Counterpoint: Confirm Ben Bernanke
Monday, 01/25/2010 - 3:57 pm by Bo Cutter | 6 Comments
Shaping the future with today’s choices.
Paul Krugman wrote an excellent piece for the New York Times today arguing with major qualifications for Bernanke’s confirmation for a second term as head of the FED. Considering how well my blog went awhile ago arguing that progressives should get off Geithner’s back, I thought I would jump in here also.
Bernanke should clearly on the merits be reconfirmed. The fact that a couple of senators have walked from him is just life in Washington. He represents an irresistible target, a senator can get 5 minutes worth of media advantage by turning on him, so “hey, its just business.” This isn’t even a new Washington phenomenon, it’s always been this way; just a little worse now. But as
I have said before, in Ben Bernanke, the nation and the Fed have a chairman who spent much of his life as an economist studying the Depression and the Fed’s reaction then; learned a lot; and applied that learning creatively and brilliantly to the new circumstances of this financial disaster. It is quite clear that without the fast policy responses of the Fed — led by Ben Bernanke and Tim Geithner, then at the New York Fed — we would have been in a vastly worse situation.
Paul Krugman also raises three qualifications to his own support which, as he acknowledges, makes that support very tepid. First, Bernanke did not foresee the disaster coming and supported as a member of the Fed policies that did not help to turn the course until very late. Second, Bernanke has resisted a number of the major financial sector reform initiatives. And third, Bernanke is underestimating the severity of the current unemployment problem. I agree with the first two of these. Bernanke has suffered from the same syndrome everyone in the Washington policy world always catches: Miles’ law, “where you stand depends on where you sit.” The Chairman of the Fed does not believe he can be seen criticizing the Fed in any significant way. But in this particular case, the U.S. and the Fed would be better off having to contend with the criticism. Krugman is right.
The third issue is tougher. Unemployment is an enormous problem, and it is not going to go away fast. In my view, inflation is not an issue today and the Fed’s course can remain the one it is on - very low interests rates. But I’m afraid circumstances are not going to stay this clear. Our impending deficit and debt problems will begin to hit us before our unemployment problems have been solved and at that point we are going to face an excruciating policy dilemma. On this issue, I think Bernanke is trying to allow himself and his institution some room to maneuver in the future.
I agree with Paul Krugman, with much more conviction.
Roosevelt Institute Senior Fellow and Braintruster Bo Cutter is formerly a managing partner of Warburg Pincus, a major global private equity firm. Recently, he served as the leader of President Obama’s Office of Management and Budget (OMB) transition team.
In spite of his scholarship of the Great Depression, Bernanke shows little appreciation of FDR’s New Deal fiscal policy activism in his work and continues to underplay it today. He continues to discuss the importance of “fiscal sustainability”, a recipe for perpetuating today’s dire economic conditions.
Crediting him for helping to put out a fire that he lit in the first place is absurd. This crisis did not begin with Lehman’s collapse in late 2008. The uninsured nonprime speciality lenders began blowing up as early as 2006, when the bubble started stalling out. The next stage, in March 2007 was the collapse of the secondary markets in nonprime mortgages. That is nearly three years ago and there are no signs that it will be recreated any time soon. All of this occurred during Bernanke’s watch, continuing the malign regulatory forbearance of his predecessor, Alan Greenspan.
More recently, last October, Bernankeappointed Patrick Parkinson, a long time Fed economist that has never supervised or examined a bank in his life, as head of examination and supervision of the Fed. Parkinson is infamous as the Fed’s point man leading the charge against Brooksley Born’s efforts to regulate credit default swaps.
Obama should not be going to bat for Bernanke like this, just as he should go the whole hog and and fire Geithner and Summers. He has a huge credibility problem with his base. Huge. Reappointing Volcker will simply confirm the suspicions of many that he is fundamentally un-serious about “change”.
What Bo recommends is a recipe for electoral disaster for the Dems as well as perpetuating the message that there are never consequences for bad policy. If the US was a grown-up country, Bernanke would have resigned months ago.
Posted by Marshall Auerback | January 25th, 2010 at 6:46 pm
Marshall is spot on that Obama risks alienating his own political base further by supporting a second term for Bernanke.
It appears that a week of populist revolt against Obama’s economic team has ended with signs that Obama would retain, at least for now, his two highest-profile economic policy allies: Tim Geithner and Ben Bernanke.
