January 23, 2010
Why Bernanke should be reconfirmed
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 (, ), keeping interest rates too low for too long over 2003-2005 (, ), taking some real risks with the Fed's new balance sheet (, , ), and pretending the Fed had nothing to do with the commodity price boom of 2008 (, ). 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.
Posted by James Hamilton at January 23, 2010 08:50 AMdigg this | reddit
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
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
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 (, ), keeping interest rates too low for too long over 2003-2005 (, ), taking some real risks with the Fed's new balance sheet (, , ), and pretending the Fed had nothing to do with the commodity price boom of 2008 (, ).Other than that Mrs. Lincoln, how was the play?
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.
He must be canned.
Posted by: Terry at January 23, 2010 01:55 PM
I heartily agree with your point, Jim.
I also agree with a previous poster: you'd make a great chairman (of course, I don't know if you'd take the job -- you'd have to watch your words more carefully)
Finally, though, I agree with Abe.
I guess I'm pretty agreeable :)
Posted by: sjp at January 23, 2010 02:32 PM
"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"
and he is dead right, they are not. There was no "easy money". Just the natural rate of interest with a economy struggling to grow after the tech bust. It is really that simple. The rates are what the market wanted and the market got. Volcker overruled the market in the early 80's when setting rates to high, which was a mistake. He should have followed the market.
Bernanke's failures lay elsewhere. The only reason he won't be confirmed because Democrats want one of their own in there and I am not talking about Larry Summers. However, that will send the stock market reeling and likely deepen if not trigger any recession that forms so they are hesistant.
It is a catch 22 for the Democrats. They lose either way.
Posted by: The Rage at January 23, 2010 02:45 PM
I disagree, I think this is a good time for Ben to go.
Any Fed chairman would have responded in some way to the 2008 crisis, so the relevant question is not what would have happened if the Fed had done nothing, but whether Bernanke's choice of responses were good choices.
I think we can all agree that most of his responses were extremely late. Whatever it is we think he should have done, I think we all agree he could have and should have started earlier.
Similarly, I think we can also all agree that he has shown himself to be a very poor forecaster of where the US financial system is heading. So I don't know why anyone would take seriously his opinion of what would have happened to the US financial system if he hadn't done what he did.
In my opinion, the only strong argument for the Fed's 2008 bailouts was expediency. Matters were already spiraling out of control, so there was no time to push through emergency bankruptcy legislation for large insolvent non-banks, and arguably not even enough time for the Bush administration to use its weight to push through speedy bankruptcies while keeping the companies operating, as Obama did later with GM and Chrysler.
But the fact that there was such little time to act was precisely because Bernanke and others whose job it was to foresee and avoid such situations were so stubbornly blithe for so long. Bernanke kept his blithe act up for months after the potential for "armageddon" was being widely discuessed in the media.
I think we all know the negative side of the bailouts: the huge transfer of wealth it represented at a moment when wealth was becoming scarce, the huge reinforcement it gave to Wall Street's culture of irresponsibility, the inherent risks and very dangerous precedent of having the Fed use its power to create money to fund public spending, and the huge, rent-inducing advantage the bailouts gave to the big Wall Street banks over their smaller rivals and to big corporations over small business as the smaller banks that normally lend to small business were left to struggle on as zombies and scores of them were liquidated. The fishiest part of it all was bailing out Goldman's $13 billion short position, which it took out from AIG, against subprime CDOs it had sold and knew were going bad. Why did AIG take the other side of that bet? Why did AIG take such a massive bet that Goldman's CDOs wouldn't go bad, when Goldman itself was betting that they would? Frankly it smells to me like a deal that started as a fraud on AIG shareholders, and with the help of Bernanke, ended as a fraud on US taxpayers.
His other hallmark policy has been, since the bailouts, continuing massive money creation to help fund the deficit (by buying Treasuries), support housing prices (by buying MBSs), and generally flood the global financial system with dollars. I've had plenty of chances to argue about the wisdom of these moves on this forum so I won't repeat myself now.
Remember the sequence of events. First, Obama announced the ARRA. Next, Bernanke announced the more than doubling of the MBS purchase program and the initiation of the Treasury purchase program. Then, Obama announced the renomination of Bernanke. It smells to me of a behind-the-scenes agreement: Bernanke agreed to create money to fund Obama's spending, Obama agreed to renominate Bernanke.
The reality is that our system gives the Fed chairman little real independence. He is an indirectly elected politician, much like a Cabinet minister: nominated by the president and confirmed by the Senate. (The main difference is that he is shielded from mid-term dismissal.)
The Senate confirmation process is the proper venue for public disapproval of a Fed chairman to work against him. Bernanke has made too many mistakes and become justifiably unpopular. He should accept the public's verdict and go.
