|Ben Bernanke said one of his few regrets from his tenure as chair of the U.S. Federal Reserve is that he was unable to persuade a larger chunk of American public that the steps taken by the central bank at the height of the financial crisis were aimed at helping the entire country, not just the banks.
“There was a sense we were favouring Wall Street as opposed to Main Street,” Mr. Bernanke said in a speech to business leaders in Toronto on Tuesday. “That is unfortunate [but I'm] not sure what we could have done differently.”
At the time, he made considerable efforts to communicate what he was doing to the public, by appearing on shows like 60 Minutes and speaking to the media but he was never completely successful. That’s partly because of the perception that the middle class has been shrinking, especially since 2008, at the same time as top income earners have been getting wealthier.
A highly followed report published by the New York Times on Tuesday shows the middle class in the U.S. has suffered mightily while the affluent have largely done very well. The U.S. middle class had done so poorly, that the equivalent cohort in Canada has caught up to them, according to the Times report.
Reports like the Times story often spark howls of protest that the actions taken in the credit crisis disproportionately benefited those with Wall Street bonuses and large stock portfolios as the U.S. market rebounded to record highs. At the height of the turmoil that began in 2008, the Fed responded aggressively by cutting benchmark interest rates to zero and extending hundreds of billions of dollars of liquidity to financial institutions across the country hit by an unprecedented and catastrophic drying up of short term funding markets.
It was part of a co-ordinated effort among central bankers from all the major economies, and it succeeded in preventing the banking system from getting sucked into the abyss. However the U.S. economy still took a beating and Mr. Bernanke has taken a few knocks himself from critics who argue he could have done more to protect the jobs of average Americans.
Such criticisms are unjustified, according Paul Beaudry, an economics professor at the University of British Columbia. Mr. Bernanke “was incredibly creative and flexible in his actions and I don’t think he could have done much more,” said Professor Beaudry. “There was a recession, but the Fed can’t solve everything.”
One of the challenges was that whatever measure the central bank chose, there would be a part of the population that would be helped and a part that would not. Low interest rates are a good example because they helped people and companies that were able to borrow, but they hurt pensioners and others who are dependent on investment income.
“He was in a situation where you’re damned if you do, and damned if you don’t,” said Pierre Siklos, a professor at Wilfrid Laurier University. “I have a lot of sympathy for him.”
While the growing income gap and the declining middle class in the U.S. can’t be fully laid at the feet of Mr. Bernanke, some of the key actions taken by central bankers during the crisis continue to have a major impact on changes in the North American economy.
The low interest rate policies are a good example. Without question they helped save the global financial system from collapse, but they have also had unintended consequences, such as hugely elevated housing prices in Canada, the U.K. and parts of Asia.
Mr. Bernanke acknowledged that such “distortions” in the markets are a problem, and how to deal with them is “a difficult question.”
If distortions have been created, policymakers have got to ask themselves “what’s the right response… what will be the impact if you do this?” he said.
Central bankers, he said, must carefully weigh the potential consequences of their actions when they move to correct such distortions.