Ben Bernanke Must Go

Ben Bernanke’s four-year term as Chairman of the Federal Reserve System ends on January 31, 2010.

In a story published on August 12 and headlined “Economists Call for Bernanke to Stay, Say Recession is Over”, Wall Street Journal reporter Paul Izzo writes that “economists are nearly unanimous” in recommending that President Obama reappoint Mr. Bernanke for four more years.

Count me among the naysayers.

Although the Journal does not identify the full stable of experts it surveyed in reaching the conclusion that Mr. Bernanke has earned the profession’s “overwhelming” support, it turns out that the two economists quoted in Mr. Izzo’s article work on Wall Street. Many of the financial institutions headquartered there have benefited directly from taxpayer-financed bailouts on Mr. Bernanke’s watch.

Unwilling to bite the hand that has fed them, some of the approximately 43 economists the Journal surveyed nevertheless voiced concerns about mistakes Mr. Bernanke committed in responding to the “credit squeeze” that began in December 2007. The Fed’s failure to take appropriate action more quickly and its decision not to rescue Lehman Brothers up were two prominent complaints.

A different evaluation of Mr. Bernanke’s tenure might have emerged if the Journal had consulted more academic economists and fewer Wall Street economists. The academic economists might have said, as I would have said, that Mr. Bernanke erred in responding too quickly and too precipitously to the credit squeeze, thereby short-circuiting the salutary operation of market forces that would have purged the economy of the institutions chiefly responsible for the financial crisis, and that his biggest mistake was not denying a lifeline to Lehman Brothers, but rather throwing one to Bear Stearns, AIG, and other poorly managed firms deemed too big to fail. The recession would then have been sharper, but less long-lasting.

Mr. Bernanke’s Fed mistook the market’s inability to assess the risks associated with mortgage-backed securities and, hence, hesitation to lend against them, for a drying-up of bank liquidity.

But at the end of the day, Mr. Bernanke’s most venal sin has been to compromise the Fed’s independence of the U.S. Treasury. That subservience began under Hank Paulson and has continued under Timothy Geithner, both of whom, it should come as no surprise, have intimate ties with Goldman Sachs, which has been the big winner under the policies orchestrated by both the Bush and Obama economic teams.

I therefore predict that if the president confounds all expectations and does not reappoint him, Mr. Bernanke will not return to the halls of academe, but will instead take a cushy job at, well, Goldman Sachs.

Only by replacing Mr. Bernanke now does any (faint) hope remain of preventing the central bank from becoming the regulatory monster he and Secretary Geithner want it to be. A new chairperson, less mesmerized by the specter of the Great Depression, might redirect the Fed into doing the one job it was created to do: maintain price stability.