Posted by: Tom at January 23, 2010 03:40 PM
No politician in the western world is willing to stand up and say that we must take the pain of wiping out a lot of debt. Debt for equity would be a good place to start. Instead this system is going to get much riskier until eventually it blows up and totally fails. We are using a bunch of forecasts from a bunch of morons who claim to know the future but dont know what they are having for lunch tomorrow.
We are taking even crazier risks with government debt rather than forcing debt removal. I am 100 percent sure that they are going to mess up these forecasts and start printing like crazy. That will be the end of the western world and we are much closer than most people think. Are the idiots at the Fed ever asking themselves if the rest of the world loses confidence in the currency system and our debt markets? Probably not because Uncle Ben is arrogant formal thinking retard.
Posted by: James at January 23, 2010 04:08 PM
With all due respect, Bernanke has messed up too much and must go. While he did get October 2008 correct, the US needs new leadership at the Fed. Economists are getting too complacent protecting a failed leader. As Econbrowser notes, despite Bernanke's many documented mistakes, they are still supporting him. It's time for change.
See the great post here:
I'd like to point out that even if Bernanke is not Chairman, he'll remain on the FOMC to let his views be known.
Posted by: Hetty at January 23, 2010 06:11 PM
It is of no significance whatsoever. Whoever Obama appoints will be equally good at printing money & will do it in spades.
Posted by: bryce at January 23, 2010 07:53 PM
Should one judge a man by his action, be assured the incumbent Fed chairman saved the worldwide payment system.
Asinus asinum fricat being the strength of the herd, no banks were lending to each other.The same behaviour prevails among all and each international institutional, political layers.
Rather than politicizing a professional issue,it may be time to address the numerous weaknesses of the financial systems, their surroundings and backgrounds,and Mr Volker has just started.
The outcome of this unprecedented crisis, is that no system can survive under a dual program set for the maximization of short term political success, short term profit maximization for the financial industry.
Posted by: firstname.lastname@example.org at January 23, 2010 09:17 PM
The continuing litany of bald-faced lies out of Bernanke's mouth before, during and after the crisis is an affront to any informed and ethical person. He is an embarrassment to the nation.
I'm quite sure that a suitable replacement can be found, there's about 1200 phD economists spawned in America every year. Last, replacing him IS NOT like changing horses mid-stream, its changing horses in the middle of a fetid swamp. Its instructive to note that Lincoln had FIVE commanders of the Union Army of the Potomac: McClellan, Burnside, Hooker, Meade, and finally Grant. Lincoln's luck in finding a competent general is about the same as finding a competent FED chairman: 20%.
Posted by: MarkS at January 23, 2010 10:42 PM
We are not questioning Bernanke's integrity. We are questioning his ability to set policies.. given that he has called the crisis consistently wrongly and therefore we cannot expect any pro-active policy setting from him. We can only expect only these things from him ... print money and flood the system with liquidity, lower interest rates, bail-out banks... basically as Senator Bunning said he is THE MORAL HAZARD
Posted by: killben at January 24, 2010 01:30 AM
As a mathematician and system analyst, I get more and more annoyed at the lack of understanding the exponential growth function of ANY interest-bearing process.
While inflation relates to prices, economists should consider the MONETARY inflation that keeps happening due to "credit money" being issued. Or do you know anybody who issues "interest money" to pay for credit?
It does not really matter who issues credit and who benefits from receiving interest. When the Fed does it, there are different terms and different beneficiaries than when a large or small bank does it. But they all have in common that they issue "credit money" and thus contribute to monetary inflation.
"Public debt" and "quantitative easing" are just the most effective and economically most destructive mechanisms, because of the big numbers involved.
Deep economic thinking must include not only who supplies what kind of money but also the inevitable ccyles of e, the constant that underlies the exponential function.
Credit at zero interest is the way forward!
Sighing while trying NOT to be in Cassandra mode,
Organiser, Forum for Stable Currencies
Posted by: Sabine K McNeill, 3D Metrics at January 24, 2010 02:10 AM
Ben is a Paulson friend and a man of the GS gang. He should be fired, should be replaced by E. Warren. Which will not happen.
No worries James, he will be reconfirmed.
James, you are not good in politics... better you keep on track.
Posted by: Johannes at January 24, 2010 03:24 AM
You make several arguments to support the confirmation of Ben.
First, you say
"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."
Although I agree with your two things, I believe that it was not the Fed that averted the imminent collapse of the global financial system. The days before Lehman's bankruptcy, people believed that the system was not to going to collapse because it was government policy (Fed+Treasury) to bail out big banks. When government attempted to change that policy and allowed Lehman to go down, then people believed that the system could collapse and government quickly returned to the policy of bailing out big banks. So the government made that collapse possible: first by supporting for a long time a policy of bailing out big banks, and then by changing policy, that is, by swapping horses in the middle of the stream. This is the main reason why as an old economist that have been dealing with financial crises for several decades I have serious doubts about the performances of both Ben and H. Paulson.
