J. Bradford DeLong
Bernanke’s the One
J. Bradford DeLong
)
BERKELEY – William McChesney Martin, a Democrat, was twice reappointed to the job of Chairman of the United States Federal Reserve by Republican President Dwight D. Eisenhower. Paul Volcker, a Democrat, was reappointed once by the Reagan administration (but not twice: there are persistent rumors that Reagan’s treasury secretary, James Baker, thought Volcker was too invested in monetary stability and not invested enough in producing strong economies in presidential years to elect Republicans). Alan Greenspan, a Republican, was reappointed twice by Bill Clinton. And now Barack Obama has announced his intention to re-nominate Republican appointee Ben Bernanke to the post.
As this history suggests, it is more remarkable for a US president not to reappoint a Fed chairman named by the opposite party than to reappoint one who wishes it. Reagan’s failure to reappoint Volcker and Jimmy Carter’s failure to reappoint Arthur Burns are the main exceptions. The Fed chairmanship is the only position in the US government for which this is so: it is a mark of its unique status as a non- or not-very-partisan technocratic position of immense power and freedom of action – nearly a fourth branch of government, as David Wessel’s recent book In Fed We Trust puts it.
The reason, I think, that American presidents are so willing to reappoint Fed chairmen from the opposite party is closely linked to one of the two things that a president seeks: the confidence of financial markets that the Fed will pursue non-inflationary policies. If financial markets lose that confidence – if they conclude that the Fed is too much under the president’s thumb to wage the good fight against inflation, or if they conclude that the chairman does not wish to control inflation – then the economic news is almost certain to be bad.
Capital flight, interest-rate spikes, declining private investment, and a collapse in the value of the dollar – all of these are likely should financial markets lose confidence in a Fed chairman. And if they occur, the chances of success for a president seeking re-election – or for a vice president seeking to succeed him – are very low. By reappointing a Fed chair chosen by someone else, a president can appear to guarantee financial markets that the Fed is not too much under his thumb. And that can be a very valuable asset for an incumbent Fed chair – one that no other candidate could match.
But US presidents seek more than just a credible commitment to financial markets that the Fed chair will fear and fight inflation. They seek intelligence, honor, and a keen sense of the public interest and the public welfare. Presidents’ futures – their ability to win re-election, to accomplish other policy goals, and to leave a respectable legacy – hinge on the economy’s strength. It may or may not be true, especially these days, that what is good for General Motors is good for America and vice versa, but certainly what is good economically for America is good politically for the president.
It is here, I think that President Barack Obama has lucked out. Ben Bernanke is, I think, a very good choice for Fed chair because he is so intelligent, honest, pragmatic, and clear-sighted in his vision of the economy. He has already guided the Fed through two very tumultuous years with only one major mistake – the bankruptcy of Lehman Brothers.
Bernanke’s deep knowledge of the Great Depression and of financial crises is exactly what America – and the world – needs in a Fed chair now. And his commitment not to err on the side of underestimating either the difficulty of the situation or the value of keeping employment high would make him, I believe, one of the best possible choices for the position, even if he were not now the incumbent.
Copyright: Project Syndicate, 2009.
www.project-syndicate.org
aesop 09:16 08 Sep 09
Doubtless the reappointment of Bernanke sustains confidence in an "independent" Fed, by a the continuance of low inflation policies, as Mister Delong points out, the fed will continue to try and (Wall Street, evidently the White House along with most Economic prize fighters believe) succeed in maintaining financial market stability, on a--to say the least--shakey real economy base. Herr Bernanke will continue to get much credit for, shall we say, putting out the financial crisis fire, by drowning the system with liquidity. In time we'll see how clean an exit the central bankers will be able to engineer, so as to avoid this dreaded inflation so ballyhooed about by. It remains to be seen if and how soon this economy will again stimulate effective demand or be mired in stagnation. Nevertheless a more important issue exists other than Doc Delong's cute observations on the consonance of the two party ruling classes Fed Chair reappointments. No, the issue is that Bernanke did nothing to mitigate this disaster years before it occurred. Many, yes, many saw the housing bubble trend, pleaded and articulated, and yet got virtual media blackout. Our highest Financial priests though saw nothing and did nothing. As Dean Baker points out, only Allan Greenspan was better positioned to see and do something about the the housing bubble that led to this crisis. Again Baker notes Bernanke sat alongside as a fed governor from 2002-2005, overseeing the dubious low interest rate policy after the dot com bubble burst, prolonging and exacerbating the housing bubble, and then after moving on to the White House as an economic advisor, before the eventual 2006 appointment as Fed chairman. As a person charged to provide an environment conducive to economic stability, Bernanke failed miserably. And given the message being sent to future Fed regulators, there is to be no negative consequences for such failures. Such failure to spot a run up in housing prices, which skyrocketed from the previous 100 years, and the consequence is (drum roll, please): Fed Chairman reappointment. Wow, a Democratic president reappointed a Republican appointed Fed Chair. Geewillickers. So what? In two words, this is Moral Hazard on a truly large scale. What incentives do these guys have to crimp the financial excesses, when they may jeopardize future wall street career prospects? Given that nothing happens when they don't do their job, no incentives exist. Are we to believe exist without personal interests? No economist could be that naive. Not even Greenspan or Bernanke. And without a true regulator who is able to reign in casino capitalism (and since bailout, Banks are playing with house money), economic history, will, as they say, repeat. As of late this time would seem pure tragedy. But, Bernanke again as Fed Chair? Now thats a farce.