Bernanke's Reappointment

August 25, 2009

For a variety of reasons, President Obama’s announced decision to reappoint Fed Chairman Bernanke to a second four-year term beginning February 1st has been received well.  Major business newspapers have not yet run editorials on the action.  However, the FT editorial page recommended this move a few weeks ago.  While the WSJ editors have been very critical of Bernanke’s stewardship, the news end of that paper gave an upbeat account of the decision through the politicians and economists whose comments it selected.  Some of Bernanke’s actions concerning the bail-out of financial institutions and the initially slow response to the financial crisis have drawn the ire of of Congress, but even Senator Dodd, who chairs the Senate Banking Committee, called the choice “probably right.”  Senate confirmation is expected even if the questioning gets rough at times.

Here’s what people like about Bernanke staying on the job:

  • Continuity in leadership translates into a more predictable policy going forward.
  • Bernanke reappointment was reached unanimously, getting the endorsement of all of Obama’s key economic advisors.
  • His collegial style of leadership is likely to be an asset in steering policy through the continuing challenges ahead.
  • The economy remains too fragile to change Fed leaders now.  This is an ironic variation on the controversial rescue of several banks deemed too big to fail.
  • Economists have praised Bernanke’s creativity and expertise as a monetary economist and authority on the Great Depression.
  • Bernanke is extraordinarily intelligent in an unassuming and uncontrived way.
  • In making the announcement, Obama also lauded the Chairman’s courage and temperament, while top officials called his decision-making bold.
  • He was incredibly hard-working throughout the crisis, yet he also reached out to the American people in unique ways to gain their trust.
  • Markets, too, have shown increasing confidence in the Fed’s judgement.  Hard-earned goodwill is priceless.
  • In the first 3-1/2 years of his first term as chairman, U.S. consumer prices increased 2.4% per annum, down from 2.9% per annum in Greenspan’s final four-year term and 3.2% per annum in the entire Greenspan era.  Core inflation averaged 2.3% per annum over the past 3-1/2 years but sank to 1.5% in the latest 12-month period from 2.1% in the year to October 2005, when Bernanke’s initial nomination was announced by former President Bush.

Here are perceived faults for which Bernanke may bear some responsibility.

  • Some worry that he is overly dovish, too quick to promote growth at the risk of jeopardizing continuing price stability.  Bernanke as a Fed Governor under Greenspan provided the ideological justification for the ultra-low interest rates in 2003 to ward off the possibility of deflation.  That policy helped seed the asset bubble in real estate and present mess.
  • He has allowed the dollar to depreciate and gold to soar.  Compared to the time of his appointment on 10/24/05, the dollar has lost 18.5% against the yen and 16.8% against the euro.  Gold prices have climbed 105%, so the dollar and gold have respectively fallen about 5% per annum and advanced around 20% annually.  Classical monetarists consider the non-responsiveness of monetary policy to such trends to be a dangerous blind spot that ultimately could kill investor confidence in the dollar as a reserve currency.
  • U.S. stock prices are sharply lower.  The Dow Jones Industrial Average is 26.7% lower than on 10/24/05 despite a nice lift on today’s news.
  • The Fed failed to identify the housing and sub-prime lending problems in time to avert a crisis.  Proposed legislation would now concentrating more regulatory authority in the Fed.
  • Bernanke’s background was mostly as an academic, and he lacks Wall Street experience.  During the stewardship of last academic to run the Fed, Arthur Burns, high U.S. inflation rooted deeply.
  • Some critics accuse the chairman of subverting policy for the personal goal of securing a second term and worry that the price of doing that will be a possible loss of independence when the Fed has to begin lifting interest rates before politicians want.

A huge premium is placed on incumbency in filling the top post at the Fed.  Bernanke is only sixth chairman of the Board of Governors since April 1951.  The average term if Bernanke serves at least until January 2014 will be 10.5 years and even longer if one discounts the comparatively short 17-month stint of G. William Miller.  William McChestney Martin served two months short of 19 years, followed closely by Alan Greenspan’s 18.5 years.  Arthur Burns and Paul Volcker each served for eight years.  Although Bernanke was nominated initially by a Republican President, he seems comparatively apolitical and non-ideological.  Some find that a virtue, while other consider it a liability.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.


One Response to “Bernanke's Reappointment”

  1. euandus2 says:

    As argued in , Bernanke admits that the Fed screwed up in the housing bubble and should be given even more authority to protect us from systemic risk. You try connecting the dots.