Federal Reserve Chairman Ben Bernanke faced a tough grilling yesterday in a hearing of the House Oversight and Government Reform Committee, as indicated by the coverage here in the Washington Examiner and in the Wall Street Journal. He was pressed hard on his interactions in December and January with Bank of America CEO Ken Lewis over the issue of whether BofA should follow through on its commitment to buy Merrill Lynch. The reviews were not all positive. The invaluable Megan McArdle, a Bernanke fan for the most part, wrote that she got the impression he was lying.
McArdle also expressed the fear that Bernanke won’t be reappointed Chairman when his four-year term expires in January 2010. Certainly that’s a live possibility. Barack Obama has expressed confidence in Bernanke and Timothy Geithner has been working with him continuously for several years, first as President of the New York Fed and now as Treasury Secretary. But Bernanke was appointed by George W. Bush and is generally considered a Republican and a free market economist.
The case for Bernanke: He is probably the most knowledgeable man on earth on the economic history of the Great Depression. First as a member of the Fed Board of Governors in the first Bush term and then as Chairman since January 2006, he has striven successfully (it seems) from preventing the American and world economies from going into deflation, the dread condition when the value of money rises, consumers postpone spending and the economy goes into an extended period of contraction: the United States in the early 1930s, Japan in the 1990s. He has done this by yanking short-term interest rates down to zero and then using ingenious mechanism—“quantitative easing”—to flood the market with dollars. He has prevented the credit markets from freezing up, as they threatened to do last September. He is politically independent and can be trusted to reverse the flow of money into the market when it is necessary to do so to prevent destructive inflation. From sources close to the Federal Reserve, I am given to understand that he has been calm and unruffled during a time when he must have been under extremely great pressure, that he never loses his cool or his temper, that he has as one observer said shown “courage.”
The case against Bernanke: He is too much of a deflation hawk, and may not reverse the flooding of money into the market when it is necessary to do so to avoid destructive inflation. He has used the muscle of the Federal Reserve to interfere overmuch in private business decisions, as when he helped prevent BofA from dropping its acquisition of Merrill Lynch or when he helped force Wells Fargo to take on Wachovia. From a partisan Democratic point of view, he cannot be trusted to keep the economy growing during the 2012 election cycle; he might, in the words of longtime (1951-70) Fed Chairman William Martin, take the punch bowl away just when the party gets going.
Tradition can point in either direction. Martin was appointed by Harry Truman, reappointed by Dwight Eisenhower, John Kennedy and Lyndon Johnson. Richard Nixon replaced him in 1970 with Arthur Burns, a highly respected economist who nonetheless cooperated with the inflationary policies that helped reelect Nixon in 1972 but led to the huge inflation of the middle and late 1970s. Jimmy Carter installed his own man, G. William Miller, then when inflation raged brought him to the Treasury and installed Paul Volcker in 1979. Volcker’s successful clampdown on inflation was backed by Ronald Reagan, despite considerable political cost in the 1982 offyear election, but in 1986 Reagan appointed Alan Greenspan. Greenspan was reappointed by George H.W. Bush (who came to believe he refused to reinflate the economy to his political detriment in 1992), Bill Clinton (who seemed to get on well with him) and George W. Bush.
Whom might Obama appoint instead? One name on everyone’s list is former Treasury Secretary and current White House economic counselor Lawrence Summers. By everyone’s estimate, not just his own, he is a brilliant economist, absolutely first-rate—even better in his time that Arthur Burns was four decades ago. But the parallel may be troubling to some. According to numerous press accounts, Summers’s advice to Obama takes into account not just economic considerations but also political factors. Does that mean he would do for Obama in 2012 what Arthur Burns did for Nixon in 1972? Not necessarily. But it’s possible that a Summers appointment would increase inflation expectations, and inflation expectations are one of the things that produces inflation. Another name I hear is that of Janet Yellen, president of the Federal Reserve Bank of San Francisco, emeritus professor at Berkeley and Chairman of Bill Clinton’s Council of Economic Advisers in 1997-99. She has an excellent academic reputation and, I’m told, has been making very sensible sounding speeches about the economy. Plus, hey, she’s a woman.
Few if any other appointment Obama will make will be more important than this one. Let’s hope he makes a good choice. And let’s hope he lets Bernanke know reasonably soon whether he’ll be reappointed or not. We don’t want to take a chance that the Fed Chairman will be auditioning for a second term while he’s serving his first.
