Barack Obama has announced that he will reappoint Ben Bernanke to a second term as Federal Reserve Chairman. This is an important appointment Obama will make during his entire administration, and the statement he made it announcing it on Martha’s Vineyard was thoughtful and statesmanlike. “Ben approach a financial system on the verge of collapse with calm and wisdom,” he said, “with bold action and out-of-the-box thinking that has helped put the brakes on our economic freefall. Almost none of the decisions he or any of us made has been easy.”
This looks, on the whole, like a good decision by the president. As I wrote last month, Bernanke clearly has been seeking reappointment and financial markets would probably have been adversely affected if Obama chose someone else. Bernanke possesses one important qualification—he probably knows more about the economics of the 1930s than anyone else on earth—and he seems to have navigated through the financial crises of 2007-09 with a cool head and considerable creativity.
Irwin Stelzer of the Weekly Standard takes pretty much the same view, but expresses the caveat that in his second term as Chairman Bernanke will probably have to reduce the money supply he has so hugely increased in order to prevent inflation. In his July 21 Wall Street Journal article, which I referenced in my July blogpost, Bernanke argued that he has the tools and willingness to do that. Nonetheless, it will be a tough call, particularly if he seems to be clamping down on economic growth in the runup to the 2012 election.
How should we rate Bernanke’s performance in his first term? Pretty highly, I think, but not perfect. Two of my favorite economic commentators, Megan McArdle of the Atlantic and Tyler Cowen of marginalrevolution.com, argue that the various bailouts, in all of which Bernanke played a lead role, had good effects, on balance. Without them, they argue, credit could have been frozen and the economic downturn would have been much worse.
Wall Street Jourrnal economics reporter David Wessel, in his recently released In Fed We Trust: Ben Bernanke’s War on the Great Panic, take a similar view, though not without some caveats of his own. Wessel’s book contains some terrific reporting which I hadn’t seen elsewhere, and on the whole presents a favorable picture of Bernanke, who comes across as always cool under enormous pressure, and of Timothy Geithner, Treasury Secretary now but head of the New York Federal Reserve Bank during most of Wessel’s narrative, who comes across as much more forceful and decisive than he has seemed in his public appearances. Former Treasury Secretary Henry Paulsen, in contrast, comes across as impulsive and overly inclined to change his positions abruptly. Wessel also paints interesting pictures of Fed Vice Chairman Donald Kohn and Board of Governors member David Warsh.
In retrospect, however, I am left wondering whether the March 2008 bailout of Bear Stearns was the right call. At the time it was thought that a Bear bankruptcy could lead to huge negative consequences for counterparties on its trades—consequences that could bring down other investment banks and perhaps some big banks as well. The experience of the September 2008 Lehman Brothers bankruptcy, in which counterparty claims were settled pretty easily within a week, leads me to wonder whether this assumption in March was correct—though defenders of Bernanke, Paulsen and Geithner, all of whom played key roles in the Bear bailout and the refusal to bail out Lehman, can argue that after Bear counterparties had a chance to shore up their positions in a way that they had not done six months before.
Wessel makes the point that Bernanke, Paulsen and Geithner did not do enough in the six months after the Bear bailout to devise mechanisms to shore up the financial system. They seemed to regard the Bear collapse as a one-off event, after which the financial system would have smooth sailing. This comports with my own limited observations. But having said that, and conceding that mistakes were made at least somewhere along the way, I tend to concur with Wessel, McArdle and Cowen that Bernanke and the others on balance prevented a much more serious financial and economic collapse from occurring than might have happened if others were in charge. Barack Obama, who was preoccupied with his presidential campaign during most of 2008 and who did not meet and talk with Bernanke until July 2008, seems to have reached the same conclusion.
In that light, it’s a good thing that Obama announced Bernanke’s reappointment now, rather than let speculation about it continue through the fall.
