 5.25 per cent was held until September 18, 2007. The Great Recession took hold during these 14 months. America’s nose was held under the water for 14 months. Then it stopped breathing. My team (I was then associated with Goldman Sachs) was privileged to be working with him at that time.
Bernanke understood what had to be done. The Great Recession began in December 2007. Bernanke had made two rate cuts before the recession was officially declared to have taken hold. The first was by 50 basis points on September 18, 2007. The second was by 25 basis points on October 31, 2007.
There was a third rate cut of 25 basis points on December 11, 2007. By then the Great Recession was deepening and spreading. The Great Recession lasted until June 2009. Output shrank by 5.1 per cent.
There would be seven more rate cuts in 2008. The US Federal Funds rate was set to range between 0.00 per cent and 0.25 per cent on December 16, 2008. Bernanke did everything possible to pull the economy out of recession and to get it back into shape. The Great Recession ended in June 2009. The economy began to gain stability and traction.
Bernanke used a range of monetary tools to yank back the yield curve to normal. Thereby, he yanked back the economy out of gloom. First, by holding down the US Federal Funds rate, the Treasury yield curve was given the lowest possible intercept.
Second, by expanding money supply, the US Fed made up for the loss in money velocity. The economy began to grow. Third, through quantitative easing, the yield curve was actively sloped through the maximum possible term to regain the shape of a normal yield curve.
Bernanke oversaw the impact of these purposeful policies on the real economy and on the fiscal health of the US. He has been justly named the winner of the Nobel Prize in economics in 2022.
The writer is the founder of CreaSakti, a financial and economics consultancy