The Bernanke Legacy

Christopher P. Casey  | Feb 3, 2014  | Daily Dispatch

The Federal Reserve is not currently forecasting a recession. – Ben Bernanke, Januuary 10, 2008 [1]

With Ben Bernanke’s exit as Chairman of the Federal Reserve, every political physician will opine on his legacy. Many will view him as the savior of capitalism. The others will agree, but caveat the compliment by stating his monetary mischief eventually exceeded its necessity. So while some may debate recent Federal Reserve policy, all condone his reaction to the Great Recession of 2008. His legacy will be viewed as having acted promptly, properly, and aggressively to the greatest economic threat since the Great Depression, for quantitative easing and negligible interest rates are universally proclaimed to have stabilized the economy and set the stage for future growth. This author disagrees.

Determining what Bernanke’s Federal Reserve should have done in a recession – and whether or not Bernanke acted properly – requires an examination of what causes recessions. Just as doctors can only properly treat patients with an understanding of germ theory, economists can only restore economic health through an understanding of business cycle theory. All cures require the cognizance of causality.

Bernanke has always been portrayed as an “expert” on the Great Depression, so surely he must understand the true cause of business cycles. In 2002, he clearly stated he knew the origin of recessions (or at least deep recessions, a.k.a. depressions) and believed them relegated to history, never to return:

I would like to say to Milton [Friedman] and Anna [Schwartz]: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again. [2]

What did the Federal Reserve do that Bernanke swore would never be repeated? What was this transgression it committed in causing the Great Depression? Bernanke, and all “monetarist” economists, blame the central bank’s contraction of the money supply. But clearly this did not cause the 2008 Great Recession, for none of the monetary metrics ever decreased. Faced with such facts, the Chairman of the Federal Reserve could reach one of two conclusions: either the 2008 Great Recession (and possibly all other recessions) had some different cause or causes relative to the Great Depression (which is nonsensical), or the monetarist theory of business cycles was in error. Bernanke chose the former. He chose unwisely.

Is there a better explanation of the business cycle? One which describes all recessions and depressions? One which explains the widespread and severely erroneous judgment of businesses in forecasting the future as revealed in the “bust”? One which illustrates why it is a cycle, and why this cycle first appeared in the 19th century? One which justifies why capital goods industries are more sensitive to booms and busts relative to consumer goods industries? One which explicates why significant money supply expansion precedes every single recession?

The Austrian school of economics has such an explanation. When a central bank increases the money supply with fiat currency, it artificially decreases interest rates. As interest rates are a universal market signal to all businesses, investments which previously appeared unprofitable now seem to make economic sense. However, these expenditures are actually being “malinvested” relative to the natural level of interest rates as determined by the supply and demand of savings.

When a central bank ceases or severely mitigates its expansion of the money supply, the natural level of interest rates reasserts itself, and a recession ensues. Recessions are the beneficial period by which previous investment wastes and errors are corrected. The Austrian theory of the business cycle explains every phenomenon exhibited by every business cycle, and further explains its historical onset (concomitant with central banking and/or fiat currency).

Recessions, while they may be postponed, cannot be avoided. As the eminent Austrian economist Ludwig von Mises noted:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.[3]

Bernanke chose the latter (and has timed his exit superbly to cover his culpability). So what should he (or any central banker) have done when overseeing a recession? Only one directive applies: do not interfere with the economy’s adjustment process (a.k.a. recession). Do not prevent the liquidation of assets (or companies) with bailouts. Do not stimulate consumption and discourage savings through deficits and other means. And above all, do not inflate the money supply again which will only bring another recession in the future (which is why business cycles are, indeed, cyclical).

In light of what should not be done in a recession, Bernanke’s actions are an abject failure. For he responded to the Great Recession by advocating (with his Treasury troupe in tow) and/or performing a troika of trouble: big bailouts, huge deficits, and massive monetary expansion. In this dire economic situation, he responded with a disastrous blend of monetary omnipotence and judgmental incompetence.

The Bernanke legacy will eventually be known for what he has caused: severe recessions, high inflation, and just possibly, a “final and total catastrophe of the currency system involved.” We will never forget you Ben, nor forgive you.


  1. Associated Press “Bernanke: Fed Ready to Cut Interest Rates Again”. The Washington Post. 10 January 2008. <>.
  2. Bernanke, Ben. “On Milton Friedman’s Ninetieth Birthday”, At the Conference to Honor Milton Friedman, University of Chicago, Chicago, IL. 8 November 2002. <>.
  3. von Mises, Ludwig. Human Action: A Treatise on Economics (Irvington: Foundation for Economic Education, 1996).

Christopher P. Casey, CFA®, CPA is a Managing Director at WindRock Wealth Management ( Using Austrian economic theory, Mr. Casey advises wealthy individuals on their investment portfolios to maximize their returns and minimize risk in today’s world of significant government intervention. Mr. Casey can be reached at 312-650- 9602 or at