Challenges after Bernanke

Cho Yoon-jae

Ben Bernanke last week ended his eight years of service as the head of the world’s most influential central bank. He enjoyed encomiums for saving the United States and the global economy from the worst-ever recession since the Great Depression through an unprecedented aggressive and creative policy mix, building a legacy for himself and the mighty power of the U.S. Federal Reserve. There could have been more suicides, school dropouts, job losses and broken families had he not used all the tools - imaginable and unimaginable - to fight the crisis, including the massive bond-purchasing program known as quantitative easing.

But Bernanke cannot take all the credit. He was the maestro of an orchestra of Fed committees, with support from the media, Congress, scholars and the government. He might not have pulled off his unconventional experiments in monetary policy if it not for his impressive credentials as an economist and his expertise in the Great Depression and Fed policies. He also benefited from the public confidence, won by criticizing the Fed’s role in the catastrophic Wall Street meltdown and mess caused by the subprime mortgage market. The former Princeton professor with steady and confident hands navigated through the tumultuous waves and panicky cries by employing all his knowledge and experience to safely steer the U.S. and global economy into safer and calmer waters.

His part is done, but the mission remains unfinished. While keeping interest rates near zero, Bernanke opened up an era of extraordinarily loose liquidity, using the central bank’s power of printing money to purchase bonds from financial institutions from late 2008. Through three tranches, the bond-purchasing program has quadrupled the Fed balance sheet to $4 trillion. Now comes the painful part of retracting the overspending. The Fed must smoothly temper the balance sheet by reducing the size of its bond-buying program and ultimately raising interest rates. Whether those emergency actions were right or wrong could be made known once the abnormal liquidity and interest rates return to normal. Markets long accustomed to easy and low credit could turn rocky and jittery when tightening kicks in.

Janet Yellen, who succeeded Bernanke, will need extraordinary skills in navigating a soft landing. Tapering already has spooked and shaken global markets. Emerging economies have been hit by capital flight and fears of a massive cash-out that have roiled currency and equity markets. It is now up to the governments and central banks in battered economies to clean up the disastrous mess. As the crisis-fighting monetary easing gives way to tightening, the downscale will likely cause casualties around the world.

What’s worse, the Fed’s policy did not remove or fix the fundamental problems in the system that led to the 2008 financial crisis. Globalization and advances in information technology have aggravated income inequality. The threefold wage gap between the top and bottom 10 percent of earners in 1975 widened to fivefold by 2005. The income of the richest 1 percent, which accounted for 8.9 percent of all Americans’ incomes in 1976, jumped to 23.5 percent in 2007.

Computers and automation have replaced labor. The cheap work force in China and emerging countries stole away jobs, making lives harder and harder for working-class Americans. U.S. politicians opted for the easy way out instead of seeking fundamental solutions to their country’s problems. Financial deregulation, credit and liquidity expansion boosted consumer and business borrowing, inflating assets and mortgage values, briefly winning the hearts of most Americans. The fallout has been the biggest financial debacle since the Great Repression.

The crisis-fighting process did not involve reform and restructuring. Financial regulations were tightened, but incentive-driven economic mechanisms remain intact. More cash was pumped into the system, drowning it in an excess of liquidity. The U.S. and global economy has picked up vitality, and markets and businesses have recovered confidence since surviving the crisis. The Bernanke incentives helped to get the engine going. But monetary policy cannot do the work of innovation and restructuring.

Globalization and the information age are here to stay. Income disparities will go on widening. From 2008 and 2012, the 10 percent of the highest earners pocketed 154 percent of the gains made in American incomes, leaving the remaining 90 percent to a decrease in real incomes. The United States must reinvent its education system by upgrading the quality of its public education system to even out opportunities. Individual talent and endeavors must matter instead of family wealth that defines education and income levels. The overall competitiveness of and income distribution in society also must improve.

But these reforms cannot take place overnight as they need mainstream players to be persuaded to give up some of their rights. Today’s problems were created and then worsened because politicians and economic players cling and pursue self-interests. Fixing those problems only gets attention during times of crisis, then dies down when the economy revives.

Bernanke’s work is done. But the challenging test for capitalism, democracy, globalization and the information age remains.

Translation by the Korea JoongAng Daily staff.

JoongAng Ilbo, Feb. 8, Page 31

*The author is a professor of economics at Sogang University.

By Cho Yoon-jae