Cover Story
Bernanke near his office in the Federal Reserve building in Washington
Mary F. Calvert/The New York Times/Redux
Bernanke near his office in the Federal Reserve building in Washington

The house that Ben built

Economy | Behind Washington fights between the White House and Congress over taxes and spending, Federal Reserve Chairman Ben Bernanke has pursued a high-risk strategy experts say is fundamentally changing the U.S. economy

Issue: "Moneymaker," March 23, 2013

CHARLOTTE, N.C.—In 1945 the grandparents of Federal Reserve Chairman Ben Bernanke bought a small tract of land on East Jefferson Street in Dillon, S.C., a town near the North Carolina border that—then as now—had less than 10,000 people. They paid $750 for the lot. The grandparents, Jonas and Pauline, were prudent and well educated: Pauline trained to become a physician at the University of Vienna. Jonas Bernanke, a pharmacist, had opened Jay Bee Drug Company on Dillon’s Main Street in 1941. Within a few years, the Bernankes had built a large brick home on the property. In 1960, Jonas sold the house to his son, Philip, for $22,000. Philip raised the future Fed chairman in that house.

The brainy young Bernanke (he scored 1590 out of 1600 on his SAT) went off to Harvard (summa cum laude) and then to the Massachusetts Institute of Technology for his Ph.D. His parents worried about his going north and losing his Jewish roots. For centuries, South Carolina has kept a thriving Jewish community: As early as 1700, the state had a significant Jewish population and was the first place in America to elect a Jew to public office. In 1800, over 2,000 Jews lived in South Carolina—more than any state in the nation. A friend eventually convinced Ben’s parents “there were Jews in Boston” and they sent him to New England. 

Dillon, the textile and tobacco town Bernanke left behind, fell on hard times. Global forces beyond the control of Dillon’s hard-working and thrifty residents shut down the area’s textile plants and tobacco farms. At the height of the Great Recession, which took place on Bernanke’s watch, Dillon’s unemployment hit 15 percent. 

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In some ways, the drama of Bernanke’s departure and Dillon’s decline is playing again on a much larger stage. This time it’s the American economy that’s a tangled mess as Bernanke himself—who will end his second four-year term as Fed chairman next January—prepares once more for the exits. And as we enter what will likely be Bernanke’s last year as Fed chairman, questions about the 59-year-old’s legacy arise: Have his policies saved America from bankruptcy, or made matters worse? If they have made matters worse, who will be left to clean up the mess he leaves?

The answer to the first question depends on whom you ask. Donald L. Kohn became the Kansas City Federal Reserve Bank governor in 2002, the same year Bernanke became a Fed governor. Then President George W. Bush appointed them both, and Kohn served through 2010, during the worst of the financial crisis and Bernanke’s first years as Fed chairman. He gives Bernanke high marks, saying he’s “done a superb job given the challenges he’s faced. I predict historians will look favorably on his tenure.”

The Wharton School’s Jeremy Siegel also gives Bernanke a good grade for the way he’s handled the financial crisis. “On the whole, I’d give him an A,” Siegel told me. “I support the quantitative easing he has done. It’s prevented a much worse financial crisis.”

Quantitative easing is the central bank’s practice of buying assets from financial institutions with newly created money. Central banks use this technique when interest rates—the primary lever a central bank can pull—are already at or near zero. 

Bernanke first embarked on a series of quantitative easing strategies in 2008. Because the Fed had already lowered interest rates almost to zero, a frenzy of home building, buying, and selling drove prices up. When the bubble the Fed helped create burst, the financial markets panicked. Banks stopped lending money. Capital markets froze. No longer able to lower rates, the Fed bought $800 billion in mortgage-backed securities in a desperate attempt to provide liquidity to the crashing housing market. 

A second round of quantitative easing—QE2—began in November 2010, when Bernanke announced a decision to buy $600 billion in Treasury bonds. In September 2012, Bernanke announced QE3: The Fed would buy $40 billion in mortgage-backed securities per month through at least 2015. Finally, in November, Bernanke announced what some call QE-Infinity: The Fed will purchase Treasury securities at the rate of $45 billion per month with no end date in sight. Bernanke said on Nov. 12 that the Fed would continue the purchases and would keep interest rates low until the unemployment rate fell below 6.5 percent, or long-term inflation projections rose above 2.5 percent.

Even Bernanke supporters swallowed hard at his most recent pronouncement. Siegel, for example, told me, “I’m concerned about the focus on the unemployment rate. He has elevated a measure that involves a lot of subjectivity.” Siegel refers to the fact that much of the recent drop in the unemployment rate is the result of discouraged workers leaving the workforce altogether.


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