(via David Warsh)
Mark A. Sadowski on Bernanke and Fed policy from 2006 - 2008:
In fact the passage quoted in this post almost makes my head explode.
Bernanke took over the Chair in January 2006. At that point the fed funds rate was 4.25%. The FOMC continued to raise the fed funds rate in quarter point steps until it reached 5.25% in June. By August the yield curve was inverted and remained so through May 2007:
Every recession since WW II has been preceded by an inverted yield curve in the previous 6-18 months. This is something which is easily controlled by setting short term interest rates. At the time Bernanke dismissed it as something that was not important and partially attributable to things outside of the FOMC's control which really is fundamentally BS.
Year on year nominal GDP growth in the US fell from 6.5% in 2006Q1 to 5.3% in 2006Q3 to 4.3% in 2007Q1 to 3.1% in 2008Q1 to 2.7% in 2008Q2:
Lehmans Brothers filed for bankruptcy in 2008Q3. So the rate of change in nominal GDP had been falling significantly and steadily for two years before the financial crisis hit with full force. Financial crises are the inevitable result of steadily and significantly falling rates of growth in nominal incomes.
In my opinion this is at least partially attributable to the change in leadership at the Fed. Greenspan, for all of his many failings, was very sensitive to the state of the economy, and I doubt he would have let monetary policy become so contractionary for so long. Bernanke on the other hand is a great believer in Inflation Targeting (IT) and was paying too much attention to inflation. (One can make an argument that this was a regime change, from flexible "constrained discretion" to a rigid IT.)
This probably became an even greater problem in late 2007 and early 2008 when headline inflation surged due to the boom in commodity prices. The FOMC was aware the economy was in the midst of a financial crisis as early as August 2007 due to the spike in credit spreads, and yet they took their time in lowering the fed funds rate. In fact the "credit and liquidity programs" which started in December 2007 were fully sterilized until the very week Lehmans filed for bankruptcy, effectively borrowing liquidity from the general economy to keep the the more troubled parts of the financial sector above water.
I could go on and on about all the monetary policy mistakes made during Bernanke's first three years but the point is this. Warsh is pinning medals on Bush and Bernanke for how well they handled a crisis which they ultimately were responsible for tipping the economy into.