Abstract
Friedman's mantra, “Inflation is always and everywhere a monetary phenomenon” (Friedman, 1970, p. 24) illustrates his perspective on the macroeconomic causes of the Great Depression, specifically the monetary collapse that emerged as the principal cause of the Great Depression—recognized among the public as well as scholarly consensus. At Friedman’s 90th birthday party in 2002, Ben Bernanke praised Friedman saying, “I would like to say to Milton, regarding the Great Depression, you are right, the Fed was accountable. We regret it deeply” (p. xvii). When Bernanke says, “But because of you, we won’t do it again,” (p. xvii) he is sometimes erroneously interpreted as fundamentally a Friedmanite monetarist. However, as he makes clear in his 21st-Century Monetary Policy, he is fundamentally a Keynesian in his analytical framework and outlook: “So-called in a modernized form, Keynesian economics remains the primary perspective at the Fed and other central banks.” Friedman’s statement had been restored with Bernanke’s, which reads, “Although a rise in the money supply and inflation bears some relationship in the short term, at least in certain scenarios, the relationship can be unstable and difficult to forecast in the long run” (p. 35). Except in rare cases, Bernanke, like his predecessors and successors at the Federal Reserve, views monetary policy primarily as an interest rate policy.
There have been two major catastrophes that have devastated the international economy in the last two decades. First, is the U.S. real estate bubble, which broke out in 2007 and bolstered disastrous financial crises since the Great Depression. The largest outbreak in a century was started by the COVID-19 pandemic, discovered in China in 2019. Ben Bernanke’s 21st-Century Monetary Policy is obligated to become a classic work on the Federal Reserve System’s historical memory from the post-war period to the COVID-19 recession. Bernanke led the monitoring of the American Government’s extraordinary action during the first of these economic disasters. He served as the head of the Federal Reserve Bank under the administrations of former presidents George W. Bush and Barack Obama. Bernanke supervised and implemented suitable remedies to mitigate a severe recession. He and his colleagues were entirely competent. A worldwide downturn had been experienced in 1929. The Great Depression had several causes, but one of the main ones was the worldwide gold standard, which had been reinstated after being suspended by most nations during World War I. Notwithstanding this, neither the United States nor the rest of the world perceived a depression: the unemployment rate peaked at 10% in 2009 in contrast to 25% in 1933.
In Bernanke's latest book, “21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19,” a history of the Federal Reserve encompassing the last century has recently been released. In this book, the Federal Reserve of now (and tomorrow) is principally examined through a historical prism. The book focuses on making scientific judgments and is void of personal bias. It enables readers to evaluate Bernanke's arguments and consider the lessons from which today’s policy makers, who are once again combating inflation, may learn. Bernanke intends to enhance the public acceptability of this new monetary system.
The early chapters in 21st Century Monetary Policy on the Federal Reserve from the 1960s through the 1990s contain a plethora of information, as well as fascinating facts about theoretical studies still implemented by the Federal Reserve. The Federal Reserve’s chairperson from 1951 to 1970, William McChesney Martin, is quoted as saying that the central bank’s responsibility is to “take away the punch bowl just as the party gets going”; that is, to raise interest rates to control inflation as the economy grows. Martin and his successors have mostly upheld this position. Bernanke argues that “changes in the overall demand for goods and services” and “shocks to supply rather than demand” are often what influence inflation. Since at least the 1960s, if not earlier, “debates about the causes of inflation expectations and about how central banks might change those expectations have been essential to the study and practice of monetary policy,” claims Bernanke. This analysis does not consider Friedman’s emphasis on the money supply.
This book is arranged into four sections. Before discussing how Paul Volcker and Alan Greenspan controlled monetary policy, Bernanke (in the first four chapters) provides a superb historical overview of the period of high inflation. In chapters 5, 6, and 7, he describes how monetary policy was carried out during his own term as chairman. Chapters 8 to 10 analyze the evolution of American monetary policy under Janet Yellen and Jerome Powell, respectively. The review of the events of pre-pandemic time continued even during the outbreak of the pandemic in early 2020. The book concludes with a significant section on prospective developments and three chapters on how monetary policy will be implemented. One chapter discusses monetary stability and oversight, while the last, brief chapter discusses the Federal Reserve’s social responsibility. Chapters 5 through 7 are an exposition of the events that happened while Bernanke served as chairman, and Chapters 11 through 13 offer his perspective on anticipated monetary policy; these will be of special interest to many readers.
