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What Else Is There?

January 29, 2010

We’re all very aware of the responsibility with which the Fed is shackled in the upcoming year:

Mr. Bernanke’s toughest challenge this year will be deciding when to raise interest rates as the economic recovery takes hold. If the Fed moves too soon, it could kill a nascent recovery, hurting an already weak labor market. Moving too late could fuel another asset bubble or bring the high inflation rates seen in the 1970s.

Unfortunately, some of the more devious politicians in the Senate think that somehow the Fed’s action will be drastically altered if the Chairman is replaced:

Critics assailed him for his record ahead of the crisis, from bank supervision to mortgage regulation to the financial rescue. “Bernanke fiddled while our markets burned,” said Republican Sen. Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee. “I believe that it is the duty of this body to hold accountable those regulators whose poor oversight of our financial institutions and markets helped produce the greatest economic crisis this country has experienced in eighty years.”


Republican Sen. Jim Bunning, one of Mr. Bernanke’s fiercest critics, said “a vote for Ben Bernanke is a vote for bailouts,” and added, “If you want to put an end to bailouts and send a message to Wall Street, this vote is your chance,” he said.

While it’s pretty obvious that Shelby and Bunning are engaging in a double whammy of sleazy politicking in order to cater to the Tea Partiers (some of whom are on the Ron Pau/Glenn Beck “End the Fed” bandwagon) while advocating Congress’s own right to undermine the Fed’s independence (which is equally as despicable), the real question of whether or not Bernanke should have been replaced remains.

Jeffrey Miron endorses him:

I think the Fed has erred tremendously during Ben’s first term, both by supporting the bailouts and by expanding the Fed’s actions beyond standard open market operations (e.g., buying up mortgage-backed securities).  In my utopia, the Fed would not exist at all.

But we do not live in that utopia (yet).  If Ben is not confirmed, we will stil have a Fed, and someone will be chairman.

I think this is right, besides the bank bailout thing (which I saw as a necessary evil). Bruce Bartlett explains why rejecting Bernanke’s confirmation at this juncture won’t result in any meaningful change anyway in the near future:

Opposing Bernanke at this point is almost costless for everyone involved. If he is not reconfirmed as chairman he will still remain a member of the Board because his position as chairman is separate from his position as a member of the Board.

Secondly, the Fed’s vice chairman, Don Kohn, is highly respected and been with the organization forever. He will simply take over the formal duties as chairman once Bernanke is no longer chairman.

Third, the Fed, by its nature, tends to operate by consensus. So it doesn’t really matter very much, insofar as monetary policy is concerned, whether Ben is chairman or merely a member of the Board. Remember also that the policymaking arm of the Fed is the FOMC, which includes a number of regional bank presidents.


…the issue of Bernanke’s reconfirmation as chairman is a bit of a red herring. I don’t anticipate any meaningful change in policy at least in the near term. If it turns out that this is just the opening shot in a war between Congress and the Fed, that’s another matter.


… what is the alternative? Calculated Risk says we can do better. But can we, really?

It’s not that hard to think of people who have the intellectual chops for the job of Fed chair but aren’t fully part of the [banking] Borg. But it’s very hard to think of people with those qualities who have any chance of actually being confirmed, or of carrying the FOMC with them even if named as chairman (which is one reason why this suggestion is crazy). Does it make sense to deny Bernanke reappointment simply in order to appoint someone who would follow the same policies?

The short answer is no.  While I think the Fed botched the housing bubble, I do support the easy-money policies it has pursued.  That said, even if you disagree with the latter, what else are we going to do?  And I don’t want to hear any “defeatist attitude” blather—this is politics.  You deal with what you have.

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