“Tim Geithner helped steer the financial sector and the entire economy through the worst crisis since the Great Depression,” Mr. Emanuel said in an interview. “He’s not going anywhere.”
In a perverse sort of way, Emanuel is also spot on: Bernanke’s monetary policy at the Fed and Geithner’s fiscal policies at the Treasury do appear to be not going anywhere fast.
The first year of the Obama presidency has been a monumental disappointment. By now, the President’s populist rhetoric of “change we can believe in” rings hollow against the hard data of the sad shape of the economy.
The critical bottleneck to recovery is the continuing loss of jobs. Conventional economic wisdom asserts that employment is the lagging indicator. Unemployment cannot be expected to fall until after the economy recovers. But in an economy that suffers from overcapacity due to low wages, as the world economy is today, economic recovery from excessive debt cannot be achieved without full employment with living wages to produce the needed rise in demand to absorb overcapacity. The government, despite its enormous power to intervene in the economy on the supply side, is stuck in a self-perpetuating vicious cycle of stagnation caused by unemployment that in turn causes stagnation.
Bernanke is closely identified with Fed policies that had landed the global economy in its current sorry state. Many, particularly conservative Republicans, Blue Dog Democrats, let alone progressives, are concerned about Obama’s proposals to expand the powers of the Fed, in view of its history of persistent failure to spot and preempt pending systemic financial crises. Critics question the wisdom of giving an institution with such poor record of performance the prime role as a systemic risk regulator in the proposed regulatory overhaul of the financial system.
Opposition to the reappointment of Bernanke can be traced to three aspects. The first is ideological: despite Bernanke’s subscription to Milton Friedman’s non-provable counterfactual conclusion that central banks can eliminate market crashes with timely and aggressive monetary easing, Bernanke is on the same ideological side of his predecessor – serial bubble wizard Alan Greenspan – who had argued that monetary authorities are best positioned to clean up the mess after the bursting of asset bubbles than to pre-empt the forming of the bubble itself. This ideological fixation of the Fed proper role as a cleanup crew rather than the preventive guardian of good systemic health, which Greenspan has since acknowledged as a grievous error, eventually led to the systemic financial collapse of 2007. (Please see my August 24, 2007 AToL article: Central Bank Impotence and Market Liquidity)
The second aspect is analytical: Bernanke, as Fed chairman-designate waiting first term confirmation, argued in a speech on March 29, 2005 while still a Fed governor, that a “global savings glut” has depressed US interest rates since 2000. Echoing this view, Greenspan testified before Congress on July 20 that this glut is one of the factors behind the so-called “interest rate conundrum”, i.e., declining long-term rates despite rising short-term rates. In reality, there was no savings glut, only a dollar glut that went overseas as US debt from trade deficits and returned to the US as savings of low income Asians because of dollar hegemony in which Asians cannot spent dollars in their domestic economies without inflation. (Please see my January 11, 2006 AToL article: Of Debt, Deflation and Rotten Apples)
The third aspect relates to policy: Bernanke is a card carrying market fundamentalist who believes that markets can best be self regulated. He and Greenspan repeatedly opposed financial market regulation beyond even ideological grounds to argue also on operational ground that US regulation would merely drive market participants overseas to less regulated jurisdictions and that the US will not accept international coordination that threatens national sovereignty. On regulation, Bernanke is of the school of “if I don’t smoke, somebody else will”. (Please see my January 10, 2004 AToL article: Fed’s Pugnacious Policies Hurt Economies)
Posted by Henry C.K. liu | January 26th, 2010 at 9:54 am
I think Matt Yglesias made an interesting point last week when he wrote that “the appeal of Ben Bernanke is that there really is basically nobody who’s better qualified on paper to lead the Fed in this time of crisis. But the problem is that he’s steadfastly refused to apply his own ideas for boosting growth. It’s bizarre.”
The question is, if Bernanke isn’t confirmed, what happens next? Even if Obama could find a better candidate, the Senate is gridlocked and Republicans have been blocking important nominations for the last year. Maybe they’ll be reluctant to play games with the Fed, but there’s been no evidence of that reluctance with Treasury Department or TSA appointees.
