When Ben Bernanke won a share of the Nobel Prize in Economics earlier this week, I heard from a lot of irate readers suggesting that he did not deserve it because he is responsible for today’s high rates of price inflation. But the simple truth is that Bernanke, whatever mistakes he may have made as chair of the US Federal Reserve from 2006 to 2014, is not to blame for today’s predicament.
It is true that Bernanke shepherded through a major programme of quantitative easing and money-supply expansion. He oversaw a huge injection of reserves into the banking system; by October 2009 banking reserves had risen to $2.1 trillion from $870 billion before the crisis. Still, those policies did not spur massive inflation.
Yes, under Bernanke the Fed did create money and use it to purchase assets from banks — longer-term government bonds, commercial paper, mortgage securities. That increased the supply of money. But the Fed also oversaw an increase in the demand for money — bank reserves in particular — by paying interest on reserves held at the Fed. Furthermore, there were other deflationary pressures at the time, due to collapses in credit and mortgage markets.
All told, under Bernanke’s tenure average inflation rates remained below 2 percent. The Fed tried to engineer a mix of money-supply boosts and money-demand boosts that would not lead to excess inflation, and it largely succeeded. The figures for money supply alone don’t tell the whole story.
The most persuasive critiques of Bernanke, in fact, have argued that rates of price inflation should have been higher, rather than lower. That would have done a better job maintaining aggregate demand in the economy and limiting unemployment.
Sometimes it is alleged that this ‘Bernanke inflation’ was channelled into asset prices, such as equities and crypto, rather than retail or consumer prices. That hypothesis doesn’t fit the data, either. During most of Bernanke’s tenure, stock prices were broadly within historical norms, considering such measures as price-earnings ratios. Some particular stocks were overpriced, as is always the case, but stocks as a whole were not crazy high. As for crypto, inflation rates are much higher today — and crypto prices have been collapsing, not soaring.
More generally, it doesn’t make sense to talk of inflation or new money as being ‘trapped’ in one particular sector. Assume for the sake of argument that somehow inflation was concentrated in the crypto sector. You might think that sellers of crypto could just turn around, take their sales receipts, and buy more crypto. Why would you act that way? If you are bullish on crypto, why initially sell at all? Even if you did end up selling, your initial crypto sale and subsequent purchase will more or less offset each other in the crypto sector.
The reality is that, if the new inflationary monetary injection somehow flowed first into the crypto sector, it would soon find its way into the broader economy and push up prices across the board.
Another claim I hear is that the Fed simply did too much quantitative easing, which was eventually going to catch up to the economy. It’s like pumping too much air into a balloon; sooner or later it has to burst.
But monetary policy does not work that way. It does have lags, but a major inflationary episode leads to noticeable increases in inflation in a bit more than a year, as has been shown by the research of Milton Friedman and others. The effects of new monetary policy do not sit idle for a decade or more.
The actual causes of the recent inflation are pretty simple: big increases in the money supply over the last few years, too little restraint with fiscal stimulus and big hikes in energy prices, mostly as a result of the Russian attack on Ukraine. Economists disagree on the relative import of those different shocks. But they agree these are the major relevant factors, not some monetary policy decision taken in 2009.
And you know what? None of those factors is the fault of Ben Bernanke, who has been living and working peacefully near Princeton, New Jersey, consulting with a hedge fund and performing such dramatic jobs as president of the American Economic Association.
So let him enjoy his Nobel prize in peace.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. Views are personal, and do not represent the stand of this publication.
Credit: Bloomberg
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