Second, you highlight his "intellectual stamina". Yes, I like it very much, and I hope that all leaders have it. It is, however, something of value before choosing a strategy. For Ben, that time is gone. It was gone by September 18, 2008 when he (and HP) had to acknowledge that they couldn't afford to let other big banks to fail. The sort of "intellectual stamina" you talk about is not good when you have to implement your decisions; on the contrary, it leads to a continuous questioning of what you're doing. Maybe you mean something else, but certainly I don't agree with your claim that "intellectual stamina is the most important quality we need in the Federal Reserve Chair right now."
Third, you claim that other candidates are worse. You're right but only to the extent that you agree with Ben's strategy. In my view, only if politicians agreed on some other strategy, I'd argue for replacing Ben with someone that could implement effectively the new strategy. Indeed, at this very moment politicians do not agree on any alternative strategy, and since the Obama administration is failing miserably you cannot expect any alternative strategy to be seriously considered for some time. Thus, if the current strategy is going to be continued, it doesn't make sense no to confirm Ben.
Posted by: E. Barandiaran at January 24, 2010 04:50 AM
"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."
If that's true of you it sure doesn't show in your writing here at EconBrowser or in TSA. Showcasing the work of other folks in guest posts is just one example. I'm one reader who appreciates it.
Posted by: Robert Bell at January 24, 2010 06:11 AM
I agree with you that Bernanke should be reconfirmed but not for the same reason. A man with intellectual stamina headed in the wrong direction can be the most dangerous of all.
Now that is not to say that Bernanke is headed in the right direction. It is to say that Bernenke is a prisoner of the system. The Federal Reserve System by its very nature is destructive. Any time you alter the quality of money whether to depreciate or appreciate it you damage the economy but altering the quality of money has been the purpose of the FED from the beginning.
But I support his reconfirmation for pragmatic reasons. The international community could very easily revolt leading to a plumetting dollar. Any FED chairman is going to have an economic philosophy. At least Bernanke recognizes that inflation is bad and while expanding the money supply based on his Keynesian beliefs he is attempting to minimize its impact on the general economy. This administration and Senate will only give us someone worse.
I echo you by asking who would those who oppose him like to see take his place? Volker was a dangerous monetarist. Had we not had the supply side tax cuts of the Reagan administration he would have taken us into an economic contraction like that of the Pancic of 1837. Greenspan up until about 1994 would be fantastic, notice his consistent and amazing success during the Bush I years and early Clinton years. He fell prey to his own self-importance and hubris and brought on the recession of 2000 and then conditions that gave is the current credit crisis.
Anyone nominated by the current administration would bring two things, first, monetary disaster on the order of Nazi Germany, Venezuela or, God forbid Zimbabwe, then secondly, Fascist control of the entire monetary system.
For this reason Bernanke should be reconfirmed until we can elect a president who would nominate a better candidate or, hope against hope, dismantle the FED altogether.
Posted by: RicardoZ at January 24, 2010 07:03 AM
Bernanke's the best Chairman since William McChesney Martin. Even so, Bernanke made a lot of political errors. I think that he is now "broken in" and will have an easier time doing his real job.
Bernanke was the first to "tighten" monetary policy. Greenspan never got close to "tightening" monetary policy. Bernanke was entirely responsible for the FEB 27 07 shakedown. I'm not sure about the 2008 commodity boom, as it seemed to be just a shift in the collosal money flows already set up by Greenspan. I.e., housing speculation eventually became unprofitable driving money flows into other investments-commodities.
Paul Volcker was the worst Chairman we ever had. At the start of the DIDMCA Volcker allowed total reserves to climb at a 17% annualized clip until the end of DEC 80. Volker targeted non-borrowed reserves & not total reserves when at times 10% + of all reserves were borrowed. He is responsible for the elimination of usuary ceilings. He widened the Fed Funds "Bracket Racket", he did not eliminate it. He set off the "time bomb" in Jan 81 (NOW & ATS accounts) preseging a 19.2% rise in nominal gnp.
I don't think you can now find a better candidate.
Posted by: flow5 at January 24, 2010 07:55 AM
"Even with all he's been through, the man retains a remarkable openness to hear what others may have to say."
Which in my opinion is his least desirable quality. Traditionally Fed Chairmen have been able to steer FOMC consensus not just serve as its mouthpiece. Little that the FOMC says these days (or even has said since Bernanke's confirmation) reflects his own personal convictions, as represented by his previous polcy statements and papers, of how monetary policy should be conducted in a liquidity trap. It's quite clear that Charles Plosser has been steering the FOMC consensus for some time now and the only thing that man cares about is nonexistent inflation.
