Take Bernanke, again. During his first FOMC stint from 2002 to 2005, the committee responded to a deflation ‘scare’ with successive rate cuts dropping the fed funds rate to a 45-year low of 1%. In just a few years time, people would see that boost to the credit markets as a mistake. And Bernanke was closely associated with it – he had long argued for fighting deflation with extreme measures. He then downplayed the risks of his preferred policies, as in his insistence that falling house prices were a ‘pretty unlikely possibility’ and subprime mortgage troubles were unlikely to result in significant ‘spillovers.’
So Bernanke was a central figure in the lead-up to the crisis, but you already knew that. Our point is that it had little effect on his reputation. Among mainstream economists and in the mainstream media, he’s currently basking in the admiration of his ‘courage to act.’ By comparison, his critics, mostly in the financial sector and outside the mainstream, point to his shortsightedness. Which perspective wins? As of today, the ‘hero tale’ dominates. Just as presidents need only act presidential to gain plaudits during wartime, central bankers need only act aggressively to gain plaudits during financial crises. In either case, it doesn’t matter what came before.
Why the Fed’s Priorities are Changing
With those ideas in mind (that we’re dealing with perceptions more than realities), let’s look at the reputational risks faced by today’s FOMC. We’ll argue that the current decade’s primary risk – the risk of a 1937-style relapse into recession – is fading in importance. Until recently, an echo recession similar to the one that snuffed out the mid-1930s recovery would have been a reputation killer. It would have led people to question whether the 2008 – 9 recession would morph into another Great Depression, after all.
This post was published at Zero Hedge on Sep 6, 2017.