I am no fan of Ben Bernanke, longtime readers know. There are many reasons to find fault with him:
- His actions on the Fed while Greenspan was Chairman provided the intellectual support for over-providing liquidity to the market. Dropping the Fed funds rate below 2% was indefensible. All the economy needs is a small positive slope to the yield curve, and after a few years, the economy will normalize. Steep yield curves work faster, but they encourage bad investments because when the yield curve is steep, many people will try to clip free income.
- Rather than encouraging liquidation of broken financial institutions, he gave money to holding companies in exchange for ownership, with few strings attached. The Fed should not have power to bail out any financial institutions; that power should belong to Congress or the Treasury directly, so that we can hold them accountable.
- He resisted giving information regarding the bailouts by denying FOIA requests. There is no good reason to avoid those requests. The insurance industry has to reveal every asset, and material liabilities in aggregate. The is no reason why the banks could not do the some thing.
- He has been intellectually certain that the Great Depression occurred because monetary and fiscal policies were too tight, and a trade war disrupted commerce, rather than the more likely hypothesis that loose monetary policy led to an increase in debts financing an asset bubble, and the Depression only ended when enough of the debts were extinguished (around 1941).
To any Senator that might be listening (I dream), I would simply say this — it doesn’t matter whether Bernanke is reappointed or not because the greater question is reforming the Fed. The Fed has a self-perpetuating nature, and resists real change. The faces change, but it remains business as usual. Would Congress consider:
- adding Governors that are not neoclassical economists? Bring real diversity of thought to the Fed?
- slimming down the Fed so that it does not dominate research on monetary policy? Employment of economists at the Fed is too big, and not justified by their output. You could fire half of the people at the Fed, and there would be no effect on its effectiveness.
- making the Fed solely responsible for all depositary institutions? Note: I don’t like the Fed, but I do like accountability. Let there be one institution responsible for credit, and one institution responsible for creating bubbles. The Fed has created bubbles, and denies it. No. Let the Fed take care of credit, and when they blow it, hold them accountable. Either fire those that made the bad decisions, or, move back to a commodity/gold standard. It would constrain our government that attempts to mandate prosperity with out the power to do so and fails.
Senators, if you need to vote down Bernanke for political reasons, there is no reason not to do so. The American people will not think the worse of you for doing so, and while the markets may blip down, they will recover once a new Chairman is appointed. Among conventional candidates, I would favor John Taylor, who formulated the Taylor Rule of monetary policy, which Greenspan and Bernanke violated. Unconventional candidates? Elizabeth Warren, Sheila Barr, Ron Paul, Barry Ritholtz, jck at Alea, and I could name many more people who understand our crisis better than Bernanke.
PS — the same logic applies to Timothy Geithner; he is dispensable as well. We think that the institution will change if we change the person at the top, but structural change is needed, refocusing or reducing the institution as a whole. I could generate another list of complaints against Mr. Geithner, but truly, if he were gone. without structural reform, the Treasury would not change.
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