That being said all of this debate over whether Bernanke should be reconfirmed is a waste of time. What we should be debating is the actual conduct of monetary policy. And on that score I agree with pre-Chairman Bernanke, not the Plosser manipulated puppet he has since become. If the conduct of monetary policy had been correct since late 2008 then we shouldn't be looking at double digit unemployment rates right now.
Posted by: Mark A. Sadowski at January 24, 2010 08:03 AM
Jim: I think you have framed the issue very well, and conditional on where we are at in this process, agree that reconfirmation of Bernanke should go through. That said, conditional on the disaster which took place on his watch, the decision to reappoint him stands in sharp contrast to, e.g., the World War II immediate sacking of Admiral Kimmel (post Pearl Harbor) and General Frendenhall (post Kasserine Pass). On the other hand, I am sympathetic to your implication that there's no obvious analogue of Nimitz or Patton to replace Ben today.
Posted by: Phil Rothman at January 24, 2010 09:34 AM
I think Bernanke should be re-appointed so he can spend the next 5 years wallowing in the mess he has exacerbated. He shouldn't be allowed to return to academia and proclaim that he "saved the economy from disaster". When the economy worsens in 2010 and 2011, and his reckless policies explode, he should be in Washington on the firing line.
Posted by: Invisible Hand at January 24, 2010 10:40 AM
"I'm with Abraham Lincoln: don't swap horses in the middle of the stream."
Would that be the Abraham Lincoln that sacked 4-5 commanders of the Army of the Potomac before Grant came along? Should he have stuck with McClellan?
Posted by: Bob_in_MA at January 24, 2010 11:51 AM
I disagree that Bernanke should be re-appointed, for the reason that he has apparently been captured by those he is supposed to regulate.
His inability to perceive the twin housing and credit bubbles is *exceedingly* disturbing.
Janet Yellen would be a far more credible chairman.
Posted by: IdahoSpud at January 24, 2010 11:55 AM
The entire idea of a federal reserve is un American at best. Central planning always fails. We need a floating interest rate not one determined by academia that is always blind. Fractional lending and the fed have destroyed American prosperity.
Posted by: Matt at January 24, 2010 02:01 PM
The central banker's power has been greatly expanded through the leverage built up under Greenspan's reign. We need a central banker that is not so pretentious as to contend for the role of the main economic regulator. Such a Fed chairman won't be as power hungry (as an institution, even if not personally), and thus not as addicted to leverage. I submit that Bernanke does not really fit the bill. In his recent speech/lecture, he had shown no recognition of the root cause of the problem, and he is too institutionally entrenched to change how the Fed behaves. A low key Fed chairman that can stick to stable monetary policy and leave fiscal policy to the President/Congress would be a better choice.
Posted by: HZ at January 24, 2010 04:07 PM
I recommend these two articles. The first one is by Richard Alford, a former economist at the New York Fed, and the second one is by Steve Keen.
I'm hoping when all of this is over geekspeak (greenspan) will be considered the WORST central banker in the history of mankind, bernanke WON'T be considered an expert on the Great Depression, and most economists will look like FOOLS because they don't understand the nature of/time differences created by debt.
Posted by: Get Rid of the Fed at January 24, 2010 05:43 PM
"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."
Most people with common sense understand the solution to too much debt is not more debt. Most economists, bankers, and people at the fed have trouble with this because that is how they enrich and empower themselves.
Posted by: Get Rid of the Fed at January 24, 2010 05:49 PM
"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."
Credit/debt are NOT the lifeblood of the economy. They are the lifeblood of the bankers, their economists, and the fed.
I want to hear more about bernanke's mortgage. If he can't do personal finance, then he will never get the whole too much debt thing on the lower and middle class.
Lastly, should "banks" be lending to people experiencing negative real earnings growth or even negative nominal earnings growth?
Posted by: Get Rid of the Fed at January 24, 2010 05:59 PM
Just want to join the refrain for ENDING THE FED. Bernanke will get his in time when the audits go through.
Posted by: DanialSan at January 24, 2010 06:24 PM
"and he is dead right, they are not. There was no "easy money". Just the natural rate of interest with a economy struggling to grow after the tech bust. It is really that simple. The rates are what the market wanted and the market got."
It's quite apparent that you don't know the definition of the term "the market", as in "the market rate of interest". If all the Fed did was set interest rates to what the market would then there would be no reason for the Fed at all. Market prices are those that arise without any intervention.
It's also quite clear that you don't know the effects of setting interest rates below market. Interest rates are a price and like any price it coordinates peoples actions, in this case of interest rates it coordinates the plans of savers and borrowers.
When you set a price ceiling that is below market price the effect is always a shortage as producers (savers in this case) produce less and consumers (borrowers in this case) consume more.
This was clearly happening during the entire Greenspan tenure. We had very low savings rates and very high borrowing rates. The shortage was papered over by the Fed, and hasn't had it's consequences till now. Unlike other goods interest rates are prices are temporal goods and therefore it takes time for the errors to be exposed.
