Ben Bernanke's term as chairman of the Federal Reserve ends in just eight months. Most of those familiar with his thinking say he doesn't want another term. Moving back to Princeton where he can lecture undergrads who don't understand Fed policy is apparently more appealing than being lectured by pundits who don't understand Fed policy.
As Bernanke's term winds down, a lot of people are going to be asking the question: How'd he do? How is history going to judge him?
And here's the truth: We are terrible at answering that question.
The last two Fed chairman -- Paul Volcker and Alan Greenspan -- were eventually remembered in a completely different light than when they ran the Fed.
Paul Volcker was likely the most hated Fed chairman to have ever served. In an attempt to slay inflation, he jacked up short-term interest rates to near 20% in the early 1980s, in effect intentionally sending the economy into recession.
Outrage ensued. Barely a year into his term, Volcker was burned in effigy by protestors on the steps of the Capitol. Neil Irwin writes in his book The Alchemists:
Homebuilders began mailing two-by-fours to Volcker in protest ... Automakers were similarly livid: High interest rates meant that customers couldn't afford to buy cars either. Not to be outdone by the construction workers, they mailed Volcker the keys to unsold vehicles. But farmers may have had it worst of all ... They protested by driving their tractors to Washington and circling the Federal Reserve's grand marble headquarters ...
A building-trades magazine accused Volcker of "premeditated and cold-blooded murder of millions of small businesses."
In 1981, Irwin writes, a man stormed Fed headquarters with a shotgun, pistol, knife, and fake bomb before being tackled by a security guard "just short of the main boardroom."
But 30 years later, people love Volcker. He ended up being known as the guy brave enough to do what was needed even when it wasn't popular. Volcker is, I'd venture, one of the most respected policymakers alive. Once called "one of the most unpopular people in the country," we later flattered Volcker with phrases like:
"Paul Volcker, now the most respected chairman of the Federal Reserve in recent memory..."
Alan Greenspan is the polar opposite.
During his tenure, Greenspan was adored to a cult-like extent. While protestors literally tried to kill Volcker, Greenspan once admitted that, "People would stop me on the street and thank me for their 401(k)."
This Dow Jones (^DJI 0.54%) increased fourfold in the first 13 years of Greenspan's reign. In 1997, The New York Times gushed: "The latest surge in stock prices -- one of the most powerful moves ever -- is properly credited to one man: Alan Greenspan." The Daily Sentinel crowned Greenspan the "man of the year" in 1997, writing:
Alan Greenspan is a virtuoso. He tightens a string here and he loosens one there and he makes the American economy sing like a Stradivarius. And he does it over and over again, steadily improving his technique with each passing year. Alan Greenspan, take a bow.
In a 2006 farewell lovefest marking Greenspan's retirement, two economists opined that, "we think he has a legitimate claim to being the greatest central banker who ever lived."
A few years later, two bubbles burst: The debt-fueled economy, and Greenspan's reputation.
Now apparent that Greenspan's greatest gift was blowing bubbles, toady we talk about him like this:
"Greenspan: The worst Fed chief ever."
"Alan Greenspan: feted for failure."
"History Will Show That Alan Greenspan Was Responsible for the U.S. Housing Market Bubble."
"Greenspan's Fraud: How Two Decades of His Policies Have Undermined the Global Economy."
The rule of thumb seems to be: However the masses feel about a Fed chairman, history will ultimately judge the opposite.
Why is that? I think part of it is that the Fed chair is a more secretive position than other government posts. Bank lobbyist Andrew Lowenthal once remarked:
Most of our government is very transparent. I can find out exactly how much we spend on Guantanamo, trade pacts with China, what we're spending on prescription drug coverage, or what the budget of the CIA is. Most of it is all out in the open. But you can't find anything out about what the Fed does with our money. With the Fed, we're told "Close your eyes and listen to those brilliant men over there."
That adds a mystique to the job that probably causes us to glorify Fed chairmen when things are good and savagely criticize when they aren't, both to an excessive degree. When you don't know what someone is doing behind the scenes, you get to make up a narrative in your head that likely exaggerates what they're doing and what their motives are.
But more importantly, we know that the outcome of the Fed's actions usually aren't known until years after the fact. Bernanke might be leaving the Fed in January, but his final report card won't be out for decades.
Keep that in mind as pundits begin issuing their grades.
