Monday, July 16, 2012

Ben Bernanke's - A Retrospective Look at His Effectiveness

Since Mr. Bernanke is updating us on the "state of the union" from a central banker's perspective, I thought that it would be a good idea to take a look back at his tenure as the man at the helm of the world's largest economy and how his policies have impacted a few aspects of life in America.  Here's what the economy looked like when Mr. Bernanke took the position of Chairman of the Fed on February 1, 2006.

Unemployment was 4.8 percent:

Here's what unemployment looked like after February 2006 (please note the change in scale):

Unemployment peaked at 10 percent in October 2009 and has fallen to 8.2 percent and has been stuck in a range from 8.1 to 8.3 percent since the beginning of 2012.

When Mr. Bernanke took over from his predecessor, this is what employment looked like:

In February 2006, 135,413,000 Americans were employed and employment growth was rising nicely after its post-recessional drop.

Here is what has happened to the number of employed Americans since then:

The number of employed Americans hit a peak of 138,023,000 in January 2008, then fell to a low of 129,244,000 in February 2010, a drop of 6.5 percent.  Since then, the number of employed Americans has risen to 133,088,000, a rise of only 3 percent.  The economy is not even close to making up for the jobs lost in the period from 2008 to 2010.

Real GDP per capita had grown from $44,081 in the year 2000 to $48,095 in 2006, a rise of 9.1 percent, as shown here:

By 2010, it sat at $46,844, a drop of 2.6 percent since Mr. Bernanke took office:

Here's what the Fed's benchmark interest rate looked like prior to Mr. Bernanke's rule:

Here's what it has looked like since, showing a modest amount of policy desperation:

While low interest rates seem good on the surface, sometimes they work against us.  Since longer Treasuries formed an important component of pension plans in the early part of the millennium, let's look at the interest rates on 10 year Treasuries.  The interest rate on 10 year Treasuries was a reasonable 4.57 percent in February 2006, down from its high of 6.79 percent in January 2000:

As shown here, ten year Treasuries are now yielding 1.52 percent, a drop of just over 3 percentage points since Mr. Bernanke appeared as Fed Chairman:

This has forced pension plans to look at riskier equity investments to meet their 7 to 8 percent expected rate of return and, thanks to this prolonged period of ultra-low interest rates, many pension plans are heavily under-funded.

Lastly, let's look at the M2 money supply prior to the Bernanke era:

From the beginning of the new millennium until February 2006, M2 grew from $4.633 trillion to $6.696 trillion, an increase of 44.5 percent.  

Here's what has happened since:

M2 money supply has grown to $9.992 trillion, an increase of 49.2 percent.  This is nearly double the level of January 2000.

As background information for those of you who are not aware, Congress sets the salaries of the Federal Reserve Board Members.  This year, the Chairman's salary was set at $199,700 and the other Board members receive $179,200.  The members of the Board of Governors are nominated by the President and, even though they are supposed to represent a wide range of industries, many of them tend to have banking backgrounds.  They are appointed for a 14 year term and they may not be reappointed.  Here's a quote from the Federal Reserve website:

"Once appointed, Governors may not be removed from office for their policy views. The lengthy terms and staggered appointments are intended to contribute to the insulation of the Board--and the Federal Reserve System as a whole--from day-to-day political pressures to which it might otherwise be subject."

Ben Bernanke was appointed as a member of the Federal Reserve Board on February 1, 2006, the same day that he started his first term as Federal Reserve Chairman.  His 14 year term as Board member ends January 31, 2020 and his current term as Chairman ends on January 31, 2014.

Now that we've seen how well Mr. Bernanke has done, here is a link to the Federal Reserve Bank of San Francisco website.  This game will allow you act as Federal Reserve Chairman, changing the federal funds rate and seeing how it impacts inflation and unemployment.

I wonder if Mr. Bernanke uses this as a policy tool?  Could it be any worse than all of that ineffective easing and Twisting?


  1. 17th July 2012
    The FEDS are now coming clean to the public. If you recollect, during the last 25 years, the fed has been saying that all is fine with the economy and if it is not fine, they have enough ammo to deal with any crisis.

    All these years, the Americans and the West Europeans were being drugged with a combination of high credit and protection. These people forgot what utilisation of LIMITED resources was. They were drugged in to compliance.

    Bernanke (and the US administration) is merely treating the symptom. The underlying cause is huge money supply (the cancerous growth) that is not backed with a sound business plan. Well, I guess that the US will implode under it's own drug overdose by 2016. Before that, . I expect Some European governments will topple and chaos will reign in the BAD 3 (US, Western Europe and Japan - Japan may escape). And not treating will bring the chaos closer and more violent.

    What will happen is that the stock markets will die a natural death and at the same time you will see an increase in PE and VC funds. These funds will increasing invest in companies bearing in mind that their exit routes will not be through the stock market but sale to strategic investors. George Soros has returned money to out side investors in the fund, stock markets are going in to lower orbits over a period of time with short spikes (very high) because growth is lacking in the OECD countries.

    Best wishes

    Kishore Nair from Mumbai

  2. The data shows that things haven't gone well while Bernanke's been in office. A reasonable interpretation is that Bernanke has done a terrible job. However, this mistakes correlation with causation. For example, someone could slam the Democratic House with the same data because they became the majority in 2006.

    This isn't fair unless you subscribe to the idea that he had the power to fix the situation. I don't happen to believe that. As you point out, the Fed has certain tools, and these tools may not be enough. In fact, the additional tools that elected governments haven't been enough either, as the $800B stimulus for 2009-2010 show.

    I'm not sure what Bernanke should have done when he was handed a bubble economy with generally low inflation but speculation in housing and financial products.

    The time to have reined this in was on his predecessor's watch. I'm not surprised that Bernanke has miserable results because there's no magic wand for such a huge financial crisis.

    1. I agree that much of our current problems started under the disasterous chairmanship of Mr. Greenspan... but sadly for us Mr. Bernanke is even worse in almost every regard as Mr. Greenspan... when we talked about a Greenspan put, today we need to talk about the Bernanke CDO squared put... back when greenspan was hiking rates in 2004, bernanke was going on about dropping money from helicopters... the guy is a total loose cannon who should be run out of dodge (Washington) after being tarred and feathered.

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