Conducting monetary policy isn’t like driving race cars, a sport where you win by keeping your foot on the accelerator, no matter what. We hope US Federal Reserve chairman Ben Bernanke will start telling the difference.
The race car driver in Bernanke won the crowd’s approbation last month, when 74% investors polled in a Bloomberg survey gave him the thumbs up. Now, he’s received the nod from the judge too: US President Barack Obama announced his reappointment on Tuesday. But Bernanke has still given no indication of taking his foot off the monetary accelerator.
Illustration: Jayachandran / Mint
Not that this accelerator hasn’t helped. A year ago, monetary easing stabilized the rapidly declining money velocity, a measure of money flowing through the financial system, as Bernanke and other central bankers boldly combated the worst panic in decades. Output is now rising in Japan, and its decline is slowing in the US. The Chicago volatility index, or VIX—an indicator of market fear—is back to pre-crisis levels.
This confidence is also evident among central bankers. At last week’s annual Fed retreat in Jackson Hole, Wyoming, the Financial Times reported a mood of “wary optimism”. Bernanke noted that the crisis would have been far worse had it not been for the policy response. In the midst of this self-congratulation, there were few words spared for an exit strategy.
History shows why this exit is important. The accommodative policy that stoked the last bubble also occurred in the wake of previous market crashes—the tech bubble or 9/11. Then on the Fed board, Bernanke had argued in 2003 for keeping rates low for an “extended period”. As Stanford economist John Taylor has written, that did the damage.
Which is precisely the danger again today. Obama has put faith in Bernanke not just for what he has done in the past, but also for what he’ll do in the future. And nothing so far suggests that Bernanke will budge from the status quo soon.
If central bankers get comfortable with the status quo, the inertia will infect markets and distort incentives. At least Bank of Japan governor Masaaki Shirakawa warned, “Monetary policy should avoid accelerating a bubble through creating unfounded expectations for the continuation of low rates.”
Investors are already cheering the reappointment: They, no doubt, expect the fast ride to continue. But who’s going to pick up the pieces if the global economy car crashes again?
What does Bernanke’s reappointment signal? Tell us at firstname.lastname@example.org