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Econbrowser readers are well aware that there are a number of issues on which I have concerns about some of the decisions the Fed has made, such as dropping the ball on regulation ([1], [2]), keeping interest rates too low for too long over 2003-2005 ([1], [2]), taking some real risks with the Fed's new balance sheet ([1], [2], [3]), and pretending the Fed had nothing to do with the commodity price boom of 2008 ([1], [2]). Notwithstanding, there is no question in my mind that Bernanke should be reconfirmed as Chair of the Federal Reserve Board. Here's why.
I sometimes hear Bernanke's critics speak as if there is some kind of shallowness to his world view, as if he is somehow incapable of seeing what is obvious to those with common sense. If you want a bumper-sticker-size summary of what he's all about, here it is-- Bernanke believes strongly that a credit crunch can be devastating to regular people, and has done everything in his power to mitigate that damage. You may agree or disagree with his claim that the extraordinary steps taken under his leadership "averted the imminent collapse of the global financial system." But you must agree with two things: the global financial system did not collapse, and preventing its collapse is the reason Bernanke did what he did. If you think his motives were anything other than this, you have been sucked into a groupthink far shallower than the world view sometimes ascribed to Bernanke.
I asked a senior Fed staff economist in 2008 how Bernanke was holding up personally under all the pressure. He used an expression I hadn't heard before, but seems very apt. He said he was extremely impressed by Bernanke's "intellectual stamina," by which he meant a tireless energy to continually re-evaluate, receive new input, assess the consequences of what has happened so far, and decide what to do next. That is an extremely rare quality. Most of us can be very defensive about the decisions we've made, and our emotional tie to those can prevent us from objectively processing new information. On the recent occasions I've seen Bernanke personally, that's certainly what I observed as well. Even with all he's been through, the man retains a remarkable openness to hear what others may have to say.
Please permit me to suggest that intellectual stamina is the most important quality we need in the Federal Reserve Chair right now.
I wonder which of previous Fed Chairs critics think would be better for the job than Bernanke. Surely you don't think we'd have been better off bringing Alan Greenspan back? G. William Miller fumbled badly with much simpler problems. Arthur Burns is a case study in how not to conduct monetary policy. And while I believe that Paul Volcker was the right person for the job at the time, I'd worry about whether he could adapt his hard money views to the subtlety of balancing the current short-run deflationary pressures with the inflationary potential of longer-run budget deficits. If you roll the dice, statistically you're likely to get someone more like the previous four than Bernanke. I shake my head when I look at the list of senators who say they'll vote "no." How could there possibly be an alternative whom Barbara Boxer (D-CA) and Jim DeMint (R-SC) would both prefer to Bernanke?
Perhaps some senators reason that a "no" vote could score them political points. If so, it's all the more reason to be alarmed. One of my big criticisms of Bernanke has been that he has put in peril the independence of the central bank from political pressure to help solve the nation's fiscal challenges. Even if the present skirmish over reconfirmation proves to be just a shot across the bow, it is not an encouraging development in terms of the long-run health of U.S. monetary policy.
I'm with Abraham Lincoln: don't swap horses in the middle of the stream.
Or if you'd like to hear others saying the same thing, check out Edmund Andrews, King Banaian, Brad DeLong, Richard Green, and Mark Thoma.
Posted by James Hamilton at January 23, 2010 08:50 AM
And people forget that there was a populist revolt against Paul Volcker, "FED OFFICIALS BOOED IN CHICAGO ON RATES," New York Times, June 22, 1981, (http://www.nytimes.com/1981/06/22/business/fed-officials-booed-in-chicago-on-rates.html) for the extremely high interest rates (prime up to 21 percent) and high unemployment from the tight Fed monetary policy, which according to many economists at the time slowed the economic recovery from the 1980-81 recession.
But Pres. Reagan supported Volcker's efforts despite the populist revolt and Volcker is now viewed very positively by many including our current president and Reagan is also viewed positively for backing Volcker and renominating him.
Posted by: Milton Recht at January 23, 2010 10:02 AM
JDH,
First, if one can easily come up with so many names of Fed Chairmen that did more harm than good, that might say something about the institution and about the effectiveness of monetary policy.
Second, part of "intellectual stamina" and "openness" means recognizing and learning from your mistakes. This Fed Chairman has shown little evidence of having done that.
Third, from what I've read on this blog you are an intelligent, even-handed, sober, pragmatic and intellectually honest economist. Its quite clear to this reader that you would be a better Fed Chair than the current one.
Posted by: David Pearson at January 23, 2010 10:34 AM
BTW, please consider the possibility that, because of the Fed's lack of transparency and participation in bail outs, Mr. Bernanke is too weak, politically, to be effective in his job. Actions have consequences. The result of his actions is the following shocking, unprecedented statement by a Senate Leader about a Fed Chair nominee:
"...my support is not unconditional" and [Reid] said that to merit confirmation, Mr. Bernanke "must redouble his efforts to ensure families can access the credit they need.""
Posted by: David Pearson at January 23, 2010 10:46 AM
Bernanke gave a speech last week in which he once again denied that the Fed's easy money and ultra-low interest rates were responsible for the housing bubble.
