Ben Bernanke led the Federal Reserve through the tumult of the financial crisis, trying unprecedented bailouts of financial institutions and liquidity efforts like bond-buyback programs. But those policies only scratch the surface of the legacy being left behind by Bernanke, who’s second term ends next year.
“They were starting policies that had never been tried before,” says Mitch Abolafia, a sociology professor at the University at Albany who has studied how the Fed communicates.
He says the thinking at the time went, the measures to save the economy are so unusual and so hard for the public to understand that “unless we get ahead of it and explain it in more detail than we normally would, they are bound to misinterpret what it is we are trying to do.”
And that led to what some say is the biggest change at the Fed under Bernanke’s leadership.
“The impact Bernanke has on increasing transparency, being clearer about long-term goals, is going to be part of his lasting legacy,” says Carl Walsh, a professor of economics at the University of California, Santa Cruz.
The Fed, for most of its existence, was exceedingly secretive. That started to change in the early 1990s, but it really changed during the financial crisis. Politicians and the public began to question the Fed’s legitimacy, so Bernanke defended it. He broke tradition and spoke with a journalist, Scott Pelley on CBS News’s “60 Minutes.” Bernanke decided to hold regular news conferences, and he returned to the classroom, giving a series of lectures at George Washington University.
But what may be more important is the kind of guidance Bernanke and the Fed have given economists and investors. It’s more concrete, long-term guidance. Abolafia says this move toward greater transparency at the Fed comes out of an economic theory called “Rational Expectations.”
“It said that markets will work better if the people in the markets know what to expect,” he explains.
But Abolafia predicts it’ll get tougher for the Fed to be transparent when it stops buying bonds and it faces political resistance to raising rates.
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