Quantitative easing (QE) is the strategy in which the Federal Reserve purchases significant amounts of financial assets. A post-crisis policy of paying interest on the reserve balances that banks keep with the Federal Reserve is one of the more technical strategies. A favorite strategy of Mr. Bernanke’s is “advance supervision,” which consists of elaborate policy initiatives, depth-based economic forecasts, and periodic news appearances that influence markets by articulating the Federal Reserve’s strategic vision.
Mr. Bernanke will assure you that everything resonates, which will make you feel better—compared to the fraudulently alternative scenario in which rates were slashed to zero but no other policy steps were taken, QE and forward guidance following the global financial crisis did eventually create substantially better economic outcomes. In addition to promoting employment and expenditure, the Federal Reserve’s new policy instruments also stimulated credit flows, risk taking, and confidence. Bernanke states that the Federal Reserve’s decision not to implement these new measures more swiftly and extensively was the only policy failure under these circumstances. The book aims to target not only intellectual readers but a large section of readers, as even the technical information has been expressed in simple English and in precise form, and no use of technical mathematics has been done. Although the writing is superb, adding additional tables and charts could have benefited the reader.
His tenure as chair is addressed in three chapters (5–7). This is an intriguing and vital inclusion. His fellow Federal Reserve employees’ contributions, particularly those of Tim Geithner and Don Kohn, were maybe not as well recognized as they could have been. In addition to this, it appears that his argument on whether it was necessary to push Lehman Brothers into bankruptcy is built around helping himself against any criticism: He couldn’t attend a crucial meeting but subsequently writes about the Wall Street experts’ opinion on Lehman’s balance sheet. He says that these experts were convinced that the company was strongly insolvent and would be unviable unless it was acquired by a solvent firm. This is certainly true, but given the situation, an expert from any other firm would even have a strong motivation to think the most unpleasant. Bernanke’s immediate approach to the catastrophe, with help from Kohn and Geithner, was one of the all-time major highlights of central banks’ policies, and was flexible, creative, and effective. QE, contrary to what I had previously considered, was a Bank of England program under Mervyn King, as Bernanke exhibits. The flexibility of the central bank to infuse cash flow into the economy is, in most cases, an effective and efficient technique for easing anxiety within the economic system.
In chapters 11, 12, and 13, the discussion of prospective monetary policy is concentrated on the rationale for QE. They are fine as an outcome. However, the entirety of these protections, such as those for Flexible Average Inflation Targeting, shatter when a more chronic outbreak occurs in the future. Furthermore, Bernanke goes further in chapters 12 and 13 to make the case that further structural reforms may be required to address the threats of possibly greater and more catastrophic disinflation that may result in deflation. But he never discusses what could be required if inflationary pressure increases significantly, particularly considering the current high public sector debt ratio. Moreover, he never discusses ways to raise the monetary aggregates while considering how to handle deflation. All Bernanke sees as he looks to the future is secular stagnation. He could be correct, but he also might be misinformed.
Throughout chapter 14, which addresses economic stability and the Federal Reserve’s role in supervision and monitoring, he makes some valid points about the persistent imperfections in American financial regulatory policy. Nonetheless, it may cause capital inflows to reroute to less efficient and controlled shadow institutions. A better strategy may be to stipulate that CEOs of prominent financial institutions be compelled to re-establish ultimate responsibility in their enterprises, as I have earlier indicated; this would be a substantial return to the convention of the early 19th century.
This explains the strange timing of Bernanke’s book. He praised the Federal Reserve’s wisdom while being compelled to concede it had made a mistake with inflation, which is an issue. According to inflation and the Federal Reserve’s belated attempt to raise rates and curb monetary easing, we’re still in the monetary loop from the 2007 recession. Although they aren't central banks, they have no idea whether these strategies are long term or realistic. It is unknown how to avert them or the financial implications.
This is a fantastic book that everyone must read. However, the conceptual framework and the background of which it was composed inherently anticipate that the macroeconomy’s prolonged ordinary situation will consist of stagflation and deflation for a long time.