Any fool with a grain of common sense knows better.
This is prima facie evidence that the man is not fit to hold the position of Fed Chairman.
Posted by: VegasBob at January 23, 2010 11:39 AM
I heard Kohn is the goto man if Ben doesn't get re-confirmed. I don't know that much about Kohn, but the few times I've read his public comments, in good times he sounds like Volker and in bad times he sounds like Ben.
So my guess is we have some depth on the bench. However, many are saying that the stock market gets nailed if Ben is not re-confirmed.
I'm also not sure if Ben is really the reform guy we need, after we get past the current period of flooding the system with a trillion or two or three. Even recently he sounds like he thinks we can go back to the pre-crash status quo with only minimal changes to the financial system.
But I agree Congressional motives are always suspicious. They can range from vote getting to hijacking the Fed and then Congress ends up with both the Treasury printing press AND the Fed printing press. Then we are doomed for sure.
Posted by: Cedric Regula at January 23, 2010 11:41 AM
Praise for Benanke seems to be like praise for an arsonist who happens to be a talented firefighter. Trillions of dollars of wealth destroyed, tens of millions out of work, lives destroyed, retirements postponed forever. Bernanke failed in his assigned task to regulate weapons of mass destruction and prevent Armageddon. Who cares that he seemed to do okay with the recovery?
Bank leaders throughout the world were faced with the same financial crisis -- the UK, Germany, China, etc. All seem to have done just as well or better with the recovery than Bernanke. He seems to have no particular extraordinary talent for handling a crisis.
But I think the most important reason for looking elsewhere for a new Fed Chair is his recent testimony before Congress.
From Calculated Risk: "Well, Senator, I was about to address entitlements," Bernanke replied [to Senator Bennett]. "I think you can't tackle the problem in the medium term without doing something about getting entitlements under control and reducing the costs, particularly of health care."
Bernanke reminded Congress that it has the power to repeal Social Security and Medicare.
"It's only mandatory until Congress says it's not mandatory. And we have no option but to address those costs at some point or else we will have an unsustainable situation," said Bernanke. ... "Willie Sutton robbed banks because that's where the money is, as he put it," Bernanke said. "The money in this case is in entitlements."
Not a word about the Bush tax cuts or the exploding military spending -- just Social Security and Medicare.
Also:Bernanke emphasized that the government has spent less than half of the money in the $787-billion package passed earlier this year and that analysts are still determining its impact.
"Only about 30 percent of the funds have been disbursed," Bernanke said. "It's a little bit early to make a strong judgment, a little bit early to decide whether or not to do additional fiscal actions."
You cannot have the Federal Reserve demand political independence at the very same time it is putting its thumb on the scale in the realm of political decisions.
This is the same mistake that Greenspan made when he endorsed the disastrous Bush tax cuts in 2001 that are responsible for a large portion of the debt crisis we have today. Because of this lack of political neutrality, Benanke should be disqualified from reconfirmation. Like Greenspan, he is just another political hack.
Posted by: Joseph at January 23, 2010 12:07 PM
Uncle Ben is heading us in the exact opposite direction that we should be going. All the problems that lead to this crisis are still very real and havent been addressed. How on earth can the entire economics profession miss warning about debt levels in the economy? This is a basic concept that societies have understood for thousands of years. At a hearing a couple of months ago, Bunning asked him about the debt to GDP ratio and he basically had no anwser. How is that sufficient? Is that what we are dealing with? Why would anyone want to invest in anything when they have a two trillion dollar and rising balance sheet? The country needs clarity and an accurate assement of those assets. What the Fed is attempting to do is absolutely crazy. They are going to fail and the system may collapse with no one able to fix it. The solution is identify the debts are write them down with banks taking the losses.
Posted by: James at January 23, 2010 12:14 PM
Posted by: maynardGkeynes at January 23, 2010 01:38 PM
Mr. Bernanke should not be re-confirmed.
He was a member of the Fed Board of Governors during the period in which it ease credit and ignored its regulatory obligation to the maximum under Greenspan. There is no evidence that he saw any danger in this; in fact, he was a regular, outspoken booster of Fed policy.
When, as chairman, he was faced with the financial crisis, his first steps were pretty consistently wrong. He paid 100 cents on the dollar for worthless AIG securities for Maiden Lane, he gave in to Jami Dimon on the price of Bear Stearns, he ultimately did nothing to save Lehman from a still lingering bankruptcy.
NTL, he has extended the powers of the Fed--some would say way beyond what the law allows--to support the very banks that drove America and the world into this crisis. This includes the panoply of temporary facilities which shifted private risk to the taxpayer, paying 100 cents on the dollar for worthless AIG and trash bank assets.
And, finally, he refuses to give the public and Congress access to the details of his activities, citing disclosure's potentially disruptive effects on the banks and the economy--the "mutual assured destruction" argument. It's a farce, and even his recent acquiescence on permitting some release was only given under the pressure that he would not be re-confirmed otherwise.
While he smart and has great expertise, he has no courage, no moral compass, and--in the end--he is a stooge for the banking industry. He does not have America or Americans as his foremost interests, and does not deserve to have a position in which that concern should be at the top of the list.
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