As the debate on whether or not to reappoint Ben Bernanke as the Federal Reserve chairman continues to heat up, I've seen strikingly few reasonable arguments for giving him the boot. I believe his performance very well saved us from a depression, and that the Fed's effectiveness in stabilizing the economy eclipsed even that of former Treasury Secretary Paulson's bank bailout. I also think blaming him for the real estate bubble is nonsense. It was already almost fully inflated by the time he took over for Alan Greenspan in 2006. Nonetheless, a recent opinion piece in the Wall Street Journal argues that Bernanke should take a hike.
The article makes a few points. The first notes that the market doesn't like even small increases in interest rates, so Bernanke is doomed to fail. It says:
The last two Fed tightenings contributed to swoons, even though they weren't aggressive. The Fed raised rates by only 1.75 percentage points between June 1999 and May 2000. Yet that contributed to a crash in equity markets. While the federal-funds rate did move up from emergency levels between mid-2004 and mid-2006, it was done gradually, and the real fed-funds rate was actually below 1% from late 2001 to early 2006, illustrating the Fed's extreme doveishness. Yet it was the mild hikes of 2004 to 2006 that helped trigger an end to the credit bubble.
First of all, as Bernanke has recently said he has several tools at his disposal in order to tighten monetary policy -- not just raising interest rates. As a result, it could be argued that his more subtle means of doing so could have a less disastrous effect on the economy than simply pushing rates back up.
Moreover, even if any kind of monetary policy tightening would have a disastrous affect, it's a little unclear on how this is an argument against Bernanke. Is there a magical economist out there I've never heard of who can tighten monetary policy without the market caring?
But the article further elaborates with a secondary concern: the Fed receiving systemic risk regulation responsibilities would present a conflict of interest. The article concludes if that happens:
Mr. Bernanke likely isn't the ideal person to balance these two roles, since he has a poor track record in spotting bubbles and has argued against the Fed setting monetary policy with the main aim of popping them. His instincts may have changed with the credit crunch. But until he shows he can be tough, investors need to be alert to the possibility of the Fed letting things slip out of control again.
My first point here would be that I doubt the Fed will end up the systemic risk regulator. I believe it's a lot more likely that we'll get the panel approach, which seems much more sensible to me anyway.
But let's say I'm wrong and the Fed does become systemic risk regulator. The article suggests that we ought to find a replacement that is better at spotting bubbles and then has the boldness to pop them.
Again, who is this god-like economist that the author envisions? Virtually the entire financial world was fooled by the housing bubble -- not that a bubble was forming, but just how bad the outcome would be. Moreover, what potential Fed chairman would be less likely to yield to political pressure? Someone appointed by President Obama? Such an appointee would feel even more political pressure if a member of the Obama camp. If anyone can withstand the political pressure not to pop a bubble -- though I'm not convinced anyone can -- it would be someone like Bernanke. He's far more of a political independent than anyone I would expect to see the President appoint.
I don't think Bernanke has done everything right; I don't think all of his decisions will be perfect in the future. But I think his performance in taking smart measures to prevent a complete economic collapse has earned him another term. I'm also unconvinced that there are other economists out there interested in the job who have greater training and expertise to grapple with the kinds of problems the Fed faces. When calling for Bernanke to be sacked, who his potential replacement would be must be part of the argument. If a better alternative cannot be identified, then the argument to fire him fails.
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