Two names, in recent history, come to mind when you recall individuals who have been able to put to practical use their work as PhD scholars. The first is Manmohan Singh who, as finance minister, got to test his hypothesis that the value of a currency was critical when it came to stimulating exports. The second, Ben Bernanke who was able to implement what as a PhD scholar he postulated were the lessons of the Great Depression—that the lack of accommodative monetary policies in the 1930s are what aggravated the economic downturn. The fact that, as Hugo Dixon’s column on these pages points out, the US economy is roughly 6% above its pre-crisis peak while Europe—which did not follow the ultra-accomodative Bernanke-type polices—is still 3% below its pre-crisis peak is evidence of just what Helicopter Ben did for the US with his quantitative easing. Dixon argues, though, that Bernanke got it wrong for the first few years.
It is possible that history will judge Bernanke differently, just as it did his predecessor whose ‘Greenspan Put’ encouraged irrational exuberance of the sort that, aided by the government’s populist housing policies and the banks’ disguising of sub-prime loans, led to the current crisis. The big difference, though, is that had Greenspan cracked down, economic growth would only have slowed; had Bernanke not opened the central bank’s spigots, we would have been deep in Great Depression 2.0—indeed, Abenomics in Japan is based on this very premise.
Bernanke’s successor Janet Yellen, much like Abhimanyu in the Mahabharata, is now tasked with getting out of the chakravyuh. The task isn’t going to be easy and, as Bernanke himself discovered, if the market is not adequately prepared, easing the taper can lead to disastrous consequences. Yet, the second time around, with a lot more forward guidance, the markets took a more positive view of the taper. Yellen’s mettle will be tested on her ability to stay the course, to not get rattled by events such the emerging markets fear a few days ago, and to continue to guide markets on what to expect. Not just in terms of unwinding QE but also in terms of the timing over which overnight Fed rates will start rising again.