Why Bernanke should be reconfirmed

by on January 24, 2010 at 7:27 am in Economics, Political Science | Permalink

Jim Hamilton nails it.  Excerpts:

Please permit me to suggest that intellectual stamina is the most important quality we need in the Federal Reserve Chair right now.

And:

How could there possibly be an alternative whom Barbara Boxer (D-CA) and Jim DeMint (R-SC) would both prefer to Bernanke?

Elsewhere I have to strongly differ with the Johnson-Kwak proposal that Paul Krugman be selected.  I don't intend this as a negative comment on Krugman, if anything I am suggesting he is too dedicated to reading and writing and speaking his mind.  The Fed Chair has to be an expert on building consensus and at maintaining more credibility than Congress; even when the Fed screws up you can't just dump this equilibrium in favor of Fed-bashing.  What lies on the other side of that curtain isn't pretty.  Would Krugman gladly suffer the fools in Congress?  Johnson and Kwak are overrating the technocratic aspects of the job (which largely fall upon the Fed staff anyway) and underrating the public relations and balance of power aspects.  It's unusual that an academic will be the best person for the job.

I also have to put the kibbosh on plans which postulate Bernanke as failing to receive reconfirmation but staying on the Board and letting Donald Kohn slide into the de fact #1 slot and everyone working together as before.  That's just not how things work.  Bernanke would more likely leave, plus outsiders would not know who was in charge or what the default was if the cooperation should break down.  The resulting reputational equilibrium would again prove unworkable or at least highly disadvantageous.

Overall when I read these discussions I realize that my theories of public choice are very, very different from those of some of the other commentators.

babar January 24, 2010 at 7:49 am

I agree with every word of this post.

EF January 24, 2010 at 9:37 am

A recent ABC Radio National quoted Adam Smith saying ‘profit is always highest in the countries which are going fastest to ruin’ (http://www.abc.net.au/rn/philosopherszone/stories/2009/2759571.htm).

I am angry at the architects of this economic downturn. Unlike so many others, the politically and/or financially well-connected seem to have escaped with the velocity of their wealth and careers untarnished.

I desire justice. Is that possible on this side of the curtain? I want the economic establishment to show me a path to justice that does not involve systemic collapse. If there is none then the other side attracts me.

People deserve a stronger argument for Bernanke’s confirmation than “momentum”.

Ralph January 24, 2010 at 10:54 am

I have to agree that Krugman would be an awful choice. I always remember the comment about FDR having a second (third?) rate intellect, but first rate temperament. Krugman would be the opposite. An economic Rumsfeld. I certainly understand wanting to crucify Bernanke for his mistakes leading to the crisis, but it’s not as if he was alone in his beliefs. His responses to the crisis once it occurred were, while not perfect, mostly appropriate. If they want to not reconfirm him, I hope they have a decent alternative in mind.

Steve

libert January 24, 2010 at 11:25 am

The “opposition” to Bernanke in Congress is just political posturing. He’ll get reconfirmed, for sure.

DeMint et. al are opposing him to ride the wave of anger with Washington. Bryan Caplan nailed it with his “Myth of the Irrational Voter,” but he missed one bias: the consistent willingness to make the Fundamental Attribution Error. The economy is bad, and therefore it must be Washington’s fault, and everyone there is to blame.

But the arguments “it’s Ben’s fault,” “it’s Bush’s fault,” and “it’s Obama’s fault” don’t hold water. Ben didn’t fuel the bubble–he didn’t even start as Chairman until nearly a year after the bubble began to burst. Bush didn’t de-regulate banks–that happened in the 1990s. Obama didn’t cause the collapse–if anything, his counter-cyclical policy has helped reserve course. But the irrational voter blames everything on these people, simply because they are seen as “part of the establishment.” And that is why the masses blame Bernanke (and others) for something he didn’t do.

Bill Stepp January 24, 2010 at 12:13 pm

Bernanke’s only saving grace is that there is no better alternative.

There is a better alternative. It’s called free banking.

PBRfan January 24, 2010 at 1:38 pm

The lowest his chances of confirmation hit on Intrade were 70% (in early December, on light volume). The recent “controversy” took him down from 95% to 80%, but he’s back over 90%. This has been pretty much a non-story all along.

When are news stories going to start reporting event futures? Are these not as credible, if not more credible, than vague quotes on the record or anonymous sources?

anonymous January 24, 2010 at 1:57 pm

PBRfan,

Intrade is very thinly traded, much too low to be a genuine source of “wisdom of the crowds”.

As I write this, the volume on BERNANKE.SENATE.CONFIRMED shows as 1870 (and that’s the total volume ever traded, lifetime, for this proposition). Each contract pays $10 at 100, so if you think Bernanke will be confirmed and buy at 92, you will make a mere $0.80 per contract if correct.

