How ben bernanke ‘saved the world’ with easy money – firstpost electricity flow diagram

And since central banks around the world were similarly resorting to loose monetary policies in response to the crippling after-effects of the global economic slowdown following the financial crisis of 2008, the whole global economy was going to hell in a basket, we were told.

In one of his characteristically blustery television appearances in 2011, soon after the Japanese tsunami disaster, investor Marc Faber, who publishes the Gloom, Boom and Doom Report, sneeringly referred to "helicopter" Ben’s exertions to get the US economy back on its feet through unconventional monetary policies and by buying up Treasury bonds and through the Quantitative Easing (QE) program. And while there had at that time been only two rounds of QE, Faber said he was certain that the Fed would go ahead with a QE3, QE4, QE5, QE6, QE7 and QE8 and so on.

At which point Faber, clearly savouring the moment, waded in even deeper. What he actually meant to say, he added, was that there would even be a QE 18! The money printer will continue to print, and because Bernanke "doesn’t know much about the economy, and only cared where the (stock index) S&P’s was", the Fed would keep at it, he said. "There’s nothing else they can do."

How wrong they were, how wrong. Overnight, in one fell swoop, Bernanke set the cat among the market pigeons by noting that the US economy was healing sufficiently well for him to visualise a scenario even later this year when the QE program could be eased – and perhaps wound down by mid-2014.

Even given the fact that US economic data is still anaemic, and unemployment still overs around 7.6 percent, the US economy is today in a far better place than it was in 2009, when Barack Obama took office. Even so, Bernanke’s artful wording during his scenario-building at the press conference overnight gives him plenty of room to keep his foot on the accelerator if the economic data turns against him.

But what is today well established is that by persisting with easy money policy (without stoking hyperinflation) at a time when the US economic growth engines were not firing, and by looking to wind it down now that the economy is showing signs of revival, Bernanke has proved his critics wrong. It’s true, of course, that it was ‘easy money‘ policy of an earlier time that fed the housing bubble which collapsed spectacularly in 2008. But it is equally true that being held hostage to past follies would have dragged the US economy further into the ditch.

Just the fact that he and other policymakers have steered the US economy (and in a larger sense the global economy) through the choppy waters of the 2008 financial crisis-and are within striking distance of bringing the ship to a safe haven-holds an important lesson for policymakers.

There will always be ill-informed critics, besides malicious profiteers, who will seek to hijack policy in a manner that maximises their capacity to profit from chaos. By ignoring these critics, and by proceeding bullheadedly with his course of action, Bernanke has won the intellectual argument -and ‘saved the world’, so to speak. As commentator Martin Wolf noted recently, America owes a lot to Bernanke. Critics of the Fed policy action, he noted, "lack imagination or are indifferent to what would have happened had it not acted". Broadly speaking, he added, "the Fed has done the right thing in trying to bring the US and world economies through the crisis. It deserves praise".

Indian equity and currency markets have of course taken Bernanke’s words to heart and tanked. Given the inherent vulnerability of the Indian economy-and the excessive dependence on foreign inflows-this risk was always on. But in a larger sense, the nature of India’s economic problems are vastly different from-and more serious than-the US economy’s. Whereas the US Fed is fighting disinflation, India’s problem is on the other side: of stubborn inflation. That, as many commentators have pointed out, arises not from a failure of the central bank, which hasn’t been shy of keeping interest rates high. But even sound monetary policy cannot tame inflation when it is being stoked by supply-side deficiencies and by fiscal profligacy, as it is in India’s case.

The UPA government’s mismanagement of the economy does come in for much merited criticism from media commentators, which it has by and large chosen to ignore, in much the same way that Bernanke soldiered on by being deaf to his critics. But whereas Bernanke’s unorthodox policy measures are showing signs of validation in the improved US economic data, the UPA government has if anything driven the economy further into the ditch. In the latter case, though, being deaf to critics isn’t exactly proving to be a virtue.