The other effects of loose monetary policy were all quite apparent during the Greenspan term, bubbles, trade deficits, commodity price increases, etc. Below market interest rates tend to make long term projects appear more profitable than is truly the case. This causes more projects to be started than can be supported by actual savings. After all the money is really only markers against actual goods.
The low interest rates were supported by many different mechanisms, FDIC insurance, GSEs, asset purchases, etc. In the end, reality won out. This was also exacerbated by productivity driven price deflation from newly opened foreign markets.
Greenspan was fooled into generating way below market interest rates long before 2001-2.
This is why we need let the market decide interest rates the same way we need the market to decide the price of any other good. Central planners cannot know what the true market price is and will be fooled when market conditions change.
Bernarke has to go but there isn't anyone who has the skills to replace him because central planning doesn't and can't work.
Posted by: Brian Macker at January 24, 2010 07:45 PM
Joseph's post said: "Bernanke reminded Congress that it has the power to repeal Social Security and Medicare."
Someone needs to remind the bankers, the economists, and the fed that we the people have the right to elect someone who will repeal (abolish) the fed.
It is time for the spoiled and rich, the bankers, the economists, and the fed to stop trying to "steal" the real earnings growth and retirement of the lower and middle class thru debt enslavement.
Posted by: Get Rid of the Fed at January 24, 2010 07:56 PM
"the global financial system did not collapse"....yet
I don't question Mr. Bernanke's intellectual stamina or his qualifications for the job but the fact remains that he is engaged in a horrendously radical experiment, the outcome of which has yet to be determined. It is premature to declare victory. The future repercussions of Mr Bernanke's policies could very well make the Great Depression look like a walk in the park. Mr Bernanke is gambling with the livelihoods and financial security of hundreds of millions of Americans and perhaps billions of people worldwide. Do you feel lucky?
Posted by: carlo ponti at January 24, 2010 10:03 PM
Get Ride of The Fed:
Very much liked the articles you posted above,
While I was reading these it was like I was talking to myself, except it was coming out in whole sentences and cohesive paragraphs and some nifty charts. In color no less.
However, even Steve Keen says we can't Get Ride of The Fed. Or at least wouldn't want to. (the discount window is good for emergency check clearing in a cash economy) He just wants to make them act like a Central Bank again. Whenever that was. Systematic risk monitoring and regulation is apparently a new function for them to take on, never before attempting by any government agency or central bank anywhere in the world. If I am hearing all these people right!(sort of like neither the CIA nor the FBI nor the Pentagon had responsibility for guarding the World Trade Center)
Posted by: Cedric Regula at January 25, 2010 03:57 AM
Here's an interesting Fed conspiracy theory from Zero Hedge, the self proclaimed propagator of conspiracy theories, but only if the are true.
This one comes with evidence, the Fed drained liquidity in a big way, just as they were cajoling Congress (along with Paulson - they are team players) for the $700B TARP blank check.
Posted by: Cedric Regula at January 25, 2010 04:46 AM
Zero Hedge also predicts QE will be alive and well thru 2010, with or without Ben. Reason? Seems there is more debt issuance than buyers at current interest rates. Drat!
Posted by: Cedric Regula at January 25, 2010 05:21 AM
I would bet dollars to donuts that those that call for abolishment of the fed and/or argue that debt is unnecessary have never taken macro-analysis or monetary policy courses.
Posted by: JS at January 25, 2010 06:15 AM
I had the same thought, "yet". Although I think the "collapse" meme is overblown. It's a very old political ploy to predict catastrophe if your policies are not followed, and then to claim victory if the predictions don't come true.
I think the results would have been better had they let it "collapse", where the term is defined as whatever would happen if they didn't bail out all the losers, and drop interest rates to zero.
I think Japan is in such a bad state precisely because they tried to avoid this state called "collapse", where bad loans are cleared out, bubble prices drop, etc. You know like the "collapse" that happened in 1921.
Posted by: Brian Macker at January 25, 2010 06:37 AM
Great topic. A lot of heavy comments here today.
I personally believe that Fed policy was mistaken and materially contributed to the severity of the recession. The heads of virtually every commercial/ibank bank that got into trouble (with maybe the exception of Vikram Pandit) are gone: Fuld, Cayne, Lewis, Thain, Mack. All gone.
Who was fired at the Fed? Who was held accountable? When consumer debt was cruising up from 80% of GDP to 120% of GDP, where was the Fed?
I don't doubt Bernanke's acumen, his basic integrity or honesty. I do have doubts about his ability to take away the punch bowl. He didn't do it last time. But, in any event, I am not sure this is about merit. It's about accountability. There has to be fear at the Fed, fear that if you screw up, your reputation--the countless, punishing hours studying macro at Harvard or MIT--will be lost. For me, Bernanke's out.