Posted by Tim | January 26th, 2010 at 9:59 am
Links to:
Central bank impotence and market liquidity
http://www.atimes.com/atimes/Global_Economy/IH24Dj02.html
Of Debt, Deflation and Rotten Apples
http://www.atimes.com/atimes/global_economy/ha11dj01.html
Fed’s Pugnacious Policies Hurt Economies
http://www.atimes.com/atimes/global_economy/FA10Dj01.html
In contrast to the 6.5 millon jobs lost in the US in the past two years, the Chinese Ministry of Human Resources and Social Security just announced that China created 11.02 million new jobs in urban areas in 2009, topping the government goal of 9 million. Still, China’s unemployment problem is a long way from being solved. Around 5.14 million laid-off workers were re-employed last year, exceeding the preset goal of 5 million. Urban unemployment rate stood at 4.3 percent, with 9.21 million people being registered as unemployed.
Posted by Henry C.K. liu | January 26th, 2010 at 10:07 am
Notithstanding Waren Buffet’s prediction that chaos will result if Bernanke is not confirmed,
Sudeep Reddy reports in WSJ:
Senate Banking Committee Chairman Chris Dodd said today that Ben Bernanke cannot remain as chairman of the Federal Reserve if the Senate does not confirm him by January 31 when his four-year term expires. In an interview on CNBC, Dodd said Fed Vice Chairman Donald Kohn would take over as chairman. Sen. Judd Gregg (R., N.H.) made the same point. The comments generated some confusion on Wall Street, but the situation isn’t clear-cut.
This much is clear: A Fed chairman cannot automatically stay in his position after his four-year term as chairman expires. Members of the Fed board, in contrast, can remain in office as governors until their expired term has been filled. The Federal Reserve Act says that the Fed vice chairman acts as chair in the “absence” of the chairman. But “absence” is not defined.
The Fed has twice faced circumstances in which a chairman has not been confirmed by the Senate by the time his term expired. But in both those cases, the Fed did not have a vice chairman in place so the members of the Federal Reserve Board elected the chairman as chairman pro tempore. In 1948, Marriner Eccles served as chairman pro tempore from February 3 until April 15, when Thomas McCabe was sworn in as chairman. And in 1996, Alan Greenspan served as chairman pro tempore from March 3 to June 20, when he was confirmed by the Senate for a third term as chairman.
Bernanke’s 14-year term as a governor — one of seven positions on the Federal Reserve Board — runs through 2020. What would stop the Fed board from electing Bernanke as chairman pro tempore if he’s not confirmed by February 1? That’s not clear.
The Fed and Sen. Dodd hope the confirmation vote will come soon after the Senate reconvenes on January 19. But at least four senators have placed holds on the nomination, forcing Senate Majority Leader Harry Reid to schedule a floor debate about Bernanke, invoke cloture on the nomination and prepare for an up-or-down vote. At the moment Bernanke seems to have the 60 votes he’d need to be confirmed. But if the Senate delays a full vote past January 31, the Fed’s Board could be forced to make a decision to avert worry on Wall Street.
UPDATE: Former Fed governor Larry Meyer of Macroeconomic Advisers points out that even if Bernanke had to step aside for Kohn as chairman of the Fed board, he could remain as chairman of the central bank’s Federal Open Market Committee. The chairman of the FOMC, which sets interest rates, is elected to a one-year term by the committee’s members at the group’s first regular meeting of the year (January 26-27). When nominations are taken at that meeting, the chairman of the board by custom is the only one nominated. So Bernanke could remain as FOMC chairman even if Kohn had to be nominated as chairman of the Federal Reserve Board. (This wouldn’t eliminate investors’ concerns entirely, but could limit some worries about the direction of interest-rate policy in the event of a bureaucratic delay.)
Posted by Henry C.K. liu | January 26th, 2010 at 10:15 am
It is getting increasingly clear that Bernanke’s alphabet soup of credit enhancement programs and his embrace of a 0% interest rate policy don’t cut it. Nor are deficits large enough to reflate (and they almost certainly won’t be in the future either, given Obama’s recent embrace of a spending freeze).
Bernanke was asked by Time magazine late last year if he had any tools left. He said yes. When asked what they were,
he had no specific answer. Well, if he does have more tools, with 10% unemployment and weak prices and a dual
mandate for full employment and price stability, what’s he waiting for? Is he planning to hold the American economy hostage until he gets a 2nd term?
Should market psychology turn to the notion that the Fed has no tools to inflate,
and we have a Congress dead set against larger deficits, it can all get very
ugly very quickly in the race to the exit from the inflation plays (including steepeners) currently on the books.
Posted by Marshall Auerback | January 26th, 2010 at 11:01 am