President Obama has re-nominated Ben Bernanke to serve as chairman of the Federal Reserve and everybody expects the Senate to confirm him. Although Bernanke has been widely praised for driving the expansionary monetary many think saved the financial system, he has his detractors. After all, you can't preside over the largest financial collapse since the Great Depression, extend trillions of dollars to keep our bedeviled banking system afloat and manage to escape criticism entirely. So here's one surprising critic: Stephen Roach, the chair of Morgan Stanley Asia, who writes: "It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure." Ouch!
Mr Bernanke made three critical mistakes in his pre-Lehman incarnation: First, and foremost, he was deeply wedded to the philosophical conviction that central banks should be agnostic when it comes to asset bubbles...
Second, Mr Bernanke was the intellectual champion of the "global saving glut" defence that exonerated the US from its bubble-prone tendencies and pinned the blame on surplus savers in Asia...
Third, Mr Bernanke is cut from the same market libertarian cloth that got the Fed into this mess.
I'm sympathetic the argument that it feels wrong to reward somebody who was so central to economic policy during the height of the housing bubble -- Bernanke was the head of the Council of Economic Advisers from 2005 until he replaced Greenspan at the Fed in early 2006 -- but it's not clear to me that Bernanke's inability to solve the bubble in late 2005 (when it was practically at its peak anyway) should disqualify him from another term. Moreover, whether or not Bernanke failed to sound the alarm on the housing bubble in 2006 shouldn't be the leading indicator for how he'll manage the Federal Reserve's balance sheet in the next five years.
The salient challenge facing the Federal Reserve over the next few years will be to unwind our expansionary monetary policy as the economy and demand picks up to prevent wide-spread inflation. Is there somebody more qualified to handle the Federal Reserve's post-near-depression policy than the chairman of the Federal Reserve, who also happens to be an expert in mid-1930s expansionary policy? Perhaps, but I doubt his name is Larry Summers.
Last, Tim Fernholz has some interesting thoughts about the timing of the nod. The Sparknoted theory is that Obama nominated Bernanke today to quell the potential bond market uproar over the deficit numbers released this morning.
The bond markets love to freak out at the first sign increasing deficits. To counteract the deficit news that otherwise would put CNBC and the markets in a huff, the White House is pushing ahead the Bernanke announcement, putting a little honey in the bad medicine. Bernanke is "trusted" by the "markets," in the insane parlance of our times, and this should give them some confidence going forward.
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