I could live with Larry Summers as a replacement. He has all the subtley of nuclear explosives, but his intelligence is not in doubt, nor his ability to take unpopular stands.
Posted by: Steve Kopits at January 25, 2010 08:09 AM
I largely agree with Jim's post and argument. That said (and recognizing that the latest word out of Washington, spooked by the stock market declines last week) is that Bernanke is a near sure shot for reappointment (although there may be some backroom dealing to see who gets to cast a populist vote against him and who has to bite the bullet to get him past 60). Nevertheless, I do think it is worth considering the possible alternatives if he still does fail to get through.
There has been talk of Krugman and Blinder. I doubt either are politically sellable, although Blinder would be more so than Krugman. I have never heard of "E. Warren," mentioned by somebody above. Kohn might not be bad, although he was Greenspan's right hand man, for those who think Greenspan was the main source of our problems.
The most likely candidates would be the three who were considered as alternatives to Bernanke when he was renominated. That would mean Summers, Ferguson, and Yellin. I think Summers would be bad news, although he reportedly was drooling over it last summer. I doubt the "intellectual stamina" of Ferguson, although that may be unfair. I would not mind Yellin, if Bernanke really has to go. I think she has the stamina and the experience and judgment.
Posted by: Barkley Rosser at January 25, 2010 08:57 AM
As with your June 27, 2009, ‘On Grilling the Fed Chair’ insights: RIGHT ON!
Posted by: TexFinEcon at January 25, 2010 09:29 AM
@ Barkley Rosser : ".. I have never heard of "E. Warren," mentioned by somebody above. .."
Yes, I truely believe you have never heard about the Harvard Law School and Elizabeth Warren.
Posted by: Johannes at January 25, 2010 10:48 AM
JDH should at least be on the Board, and would be a solid choice for Chairman.
Posted by: k at January 25, 2010 11:04 AM
James Hamilton's ancestor, circa 1692:
"If thou desirest a playbill-sized recapitulation of his general character, here be it -- Sewall believeth strongly that witchcraft be a grave ill to the commonfolk, and hath used all at his disposal to mitigate that ill. Thou mightest agree or disagree with his supposition that the extraordinary steps taken under his magistracy 'averted the consumption of our town in a demonic inferno.' But thou agreest surely with two things: the town was not consumed in a demonic inferno, and burning Miss Parker at the stake is the reason Magistrate Sewall did what he did. If thou deemest his motives otherwise, thou art under as much satanic influence as thou believest Mr. Sewall to be!"
Posted by: Silas Barta at January 25, 2010 01:12 PM
Ah yes, I have heard of her, and do not think she would be a very good candidate.
Posted by: Barkley Rosser at January 25, 2010 01:41 PM
Silas Barta: Very cute. Though the one direct ancestor of whom I'm aware was on the wrong side of that particular deal.
Posted by: JDH at January 25, 2010 03:17 PM
Silas Barta, very cute.
I fear that we will have to wait to see if Ben deserves to be renominated. AG looked very good up to about 2006, when I think most sensible folk should have foreseen that consumers were over-indebted and assets were overpriced, notwithstanding the view that "this time things are different" that also enabled the dot-com bubble. I made nice money making sensible bets in both instances, but I hope this was just dumb luck, because now I think chances are good that, given the severity of the possible downside consequences, we are taking undue chances in misguided attempts to support asset prices (such as the huge Fed purchases of MBS's). Yours is one of the few coherent posts to offer any support for this view, so I agree with David Pearson.
Posted by: don at January 25, 2010 04:39 PM
Whatever you say Professor. Bernanke knows one solution to all problems - cut rates and print more money. Ask not what he has done since the economy broke and the crisis hit. This is NOT a long term solution and you know it. Ask the harder question - Is Bernanke ABLE TO do the hard things - when the economy is recovering. The answer is CLEARLY NO. If it is rate cutting you need, Bernanke is your man. WE ARE NOT AT THAT POINT. WE NEED AN EXIT. And for that, he is PRECISELY THE WRONG PERSON. Just as the monetary sins he has committed all decade did not disqualify him as a good candidate for the job once the crisis hit, his rate cutting and printing DOES NOT QUALIFY HIM for the job NOW.
Posted by: ReturnFreeRisk at January 25, 2010 07:27 PM
Cedric Regula, here is the comment from Steve Keen.
"11 Steve Keen
January 25th, 2010 at 10:56 am
Iï¿½m in favour of abolishing the Fedï¿½s ability to be anything other than a clearing house between banks, but I donï¿½t believe that the public can ever be in charge of currency issuance in a world with private banking. As I note in my reform proposals, Iï¿½d rather try to make taking on debt for leveraged speculation unattractive than try to reform the nature of banking."
Get Rid of the Fed just to send a message. Keeping the clearing house between banks is fine, but make it a new entity.
