For, And Against, Reappointing Ben Bernanke
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.
July 27, 2009; 3:19 PM ET
Categories: Federal Reserve , Solutions
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