If Bernanke does indeed win, then if all the people who made money from this bet pooled all their winnings, the combined total would not even be enough to buy a used car.

If anything, bloggers take Intrade far too seriously. For once the mainstream media mostly gets it right.

Barkley Rosser January 24, 2010 at 2:28 pm

WaPo this morning says that Bernanke will scrape through, especially given the fearsome stock market reaction to the rumors he might not. But it looks like a lot of Senators from both parties will score some populist points by voting against him on the way, perhaps leading to negotiations over who gets to do that versus who can take the hit of voting for him, as it appears once again that the newly dsyfunctional Senate requires 60 votes for almost anything more significant than a resolution on how great the flag is.

If somehow he were to go down, the obvious candidates would be those who were considered at the time his renomination was up. That would be Summers, Yellin, and Ferguson. Of those, Summers is barely better than Krugman (if at all), and I do not think Ferguson has the “intellectual stamina” as Hamilton (and Tyler) puts it. Yellin would be the best fall back, but I support Gentle Ben for reasons given in the post and the one linked to.

liberty January 24, 2010 at 3:16 pm

It is so incredibly sad when the status quo gains such dominance over the minds of men that the greatest minds of a society accept the complete reverse of everything they know to be true. Political control over the monetary system by the central power known as government is so ingrained in our culture that the very minds that best recognize the error in this arrangement regularly argue for its continuation without change.

Barkley Rosser January 24, 2010 at 4:29 pm

liberty,

Probably a majority of readers here do not and never did accept that free banking is superior to some sort of control of the money supply by a central bank. If you wish to start up a debate here on free banking (and there are certainly regulars here who support it), well, that should be amusing for another rehash of an old and ongoing debate. But that is not remotely on the table in Washington, whereas whether or not to approve the renomination of Bernanke as Fed Chair most certainly is (with the question of who might replace him if not appointed also very much on relevant).

Speaking of the latter, Kohn might also be a possible permanent as well as temporary, replacement, although those particularly down on Greenspan might remember that he was identified as Greenspan’s right hand man, and was put forward by Greenspan as a possible chair at the time Bernanke was originally appointed.

anon January 24, 2010 at 5:41 pm

Also see “Front Running the Fed” from Jesse

http://jessescrossroadscafe.blogspot.com/2010/01/is-big-player-front-running-feds-buys.html

Attached is some information from a reader. I cannot assess its validity, not being in the bond trading business. But it does sound like someone has tapped into the Fed’s buying plans to monetize the public debt and is front running those buys, essentially ‘stealing’ money from the public. Its what they call ‘a sure thing.’

David Wright January 25, 2010 at 12:13 am

Krugman only cites “one reason” why his appointment would be crazy, but there is another, purely economic one, which I suspect he would also agree with.

The Fed faces an inflation/unemployment trade-off. (The death of the Phillips Curve was not that this relationship didn’t exist; it was that the curve is not constant, but depends on expectations.) Krugman has been publicly upfront about his opinion that the Fed should be more tolerant of inflation and less of unemployment that it has been for the past 30 years.

The problem isn’t that he has that opinion. (It may be a normative problem if you diagree with it, but it isn’t an objective problem.) The problem is that he has been publicly upfront about it. All the models of the inflation-unemployment trade-off say that it depends on inflationary expectations, so no matter where you favor ending up on the curve you want people to believe that the fed is commited to low inflation. If you hold Krugman’s position, you want a fed chairman who agrees with you, but secretly, and whom the rest of the world believes to an an unemployment-be-damned inflation hawk. Krugman does not qualify.

Online Auction January 25, 2010 at 12:30 am

Hi

I think Bernanke would more likely leave and plus outsiders would not know who was in charge or what the default was if the cooperation should break down.

mulp January 25, 2010 at 4:58 am

Reacting to a comment about “bailouts” I realized that if bailout were the term applied to the ultimate failures as humans:

- before the Republican dominance of Contract with America fame, bailout meant execution/euthanasia with all useful organs transplanted to improve the health of others

- since Bush and the conservative Republicans who opposed “nationalization”, bailout means giving the transgressor organ transplants, new heart, new lungs, an large infusion of blood….

When has the government before saved a insolvent bank without the stockholders losing everything, and so of the creditors taking a haircut?

And why haven’t we heard cries of outrage that the Fed, Treasury, and FDIC worked out an instant FDIC like program for money market funds to prevent the possibly massive hair cut depositors to those accounts might have taken.

Perhaps the members of Congress have lots of money in money market funds and are oh so pleased that Bernake prevented a run on the money market funds by retroactively giving them the safety of those evil FDIC insured accounts?

Matthew January 26, 2010 at 12:58 pm

Given the times I’d love to see Roubini in the role.

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