Paul Krugman: The Bernanke Conundrum

Paul Krugman's view on Ben Bernanke's reconfirmation as Fed Chair:

The Bernanke Conundrum, by Paul Krugman, Commentary, NY Times: A Republican won in Massachusetts — and suddenly it’s not clear whether the Senate will confirm Ben Bernanke for a second term as Federal Reserve chairman. That’s not as strange as it sounds: Washington has suddenly noticed public rage over economic policies that bailed out big banks but failed to create jobs. And Mr. Bernanke has become a symbol of those policies.

Where do I stand? I deeply admire Mr. Bernanke, both as an economist and for his response to the financial crisis. ... Yet his critics have a strong case. In the end, I favor his reappointment, but only because rejecting him could make the Fed’s policies worse...

Mr. Bernanke is a superb research economist..., his academic expertise and his policy role meshed perfectly, as he used aggressive, unorthodox tactics to head off a second Great Depression.

Unfortunately, that’s not the whole story. Before the crisis struck, Mr. Bernanke was very much a conventional, mainstream Fed official, sharing fully in the institution’s complacency. Worse, after the acute phase of the crisis ended he slipped right back into that mainstream. Once again, the Fed is dangerously complacent...

Consider two issues: financial reform and unemployment.

Back in July, Mr. Bernanke spoke out against ... the creation of a new consumer financial protection agency. He urged Congress to maintain the current situation, in which protection of consumers from unfair financial practices is the Fed’s responsibility.

But here’s the thing: During the run-up to the crisis, as financial abuses proliferated, the Fed did nothing. In particular, it ignored warnings about subprime lending. So it was striking that ... Mr. Bernanke ... gave no reason to believe that the Fed would behave differently in the future. ... As I said, the Fed has returned to a dangerous complacency.

And then there’s unemployment. The economy may not have collapsed, but it’s in terrible shape... Nor does Mr. Bernanke expect any quick improvement... So what does he propose doing...?

Nothing. Mr. Bernanke has offered no hint that he feels the need to adopt policies that might bring unemployment down faster. ... It’s harsh but true to say that he’s acting as if it’s Mission Accomplished now that the big banks have been rescued.

What happened...? My sense is that Mr. Bernanke, like so many people who work closely with the financial sector, has ended up seeing the world through bankers’ eyes. ... Given that, why not reject Mr. Bernanke? There are other people with the intellectual heft and policy savvy to take on his role: ...possible choices would be ... Alan Blinder ... and Janet Yellen...

But — and here comes my defense of a Bernanke reappointment — any good alternative ... would face a bruising fight in the Senate. And choosing a bad alternative would have truly dire consequences for the economy.

Furthermore, policy decisions at the Fed are made by committee vote. And while Mr. Bernanke seems insufficiently concerned about unemployment..., many of his colleagues are worse. Replacing him with someone less established, with less ability to sway the internal discussion, could end up strengthening the hands of the inflation hawks and doing even more damage to job creation.

That’s not a ringing endorsement, but it’s the best I can do.

If Mr. Bernanke is reappointed, he and his colleagues need to realize that what they consider a policy success is actually a policy failure. We have avoided a second Great Depression, but we are facing mass unemployment — unemployment that will blight the lives of millions of Americans — for years to come. And it’s the Fed’s responsibility to do all it can to end that blight.

I don't disagree at all with the pressure on the Fed to do more, unemployment is a big problem and I'm ready to give further easing a try (particularly since Congress has dropped the ball on additional fiscal policy to help with job creation). But I see this more as a disagreement over what type of monetary policy is best for unemployment now and in the future than I do as Bernanke taking the side of bankers over the unemployed.