Amid COVID-19’s fallout, SIEPR Prize winner Ben Bernanke discusses how monetary policy has evolved

Over the past few decades, changes in the economic environment — not in economic theory — have spurred new monetary policy approaches.

And because the pandemic has now “scrambled the economy,” that’s the latest challenge facing today’s Federal Reserve as it works to tamp down inflation, Ben Bernanke told an audience at the Stanford Institute for Economic Policy Research (SIEPR). The former Fed chair delivered his remarks during an event honoring him as the 2022 recipient of the SIEPR Prize – an award given every other year to an individual who has deeply influenced economic policy.

Leading the Fed from 2006 to 2014, Bernanke helped steer the U.S. economy through a global financial crisis and the Great Recession, making and influencing policy decisions that helped avert a potential second Great Depression.

Watch the video of the event and his full remarks here.

“Not only has Ben Bernanke taken bold moves to shape America’s economy during one of the country’s worst financial moments, he’s inspired many young economists during his very impressive career,” said Mark Duggan, the Trione Director of SIEPR and the Wayne and Jodi Cooperman Professor of Economics.

“His policy decisions during and following the 2008 financial crisis brought the economy through a very dark time and ultimately landed the country in a much better place that clearly benefited everyday Americans and companies both large and small,” Duggan said.

During the Sept. 23 event at Stanford — where both longtime colleagues and aspiring economists celebrated Bernanke’s achievements — the former Fed chair reflected on how monetary policy has evolved from before his own tenure to today.

“The economic environment has changed in ways that has forced the Fed to take more effective actions,” Bernanke said, referring to the dynamic between inflation and unemployment, the period of declining interest rates, and the broader issue of systemic financial stability.

Then COVID-19 hit.

“The pandemic really was an unusual event that scrambled the economy in so many ways,” he said.

Bernanke commended the Fed for controlling the economic crisis in the early stage of the pandemic, using monetary policy tools both introduced under his tenure as well as other new approaches adopted since. But he also detailed how he thinks the Fed misread the labor market impact and supply shocks, which in turn hampered its response to the subsequent increase in inflation.

The Fed has been working to catch up by tightening monetary policy — by raising interest rates — to rein in inflation. Still, when it comes to the overall economy, Bernanke noted, a variety of other factors are in play.

Whether we have a recession depends on how much the Fed has to tighten versus countervailing forces, like the strong labor market and strong balance sheets, he said.

From teaching at Stanford to the front line of economic policy

A monetary economist and economic historian on the faculties of the Stanford Graduate School of Business (1979-85) and Princeton University (1985-2002), Bernanke was appointed in 2002 by President George W. Bush to serve as a Federal Reserve governor and later became the chair of Bush’s Council of Economic Advisers. He was tapped by Bush to lead the Fed beginning in 2006—just as the housing crisis was beginning to develop. He was reappointed as Fed chair by President Barack Obama and stayed in the role until early 2014.

As the global financial crisis emerged in the summer of 2007, the Federal Reserve under Bernanke deployed a wide range of novel tools to try to stabilize the system, including providing liquidity to troubled financial firms, lending to nonfinancial borrowers, serving as market-maker of last resort, and making dollars available to world markets.

After Lehman Brothers failed in September 2008 — greatly worsening the crisis —  Bernanke collaborated with New York Fed President Timothy Geithner and Treasury Secretary Henry Paulson to recapitalize and stabilize the banking system, using $700 billion in funds appropriated by Congress in the TARP bill.

The financial crisis was controlled by mid-2009, avoiding a possible second Great Depression, and the TARP funds were ultimately paid back. But the economy entered a deep downturn known as the Great Recession.

The Federal Reserve under Bernanke battled the Great Recession, first, by cutting its policy rate nearly to zero and, second, by deploying new policy tools, including large-scale asset purchases (quantitative easing) and explicit forward guidance. The Federal Reserve under Bernanke also worked to increase the institution’s transparency: For example, Bernanke appeared on TV shows like 60 Minutes, the Fed introduced a formal inflation target, and Bernanke began a tradition of regular post-meeting press conferences by the chair.

Since leaving the Fed, Bernanke has been a Distinguished Fellow in Residence with the Economic Studies Program at the Brookings Institution. At Brookings, he has published several papers and two books, including The Courage to Act, a memoir of the crisis that made the New York Times bestseller list, and, most recently, a book on the Fed’s past and future entitled Twenty-First Century Monetary Policy.

“When you look at the totality and impact of Ben Bernanke’s career in economic policy, he becomes a clear-cut choice to receive the SIEPR Prize,” said former SIEPR Director John Shoven.

The SIEPR prize was inspired and first funded by George Shultz, who served as President Richard Nixon’s budget director, Secretary of Labor, and Secretary of the Treasury, and later led the State Department during the administration of President Ronald Reagan.

Recipients of the SIEPR Prize are selected by Duggan; Shoven; Monika Piazzesi, a SIEPR Senior Fellow and the Joan Kenney Professor of Economics at Stanford; Jon Levin, a SIEPR Senior Fellow and the Dean of Stanford’s Graduate School of Business; and Jim Poterba, president of the National Bureau of Economic Research.

Since the program’s founding in 2010, the SIEPR Prize has been awarded to Paul Volcker (2010), another former Federal Reserve chair; Martin Feldstein (2012), a Harvard professor and former chair of the President’s Council of Economic Advisers; Stanley Fischer (2014), former governor of the Bank of Israel and vice chair of the Federal Reserve; Alice Rivlin (2016), a former vice chair of the Federal Reserve, director of the White House Office of Management and Budget, and founding director of the Congressional Budget Office; former U.S. Senator Bill Bradley (2018), a key architect of the 1986 federal Tax Reform Act; and Nicholas Stern (2020), the IG Patel Professor of Economics and Government at the London School of Economics and lead author of the influential Stern Review on the Economics of Climate Change.

“I’m honored to receive the SIEPR Prize, joining a distinguished list of recipients,” Bernanke said. “The Prize highlights the importance for practical policymaking of rigorous academic research, of the type that SIEPR is known for.”