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For, And Against, Reappointing Ben Bernanke

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There's been rather a lot of commentary on whether Barack Obama should reappoint Ben Bernanke to the Federal Reserve. Count me with Tyler Cowen: In this case, Bernanke probably should be reappointed, not only because he's performed admirably, but because this is a precarious moment for the Federal Reserve in general, and it's best to keep a steady hand on the tiller.

But -- and here's where this post gets confusing -- though I believe Bernanke should be reappointed, I don't think any Federal Reserve chairman should be reappointed. In this, I'm with Kevin Drum. It's not good for the Federal Reserve to be helmed be revered monetarist legends with nicknames like "the Oracle." As much damage as Greenspan's actual decisions made toward the end, I think there's a case to be made that his reputation was more damaging: He was so broadly respected that his overconfidence in the system helped lull everyone else into being overconfident in the system.

Given recent experience, the central question for any new financial regulatory regime has to be, "How well will these regulations work if the Federal Reserve chairman doesn't want to use them?" That, after all, was the situation we were in with Greenspan. He could have regulated the subprime market, and Ed Gramlich, one of the Federal Reserve governors, even asked that he do so. But Greenspan, like everyone else, was caught up in the bubble. And that made it much harder for anyone else to do anything about it.

One partial response to that lesson could be to limit the ability of any particular Federal Reserve chairperson to attain mythic stature. It was much easier for Greenspan to ignore requests for regulatory oversight because he was essentially above reproach. Over multiple terms and many lionizing articles, he had become bigger than the game. There was no regulation as wise as the Oracle, and so he could pick and choose. A Federal Reserve chair with less of a reputation might be more usefully constrained.

Photo credit: AP Photo/Gerald Herbert.

By Ezra Klein  |  July 27, 2009; 3:19 PM ET
Categories:  Federal Reserve , Solutions  
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Comments

Ezra,
I agree with most of the things that you write, but I think this is dead wrong. Doesn't anyone anywhere (other than the people who are losing their houses and jobs and businesses) have to pay for the mistakes of the banks and hedge funds and regulators?

In my perfect world, the bank decision makers and regulators would be fired and have a hard time getting new jobs in the industry. Bernanke and the rest of the Fed governors would be turned out. There would be a price for failure.

Otherwise, why do you think that the future will be any different? It will always be easier to go along with the consensus if there is no downside. If you are wrong and there is a catastrophe, the Ezra Kleins of the world are right behind you! Can't change captains in the middle of the stream!

It would have taken courage to fight the bubble and prevent this mess. If there are no consequences for being wrong, why would a future fed chair take the risk?

Posted by: RobbL | July 28, 2009 9:09 AM | Report abuse

I agree with RobbL about the (de)merits of the situation. It was a disgrace and even in this disgraceful age there should be at least some token punishment (justice would be too much to hope for).

And I've argued that the Fed should be reformed along the lines that William Greider is advocating currently:
http://voices.washingtonpost.com/ezra-klein/2009/07/the_problems_with_the_federal.html

However, as I've also said before, Obama obviously has never wanted to mess with the finance system, at least not at this stage of his game. He was ambushed by the meltdown, a red-hot coal tossed from the outgoing regime. He has other things to do, and he's content for now just to restore the status quo.

Maybe in the future we get to reform all this. I'm sure Obama would back it if the country would show the muscle for it. We'll have to do the heavy lifting.

Posted by: wapomadness | July 28, 2009 10:57 AM | Report abuse

There's a perverse irony that a change in the rules for appointing the Fed chair (to a term of four years, more or less coterminous with presidential terms) that was supposed to increase the chair's accountability and give presidents more authority to align the Fed's policy beliefs with their own has at best done nothing of the sort.

When the chair had a longer, unsynchronized term, fewer presidents got to appoint one, but there was also an underlying assumption against reapointment, with no implied slur on competence. Now there's all this talk of continuity and the Great Man theory (as if the Fed didn't have a hugely competent staff, six other very smart governors and the whole damn structure of regional banks and the FOMC), and it seems as if it's never quite time to appoint someone new.

Posted by: paul314 | July 29, 2009 11:37 AM | Report abuse

Has anyone heard of this idea out of Phoenix from the private sector called 4/40 for Freedom? www.4-40forfreedom.com- basically it suggests that Congress sign into law straight modifications of existing home loans to a 4% 40 year mortgage. Interesting- is it too simple to work?

Posted by: mrose1 | July 29, 2009 6:01 PM | Report abuse

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