Given The Alternatives, Bernanke Should Stay

Ben Bernanke i i

hide captionFederal Reserve Chairman Ben Bernanke is making bipartisan waves. On Jan. 31, his first term is set to expire, and both liberals and conservatives are up in arms about his future.

Chip Somodevilla/Getty Images
Ben Bernanke

Federal Reserve Chairman Ben Bernanke is making bipartisan waves. On Jan. 31, his first term is set to expire, and both liberals and conservatives are up in arms about his future.

Chip Somodevilla/Getty Images

Should He Stay Or Should He Go? Dean Baker thinks it's time we fire Ben Bernanke.

Stephen Spruiell is a staff writer for National Review, where he covers politics, policy and economics.

Unlike most of the fights in Washington these days, the unexpected trouble over Fed Chairman Ben Bernanke's reconfirmation does not revolve around a partisan dispute. Liberals and conservatives alike have their own longstanding and legitimate complaints about Bernanke, encompassing both his pre-crisis and post-crisis governance. The real breakdown is between those who think that any politically viable alternative to Bernanke would be worse, and those who want to roll the dice with a new Fed chairman. Obama's track record with appointments concerns me, and I think anyone he appointed for Bernanke's slot would probably be worse (my preference, of course, would be Jay Leno). Given the alternatives, the Senate should vote to confirm Bernanke.

Of Bernanke's pre-crisis rule, liberals have argued that the Fed failed to regulate banks tightly enough, particularly with regard to the proliferation of exotic mortgage products and "predatory" lending. Conservatives tend to fault Bernanke for being a part of the Fed consensus that kept interest rates too low for too long, fueling the housing bubble with cheap money.

There are merits to both complaints. The predatory lending charge is overblown — the world of commercial real estate, now undergoing its own meltdown, is full of professionals who got in over their heads despite knowing full well how to read contracts. But the Fed certainly should have paid closer attention to the rapid decline of lending standards at the banks. As for interest rates, conservatives point to the work of economist John Taylor, whose eponymous rule governing sound monetary policy the Fed purposefully ignored following the 2001 recession.

If many liberals view Bernanke as the captain of our financial Titanic, they also see him post-crisis as the guy who made sure that Wall Street bankers got all the lifeboats. For their part, conservatives feel that Bernanke has printed too much money in response the crisis, greatly increasing the threat of runaway inflation.

Stephen Spruiell

hide captionStephen Spruiell

Courtesy of the National Review Online

Again, both complaints have some merit. Few would argue that Wall Street hasn't benefited enormously from the Fed's policy of near-zero interest rates, which has allowed banks to borrow money for free and park it in low-yield government securities. This is one reason why small businesses are having a hard time getting loans and grandma can't find a CD that pays more than 1 percent. And we should all worry about the Fed's ballooning balance sheet. Bernanke's decision to buy $1.5 trillion worth of mortgage-backed securities with printed money has kept mortgage interest rates low, but at what cost to the future stability of the dollar?

Most people would agree with at least one of these complaints about Bernanke, and I agree with most of them. At the same time, they must be weighed against the difficulty of the situation into which he was thrust and (especially) the politically viable alternatives. Former Fed chairman and Obama adviser Paul Volcker has a proven track record of doing the right thing in the face of political pressure, but at 82, Volcker is an unlikely pick. Fed Vice Chairman Donald Kohn shares Bernanke's views, so that wouldn't be much of a change. And there is a better-than-average chance that whoever Obama picked amid the current populist wave would turn out to be quite a bit worse. Put simply, now is not the time to gamble with another Fed chief.

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