Princeton, N.J.
A SENATE vote on President Obama’s nomination of Ben Bernanke for a second four-year term as chairman of the Federal Reserve is imminent. Rejecting him would be a big mistake, for it would both flog a distinguished public servant who helped avert catastrophe and turn the Fed chairmanship into yet another political football. Washington has plenty of political footballs already.
The case for Ben Bernanke starts with his keen intellect. But perhaps more important in these trying times, he has demonstrated great creativity. He has also displayed the courage to put his head on the chopping block for policies he thinks right. And he is now battle-tested. (Disclosure: I am a long-time friend and former academic colleague of Mr. Bernanke.)
Critics frequently point out that Mr. Bernanke has not always made the right calls. It’s a fair complaint, but who has always been right? Yes, he initially allowed the Fed to continue the regulatory laxity bequeathed him by Alan Greenspan. No, he did not foresee the full depth of the impending financial implosion. But who did? And, in my view, he and Henry Paulson, then the Treasury secretary, made an egregious error by letting Lehman Brothers collapse. (On the other hand, there were no good options.)
But his job performance since, say, October 2008 has been superlative. To cite just a few examples, Mr. Bernanke led the Fed to lower its interest rates to virtually zero in December 2008 and then to hold them there. The central bank also invented approaches to lending and purchasing assets that breathed some life into moribund markets like commercial paper and mortgage-backed securities. It led the highly successful “stress tests” of 19 large financial institutions last spring.
The success of these policies is demonstrable. The simplest and most objective measures of financial distress are the differences, or “spreads,” between various (risky) interest rates and the corresponding (risk-free) Treasury rates. During the worst of the crisis, in September to November 2008 and again in February to March 2009, these spreads skyrocketed to dizzying heights. Since then, they have fallen remarkably, providing direct evidence that the Fed’s cure is working.
Success in righting the “real” economy has naturally been slower; financial markets always move much faster than gross domestic product, incomes and jobs. But it’s palpable nonetheless. The economy was nearly in free fall during the last quarter of 2008 and the first quarter of 2009, dropping by 5.4 percent and 6.4 percent in real terms, respectively.
Then the moves by the Fed and the Obama administration took hold: G.D.P. barely declined in the second quarter of 2009; and by the third quarter it began to rise. As this was happening, the job loss rate, which was staggering last winter, fell by more than three-quarters. On Friday we will get the initial estimate of fourth-quarter G.D.P. growth, which analysts expect to top 5 percent. And there is a good chance that job growth is about to resume.
This rapid improvement came faster than almost anyone expected. The plain truth is that, as bad as the recession was, it turned out to be less horrific than expected, and Ben Bernanke is one of the reasons. Unfortunately, “it could have been much worse” doesn’t buy you much in politics.
Finally, senators should think of the institution instead of the man. The Federal Reserve System is one of the great legacies of the Progressive Era. The Fed is not flawless and has made its share of errors over the years. But since the 1950s, it has developed a well-deserved reputation for competence, integrity and, above all, nonpolitical decision-making in what may be the world’s most political town.
The Fed does not do Congress’s bidding, nor the president’s. When necessary, it can and does take politically unpopular actions. It can move quickly and decisively in emergencies. If the Fed’s political independence is compromised, the nation will lose something valuable.
There are several threats to that independence right now. But perhaps none is as potentially damaging as turning the nomination of the Fed chairman into a political circus. Doing so would be a sharp break with history, for Fed nominations have not been partisan affairs. Jimmy Carter put Paul Volcker in office, and Ronald Reagan re-nominated him. Mr. Reagan’s choice, Alan Greenspan, replaced Mr. Volcker and was retained by the next three administrations. Mr. Obama now proposes to keep in office a Republican chosen by George W. Bush.
None of these nominations were politically contentious — until now. No nominee for Fed chairman has ever been rejected by the Senate. Even no votes are relatively rare. In fact, the nominee who received the most negative votes in history was Paul Volcker, who won re-confirmation in 1983 by an 84-16 margin. Yet, in the eyes of many, Mr. Volcker was the greatest Fed chairman ever. Those 16 senators look pretty foolish in the eyes of history. There may be a lesson there.
Alan S. Blinder, a professor of economics at Princeton, was vice chairman of the Federal Reserve from 1994 to 1996.
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