Ben Bernanke Sees Weak Economy For Years

The Federal Reserve has stepped in to save the economy again, this time from the coronavirus pandemic. Not only did it cut interest rates to almost zero, but it unleashed a barrage of new programs to prop up financial markets, bailout out investors and businesses that borrowed too much before the U.S. economy shut much of the economy to contain the outbreak. There is precedent for this: On a smaller scale, the Fed came to the rescue in the midst of the 2008 financial crisis. Few know more about central bank bailouts than Ben Bernanke, who led the Fed during that time. Bloomberg Opinion columnist Noah Smith interviewed him online last week. Below is a lightly edited transcript of their conversation.

Noah Smith: The Fed has been extremely proactive during the coronavirus crisis -- increasing its balance sheet by more than in the Great Recession, indirectly purchasing corporate debt, lending to small businesses and so on. Is this enough? Was the Fed sufficiently bold this time around, or could it have done even more?

Ben Bernanke: The Fed has certainly been proactive and appropriately so given the economic situation. Basically, it’s done three things: It’s provided sufficient liquidity to assure that key financial markets, including the Treasury, mortgage and repo markets, can function in a reasonably normal way. It’s backstopped critical credit markets, including not only the markets for corporate paper but also the markets in which state and local governments and medium-sized firms borrow. And it’s eased monetary policy by cutting rates nearly to zero and buying longer-term assets. Broadly speaking, these were the right initial steps. Will the Fed have to do more? Yes, there will be a need for fine-tuning the terms and scope of the credit facilities, to assure that they are getting credit where it is needed. And the Federal Open Market Committee will need to provide more specifics about their plans for monetary policy. But it’s reasonable to make those adjustments over time, as we learn more about the economic outlook and the effectiveness of the policies already put in place.

NS: So, the Fed is doing a lot, and ready to do more. Is there any danger of doing too much? Theoretical models -- as well as common sense -- suggest that pandemics cause both demand and supply shocks at the same time, and that the effect on prices is ambiguous. Could excessive Fed action conceivably cause inflation? Also, the pandemic may cause long-term shifts in consumer demand, meaning that some of the businesses now being sustained by Fed loans might never be viable again. At what point does the Fed let them die, so that they don't become so-called zombies?

BB: Since the Fed has undershot its inflation target for some time now, it probably would not mind seeing a modest uptick in inflation. Unfortunately, some disinflation is more likely in the next couple of years than inflation. Although there are some factors that will push up costs and thus inflation — broken supply chains, spot shortages, and the costs of making workplaces and transportation safer, for example — these will be overwhelmed by the disinflationary effects of cautious consumer and business spending, a weak global economy and low commodity prices. Of course, if I’m wrong and inflation picks up more than expected, the Fed has the tools to respond to that.