Bernanke's Nomination in Trouble

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Congressional Democrats seem to have decided, along with the President, that the key to electoral success is to be seen beating up on anyone in the financial community.  As a result, Bernanke's nomination for another term as Chairman of the Federal Reserve is now in serious jeopardy.

I see the political logic, but the economic logic is pretty poor.  Bernanke didn't become Fed chair until 2006, long after it was realistically possible to do much about the bubble except wait for it to pop.  He shepherded us through the financial crisis without another Great Depression--maybe not perfectly, but no Fed chair would have been perfect.  The markets have confidence in him.  Spiking his nomination may have grim effects on 401(k)s throughout the land.

Moreover, whatever he did that wasn't popular, he clearly did with the connivance of Congress.  Congress wanted him to pump money into banks; they just didn't want to take political responsibility for it.  If they'd really objected, they could have amended the Federal Reserve Act at any time and stopped him cold.  But they knew what he knew:  if the banking system seized up, there would be absolutely enormous suffering.  They wanted, as he did, to err on the side of creating moral hazard and bailing out undeserving bankers, rather than bread lines and 25% unemployment.

Nonetheless, I'd now say it's quite likely that his nomination will not make it through the Senate.  They need someone to strike at to take voters minds off the health care bill and the debacle in Massachusetts.  I think Ben Bernanke just got nominated to lean into the strike zone and take one for the team.

What's slightly worrisome is what happens next.  A populist Fed chair sounds fun--full employment for everyone!  But the Reagan recession is what Volcker had to do in order to clean up the nasty aftereffects of fed chairs that bowed to political pressure for easier money.  Remember Paul Volcker, who everyone to the right of Chairman Mao now suddenly loves?  He put short-term interest rates up to over 20%, and unemployment up to over 10%, because it was the only way to cut off inflationary expectations.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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