I want the fed out of the interest rate/cheap debt level business and out of the cheap labor business.
Posted by: Get Rid of the Fed at January 25, 2010 11:01 PM
Why Bernanke NOT should be reconfirmed (and why Geithner must go):
AIG secrecy/cover-up. "U.S. securities regulators originally treated the New York Federal Reserve's bid to keep secret many of the details of the American International Group bailout like a request to protect matters of national security, according to emails obtained by Reuters."
Some commitment to democratic institutions and principles is a job requirement.
Posted by: d4winds at January 26, 2010 05:34 AM
Everyone loves to weigh in on the Fed. Bernanke is a red herring. The real argument should be about whether the Fed itself has/does benefit our economy and whether or not it should be abolished.
It has not gone unnoticed by many, that the entire concept of a centrally planned interest-rate fixing cabal is totally contrary to a free market system. I laugh at every Fed meeting, while the markets hang their fortunes on the fleeting words of one single balding egghead. How ridiculous an idea to a free society!
It should also not go unnoticed, that England had already had a central bank for well over 80 years at the time our constitution was written. The fact that our country's founders, merchants and businessmen all, specifically chose NOT to establish a central bank, should be most telling to every American.
Posted by: Keith at January 26, 2010 05:44 AM
Get Rid of the Fed,
"I want the fed out of the interest rate/cheap debt level business and out of the cheap labor business. "
Ya, me too. Especially since I think they are just creating tomorrow's toxic waste this way.
But there is still a need for a systematic risk regulator. I'm tired of worrying about whether I will set off a bank run everytime I swipe my debit card at Wal-Mart just because my bank's trading subsidiary, or someone else's, blew it one day and there is no money at the bank anymore.
Only problem is whether we can even let the Fed be the one to do this, since they seem so intent on creating systemic risk with policies followed over this decade, and now, in an attempt to "fix the economy".
It's quite possible that in a few years everyone will be discussing whether we should let the Fed be "Too Big To Fail". As usual, after the fact, of course.
Posted by: Cedric Regula at January 26, 2010 05:55 AM
Americans are angry with Americans. Will fundamental issues like deeply entrenched entitlements to cheap energy, detached housing, and full employment be addressed? No. Will the "easy solution" of addressing scarce resources by targeting other peoples' resources with aerial bombing campaigns continue? Yes.
At least there appears to be some consensus to avoid radical change.
This should all get most entertaining when the US central bank starts to raise overnight rates in the context of still high levels of unemployment, and persistently large residential home inventories.
Posted by: GNP at January 26, 2010 10:21 AM
"This should all get most entertaining when the US central bank starts to raise overnight rates in the context of still high levels of unemployment, and persistently large residential home inventories."
"If" is still in question. Taking the predictions of our two most esteemed financial luminaries, Goldman and Morgan Stanley, MS predicts the first tiny rate increase coming in June of this year. Goldman says not till 2012 sometime! That's a big difference in opinion amoung the experts.
Then if bond vigilantes finally appear from their hiding places and attempt to force up long rates, the Fed has invented their new QE tool, and imagine the pressure to wield it some more!
Posted by: Cedric Regula at January 26, 2010 11:45 AM
Cedric: FWIW, I agree with Morgan Stanley's call for modest rate increases by mid-year. I expect two very different reactions: markets will interpret the initial modest rate hike as good news; unemployed and underemployed citizen voters and their representatives will react negatively.
Ultimately the success of monetary policy will depend on the direction of fiscal policy. For the moment, I see little or no leadership in the fiscal policy area. And I don't see large numbers of Americans standing up and saying "We screwed up and we are taking responsibility."
Posted by: GNP at January 26, 2010 12:59 PM
Bernanke first supported the extremely low interest rates in 2003-2004 that led to overinvestment in housing. Bernanke then supported and continued the 2005-2006 monetary tightening that caused the worst recession in decades. After that, Bernanke planted the seeds of hyperinflation by a huge monetary expansion. Going from one extreme to another, he has been the worst central banker imaginable.
Posted by: Darko Oracic at January 27, 2010 06:35 AM
I have heard a lot of disscussion back and forth as to whether Ben Bernanke should be reconfirmed or not. To me there is no question of the subject whatsoever. And not because of his monetary policy, disastrous as that was. No, my quarrel with him is over how he reacted to the credit crisis when it occured.
At the time of the credit crisis Ben Bernanke had a clear choice. Citibank and Bank of America were insolvent, bankrupt. If he had allowed these banks to go into receivership, as he allowed Washington Mutual to go into receivership, the Bond-holders of these banks would have taken a substantial haircut, and the remainder of the value of their bonds would have been converted to equity; furthermore the shareholders of these banks would have experienced a total loss on their investment; and, the top executives of these banks would have lost their jobs. A personal tragedy, but certainly a well deserved one, most especially for the management.
