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Thursday, August 27, 2009

Hope or Evidence?

I think this is a fair response to my contention that Bernanke will be effective at pushing for new regulation of the banking industry. Thinking about it more, it's probably true that it is based more on hope than on evidence:

Ben's Second Term, by  Kevin Drum: What do we have to look forward to from Ben Bernanke's second term as chairman of the Fed?  The New York Times asked a bunch of economists for their predictions. Here's Mark Thoma:
My worry is that as time passes, we’ll forget how bad things were and the desire to impose necessary new regulation will fade. Here’s where I think Mr. Bernanke’s experience will be crucial. He was there at every step in the development of the Fed’s response to the crisis and he will not soon forget the problems he faced (nor repeat his mistakes), making it more likely that he’ll be a forceful and passionate advocate for new regulation before Congress. [Italics mine.]
Boy, do I hope this is true.  But it strikes me as woefully wishful thinking. One of the reasons I opposed reappointing Bernanke is that I'd like to have someone running the Fed who's serious about reregulating the financial industry, both at a macro and a consumer level. ...

Still, I remain hopeful.

Update: Free Exchange also responds:

What will Ben Bernanke do?, Free Exchange: Kevin Drum is collecting predictions about Ben Bernanke's second term. Here's Mark Thoma, for instance:
He was there at every step in the development of the Fed’s response to the crisis and he will not soon forget the problems he faced (nor repeat his mistakes), making it more likely that he’ll be a forceful and passionate advocate for new regulation before Congress. ...
Now, no Fed chairman (or potential Fed chairman) can or will pre-commit themselves to specific policy actions before they're nominated (nor should we want them to, given the importance of Fed independence). At the same time, nomination is the one time that political actors get some kind of say over what they want in a Fed chairperson. It therefore seems like it might be a good idea to ask what a nominee's priorities are ahead of time. ...
In other words, it shouldn't be unclear whether Mr Bernanke is going to forcefully advocate for needed regulatory changes. And maybe it isn't unclear to the president. But there's not necessarily any reason we ought to be flying blind with respect to the chairman's views on issues that will be hugely important during his second term. ...

Update: Tim Duy emails:

Bernanke will run away from financial reform if it means the risk of exposing the Fed to enhanced GAO oversight.  And maybe he should.

[End updates]

Here's Thomas Palley's view of Bernanke's reappointment. Thomas is, you will recall, a "heterodox economist" so it's not surprising that most of his criticism is directed at the profession itself rather than at Bernanke (much of which is in the full version of the article). Unfortunately, heterodox economists didn't do any better than mainstream economists at foreseeing and warning about the crisis. Thus, while I agree that new thinking and change is needed to prevent problems in the future, it's not clear that his call to open the Fed to "alternative economic views" would have done anything to help to prevent the problems we are having:

One Hand Clapping for Bernanke, by Thomas I. Palley, Commentary, Project Syndicate: President Barack Obama's nomination of Ben Bernanke to a second term as chairman of the U.S. Federal Reserve represents a sensible and pragmatic decision, but it is nothing to celebrate.

Instead, it should be an occasion for reflection on the role of ideological groupthink among economists, including Bernanke, in contributing to the global economic and financial crisis.

The decision to nominate Bernanke is sensible on two counts. First, the U.S. and global economies remain mired in recession. Though the crisis may be over in the sense that outright collapse has been avoided, the economy remains vulnerable. As such, it makes sense not to risk a shock to confidence that could trigger a renewed downturn.

Second, Bernanke is the best among his peers. He did eventually come to understand the nature and severity of the crisis, and then took decisive steps that contributed to halting the economic freefall.

That record, combined with doubts that any of his peers would have done better, means replacing him with another mainstream candidate makes little sense.

These two factors justify Bernanke's reappointment, but the faintness of praise is indicative of the deeper problems that his leadership has exposed. Those problems concern the state of economics and economic policy advice.

One such problem is Wall Street's implicit veto over the Fed. After all, a major reason for reappointing Bernanke is to avoid rocking financial markets. ...

In effect, financial markets have established an implicit veto over much of economic policy and the people who can hold top policymaking positions, and it is time to think how we can escape that hold.

A second problem concerns the state of economics. Though Bernanke may be the best in his peer group, the fact is that the economic crisis decisively proved him and his peers to have been wrong. ...

Though circumstances dictate that Bernanke is the best candidate and should be reappointed, the real challenge is to ensure a thorough intellectual housecleaning at the Fed in order to open space for alternative economic views.

The great danger is that reappointing Bernanke will be interpreted as a green flag for a flawed status quo.

That is where public debate and Bernanke's Senate confirmation hearings enter the picture. Those hearings should be an occasion for critical examination of what went wrong, and why.

If that happens, Bernanke's reappointment can serve as a trigger for constructive change rather than an endorsement of a discredited paradigm.

    Posted by on Thursday, August 27, 2009 at 09:12 AM in Economics, Monetary Policy | Permalink  Comments (34)


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