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Sunday, January 24, 2010

The Politics of Bernanke's Renomination

If you've read this site some, you know I have no use for the Federal Reserve. I also believe that Ben Bernanke is wilfully repeating the mistakes of his predecessor, Alan Greenspan. Still, I am watching most of the opposition, from both sides, to the renomination of Bernanke and almost all is political in nature.

The folks are ticked off. They are looking for someone to blame and the Fed Chairman is an easy target. It's also the wrong target. The Federal Reserve itself has plenty of blame, in my opinion, for the current financial crisis. Furthermore, I believe that the Bernanke's current loose money policy will have a devastating effect on our economy down the road.

What most politicians are trying to do is blame Bernanke for the current crisis. That's, of course, nonsense. Bernanke took over at the end of 2006. By then, the wheels were already long in motion for our current crisis and nothing was going to stop it. It's clear, however, that most in Congress haven't the faintest clue what the role of the Fed is and what Bernanke has done in his office. Here's what Boxer said.

In a statement Friday morning, Senator Barbara Boxer, Democrat of California, came out against Mr. Bernanke, who was named to his post during the Bush administration. She said she had “a lot of respect” for him and praised him for preventing the economic crisis from getting even worse. “However, it is time for a change,” she said. “It is time for Main Street to have a champion at the Fed.”

“Our next Federal Reserve chairman must represent a clean break from the failed policies of the past,” Ms. Boxer said.

I'd ask Senator Boxer two questions. First, what Fed Chairman represented the interests of Main Street and second, how can we have a Fed Chairman that has a clean break with the past. The Federal Reserve is the bankers' bank. By nature, he represents the interests of the banks. Ordinary citizens can't get a loan at the Fed's window. Only banks can. How would a Fed Chairman represent the interests of Main Street as Fed Chairman? Given that this crisis touched all parts of our financial world, how exactly would we get someone with a clean break from the past. To do that, we'd need to get a Fed Chairman entirely void of financial experience over the last ten years.

Both Jeff Sessions and Jon Cornyn have put some of the blame for the current crisis on the shoulders of Bernanke, and here's how Oregon Senator Jeff Merkey characterized the scenario.

Oregon Sen. Jeff Merkley said Friday he would vote against granting a second term to Federal Reserve Chairman Ben Bernanke, concluding that Bernanke was partly to blame for the nation's deep recession and that he is ill-equipped to lead a recovery.

In explaining his decision in a floor speech, Merkley credited Bernanke for the major role he played in keeping the nation from tumbling into a depression.

That is not enough to justify another four-year term, Merkley said, suggesting that that Bernanke was too close to bankers and Wall Street financiers. Merkley, who serves on the Senate Banking Committee, also opposed Bernanke's nomination for a second term when the question came before the committee.

Let's try and put this into perspective. What Fed policies caused the crisis? Wasn't it the loose monetary policies that caused interest rates to be kept far too low far too long? This is what Merkey blames Bernanke for even though it was Greenspan's leadership that had these policies. What policies is Merkey crediting Bernake for in lessening the current crisis? Isn't it the same loose money policies that have caused interest rates to be even lower for an even longer period?

Senator Merkey is blaming Bernanke for the policies of Alan Greenspan. Worse than that, he's then congratulating Bernanke for instituting the same policies. This is the level of political thought on the Federal Reserve out of Congress.

In 2002-2003, these same Senators were congratulating Alan Greenspan for saving the same country from the brink for the exact same policies. Now, years later they are blaming the same Fed for the policies of the past. At the same time, they are congratulating the same Fed for those very same policies in the present.


Anonymous said...


Bernanke has been with the FRB since the days of Allen Greenspan, he's got a very long history and the two of them worked together for (I think) at least two of Allens terms. Ben was writing papers about combatting deflationary forces in 2002... to write such an extensive paper indicates he foresaw this crisis coming.

His response has been one of the better responses out there, but unlike Janet Yellen (also FRB) he's waited until the crisis occurs to take action. The FRB should act in a manner that takes precautions to prevent crisis not just wait until the accident happens.

There are a number of people who could fill the position just as well as BB, there are about three who could do the job better depending on the type of reform you want. As it stands BB stands for the status quo and not much else.

Unlike a politician he can't just change policy because the public doesn't approve, trillions of bonds held all over the world force the FRB to take a position and stick to it no matter what type of opposition there is.

mike volpe said...

Maybe, however the only person that matters the chairman himself. Bernanke was on the board but they're a rubber stamp.

His response is the same, only more extreme, as Greenspan's response in 2001-2003. So, he clearly hasn't learned anything. Furthermore, neither have the pols. You can't slam the Fed for causing the crisis and then congratulate it for minimizing it since the policy is the same.