The Real Tragedy Of The Crisis Was Congress, Not The Federal Reserve

Brad Delong has written a piece in Project Syndicate that I find to be unfairly critical of Ben Bernanke.  Specifically, Delong writes:

“In 2000, Bernanke had argued that a central bank with sufficient will could “always,” in the medium term at least, restore full prosperity via quantitative easing. If a central bank printed money and bought financial assets on a large-enough scale, people would begin to step up their spending. “

I don’t think this is quite true though.  In a 2002 speech, Bernanke was very specific about this view here:

“Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.”

The key line there is “in cooperation with other agencies”.  Bernanke was very clear when implementing QE that it wouldn’t be enough.  He even explicitly stated that it wouldn’t cause high inflation.  He said he “hoped” it would be stimulative.  And in 2010 he explicitly said fiscal policy was needed to complement QE:

“However, in general terms, a fiscal program that combines near-term measures to enhance growth with strong, confidence-inducing steps to reduce longer-term structural deficits would be an important complement to the policies of the Federal Reserve.”

We have to remember that the Fed is fairly limited in what they can do thanks to the laws Congress imposes on it. They can’t even just “print money” in the sense that many think.  They are highly limited in the assets they can buy which means they basically just have to swap the composition of current private sector financial assets.  Bernanke understood this long ago and knew it wouldn’t be enough on its own.  He asked Congress for more help and instead what we got was further fiscal retrenchment and lots of bickering that resulted in no additional fiscal stimulus of any type.