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The Quarrel over Bernanke

Publishing date
31 January 2010

What’s at stake: Ben Bernanke won a confirmation vote in the US Senate on Thursday for another four-year term as chairman of the Federal Reserve after suffering the biggest show of dissent since voting on the position began more than 30 years ago. Thirty senators, both Democratic and Republican, voted against Bernanke and 70 voted for him. What remains to be seen is whether the highly charged lead up to the vote will change the debate when Congress looks to strengthen – or weaken – the Federal Reserve’s regulatory authority in the coming months. Amongst senators who supported Bernanke some want to reduce the Fed’s regulatory authority and delegate it to a new bank supervisor. Others are preparing to grant sweeping audit power over the Fed to the Government Accountability Office and want to give Congress more say on the governance of regional Fed banks.

James Hamilton says that he’s with Abraham Lincoln: don’t swap horses in the middle of the stream. Although he has concerns about some of the decisions the Fed has made, such as dropping the ball on regulation, keeping interest rates too low for too long over 2003-2005, taking some real risks with the Fed's new balance sheet, and pretending the Fed had nothing to do with the commodity price boom of 2008, Bernanke’s "intellectual stamina" – a tireless energy to continually re-evaluate, receive new input, assess the consequences of what has happened so far, and decide what to do next – is so rare and so important that we need him for four more years.

Simon Johnson writes that Bernanke is an airline pilot who pulled off a miraculous landing, but didn’t do his pre-flight checks and doesn’t show any sign of being more careful in the future. Thank him if you want, but why would you fly with him again (or the airline that keeps him on)? Naked Capitalism writes that Bernanke is the neoclassical economist most responsible for burying Fisher’s accurate explanation of why the Great Depression occurred (growing debt). His extreme actions once the crisis hit have helped reduce the immediate impact of the crisis, but without the ignorance he helped spread about the real cause of the Great Depression, there would not have been a crisis in the first place.

Ed Glaeser writes that Bernanke’s signal achievement of safeguarding the financial system easily merits re-appointment. Switching to someone new would create unnecessary confusion and a costly transition during a time when all is far from well. Adam Posen has a paper where he assesses the effects of central bank governor appointments on financial-market expectations of monetary policy. New Federal Reserve Chairman Appointments move markets the most by far on average of any economy examined.

Paul Krugman favoured Bernanke's reappointment only because rejecting him would have made the Fed's policies worse, not better. While Mr. Bernanke seems insufficiently concerned about unemployment and too concerned about inflation, many of his colleagues are worse. Replacing him with someone less established, with less ability to sway the internal discussion, could end up strengthening the hands of the inflation hawks and doing even more damage to job creation. Brad DeLong doesn’t think there’s anything wrong with Ben Bernanke’s (private, intellectual, academic) analysis of the current situation. What is wrong is that the FOMC consensus is wrong – and Bernanke’s public statements reflect that wrong consensus. So he is much more interested in moving the FOMC consensus in a constructive direction – in getting two extremely articulate and thoughtful sensible macroeconomists added to the FOMC via recess appointments by Obama to fill the vacant Fed governorships as soon as possible – than in demanding that Bernanke’s public statements deviate from the FOMC consensus: a Fed chair who doesn’t reflect the consensus in public has less power to move the consensus in private.

Simon Gilchrist, Professor at Boston University says that term limits for Fed chairmen would accomplish the goal of giving the public a greater sense of oversight without creating undue political influence. It would also have the benefit of forcing the Fed to be more articulate about its specific goals and policies because it would de-emphasize the power of single chairman. Marvin Goodfriend, former director of research at the Richmond Fed official who is now a professor at Carnegie Mellon’s Tepper School of Business, is less enthusiastic. “Imposing term limits on a central bank chairman is not necessary or sufficient to produce effective monetary policy independence.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.

About the authors

  • Jérémie Cohen-Setton

    Jérémie Cohen-Setton is a Research Fellow at the Peterson Institute for International Economics. Jérémie received his PhD in Economics from U.C. Berkeley and worked previously with Goldman Sachs Global Economic Research, HM Treasury, and Bruegel. At Bruegel, he was Research Assistant to Director Jean Pisani-Ferry and President Mario Monti. He also shaped and developed the Bruegel Economic Blogs Review.

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