opinion article in the Tuesday Wall Street Journal. Bernanke explains carefully and clearly how the Federal Reserve has expanded the money supply. More important, he describes the mechanisms by which the Fed can contract the money supply when the velocity of money increases and the danger of inflation rises. Message to Barack Obama, who must decide by next February whether to reappoint Bernanke to another four-year term or to appoint someone else: the markets will trust me to put on the brakes when necessary.
Anyone else you appoint—even as justifiably esteemed an economist as Larry Summers—could be seen by the markets as a risk, as another Arthur Burns. Burns was also an esteemed economist, but as Fed Chairman he expanded the money supply to boost the economy in time for the 1972 reelection campaign of the president who appointed him, Richard Nixon—with hideous inflationary consequences for the rest of the decade.
Of course Obama may want a Fed Chairman who will pump up the economy in time for the 2012 campaign cycle. But he may not want to take the risk of a negative reaction from market participants who, after all, remember what Richard Nixon and Arthur Burns did. Such a negative reaction could stall or prevent any economic recovery. Bernanke is saying, to markets and Obama: I can give you a smooth exit strategy from the current quantitative easing so as to prevent inflation, and that’s what you markets surely want and the best Obama can hope for.
By all reports I’ve seen, Bernanke has worked cooperatively and collegially with Treasury Secretary Timothy Geithner (both when he was New York Fed chairman last year and after his confirmation this year) and with others in the administration. This presumably enhances his chances for reappointment. That’s the carrot; the stick is the implied threat that the appointment of a replacement could be economically dangerous.
