Saturday, January 23, 2010

Throwing Bernanke and Geithner over the side

There is growing opposition in the Senate to Ben Bernanke's reconfirmation on both sides of the aisle, and there is increasing pressure on Tim Geithner as well. 

I can certainly think of a few reasons why they might be thrown overboard:
  • They let Lehman go, an event from which we have by no means recovered;
  • They have signally failed to make a persuasive case for TBTF and the so-called bailouts;
  • Bernanke has failed to persuade the FOMC to adopt inflation-targeting as Fed policy;
  • Bernanke has presided over the first annual decline in nominal GDP in 60 years;
  • Geithner has insufficient clout in the White House to stand up to the Emmanuel bank-bashing populists.

But none of the above are among the crimes for which these men are being pilloried. Instead, they are accused of "bailing having out Wall Street while doing nothing for Main Street". This criticism reveals either willful ignorance or disingenuous populism. 

Let's do a thought experiment. Let's imagine that, instead of rescuing the financial system, they had simply allowed events to take their course. The financial system and the money supply collapse. Debts become due as they mature with no hope of refinance. Nominal GDP declines by 25%. 

Haven't we been here before? Doesn't this sound a lot like the Hoover administration in general and Andrew Mellon in particular? Is this the history we want to repeat?

Bernanke and Geithner took enormous personal risks to rescue the financial system, employing their authorities and powers to their utmost, and beyond. Did they do this for personal gain? Did they benefit in any way, other than to be subjected to show trials on Capitol Hill? How much do Barbara Boxer or John McCain know about the conduct of monetary policy during a financial crisis?

Personally, I don't think that Bernanke has done enough with respect to fighting deflation and growing nominal GDP. I think the reason for this is not that he doesn't get it--considering the fact that he wrote the book on the subject. 

Instead I think that his failure to do more is due to his desire to maintain a degree of consensus on the FOMC, bringing the inflation hawks along with him as the data unfolds. He lacks Greenspan's clout and is uncomfortable with close votes on huge decisions. This is extremely unfortunate, but I do not see how someone else could possibly do a better job. (...Although, if Bernanke goes, Chairman Summers might be willing to grab the hawks by the throat.)

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