There would have been another result as well. The banks would have emerged from the experience fully recapitalized, with pristine balance sheets, capable of lending to credit worthy borrowers, and thus capable of helping the American economy recover from the recession.
But, Bernanke didn't choose that route. Instead - despite the horrific example provided to us by Japan of the terrible consequences of propping up zombie banks, and over a chorus of opposition from well known and respected economists of every stripe - he chose to shield these banks from bankruptcy, and to them prop up - and to prop them up by unilaterally, on his own authority, guaranteeing 290 Billion dollars of the worst toxic assets on Citibanks balance sheet, and an additional 300 Billion dollars of the worst toxic assets on Bank of Americas balance sheet.
By backstopping these toxic assets he committed the US Taxpayer to up to 590 BILLION dollars in loses, without Congressional Authorization of any kind, ripping, in my opinon, a gaping hole in the heart of the Constitution. By this precedent the Head of the Federal Reserve can allocate ANY AMOUNT OF MONEY, AT ANY TIME, TO ANY PERSON, OR GROUP, OR CORPORATION, FOR ANY REASON, AT HIS OWN SOLE DISCRETION, WITHOUT CONGRESSIONAL OR PRESIDENTIAL AUTHORIZATION OF ANY KIND. If Congress and the Supreme Court allow this to stand the American People are now at the mercy of the Federal Reserve any time in the future it cares to avail itself of this new source of funds. A new, extra-constitutional method of funding any activity WHATSOEVER has been opened up, unilaterally bypassing all of the basic checks and balances built into the Constitution of the United States. If the Head of the Federal Reserve - in his infinite wisdom - decides an activity should be funded, he can draw on the funding authority of the state, in any amount, to accomplish his goal. In what mad dream should any individual be given authority of that degree?
Just like the executive no longer waits for Congress to declare war, in an 'emergency', because it is 'too unwieldy' and 'too slow', now the Federal Reserve no longer needs to wait for congress to allocate funds in an 'emergency', because it is 'too unwieldy' and 'too slow'.
Well, our founding fathers WANTED the process of declaring war and allocating funds to be both 'unwieldy' and 'slow'. That is why they placed them under the authority of the Congress, where they would be carefully debated and easily defeated except in cases of overwhelming undoubted necessity, agreed to by a majority of both houses of congress and signed into law by the president. Certainly a much more cumbersome process than simply convincing one fallible man of the desirability of a certain course of action.
And what did this one fallible man accomplish by thus circumventing the clear intent of the Constitution? He seized the funding power of the state to prop up two dying banks, which, even now, after billions of dollars of aid, are too insolvent to lend, too weak to do anything but frantically build up the still horrifying gaps their balance sheets.
Billions of dollars worth of US Taxpayer dollars, and the entire assets of both banks will thus be sidelined, possibly for years, for the private benefit of their managers and investors, to shield them from the legitimate consequences of their own actions. And the American economy will be forced to struggle out of the recession without the help of the vast assets still under the management of the feckless, irresponsible managers that drove them into bankruptcy originally.
What impartial individual could applaud such an outcome?
Why are these banks being shielded from bankruptcy? Why are the managers and investors of these banks receiving this special treatment?
Why is this mis-allocation of the power of the state, and US Taxpayer's money being allowed? Without the guarantees of the Federal Reserve and the Treasury, these two banks would fall tomorrow, their bond holders and shareholders would reap their well deserved punishment, and re-capitalized banks would rise on their ashes - to perform their legitimate role in supporting the American economy.
These banks should fail. They are bankrupt now, they will be bankrupt for years. They are not lending now, they will not be able to lend for years. By shielding them from reorganization, the Federal Reserve is PROLONGING the recession, perhaps like in Japan, for many years. By shielding these banks from reorganization the Federal Reserve is placing the cost of the mismanagement of these banks on the shoulders of the American people rather than where it belongs - on the investors and managers of these reckless, irresponsible firms.
These banks should not be being shielded from bankruptcy, they should be forced into reorganization, and recapitalized IN THE NORMAL WAY, by the conversion of their bonds into equity, and then placed under responsible, prudent managers, and the US Congress should move immediately to remove the ability of the Federal Reserve to ever again guarantee loans or to purchase or lend against any security whatsoever except US Treasury Bills or US Treasury Bonds.
And last, but certainly not least, Ben Bernanke should be removed from office. He has proven himself willing to subvert the Constitution and his office for the private benefit of rich and powerful men. Perhaps he has done so for the best of reasons, or for the worst of reasons. It doesn't matter. What matters is that he has PROVEN, that his solution to a failing institution is to prop it up, to rescue the failing bank in preference to letting it fail and freeing up the resources of that bank to be used by other, wiser men. And for that reason alone, he should be placed in a position where he can do no more harm.
Posted by: dlr at January 27, 2010 06:56 AM