The Battle of Bernanke has begun.
Yesterday, the Journal broke the news that Obama would renominate Bernanke to run the Federal Reserve for the next four years in a bid to keep continuity in the still-skittish financial markets.
Today, breakingviews in The New York Times talks about why that’s a bad idea: Bernanke isn’t exactly a seer, saying “he did not comprehend the economic risks of modern financial practices,” which if anything is a severe understatement.
Edward Hadas says that’s made clear by the fact that Bernanke repeatedly claimed that the subprime problem was contained and wouldn’t hurt housing much, when it was clear at the time who had his eyes open that that was not the case.
Stephen Roach, the Morgan Stanley economist who, unlike Bernanke, foresaw big problems in the economy, skewers Bernanke in the Financial Times today, writing that Obama’s move is a “very short-sighted decision” because Bernanke’s “pre-crisis actions played an equally critical role in setting the stage for the most wrenching recession since the 1930s. It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure. Maybe the patient needs a new doctor.”
Roach writes that Bernanke, among other sins, “is cut from the same market libertarian cloth that got the Fed into this mess.” In other words, he’s Greenspan Lite. It’s worth quoting the rest of that paragraph:
Steeped in the Greenspan credo that markets know better than regulators, Mr Bernanke was aligned with the prevailing Fed mindset that abrogated its regulatory authority in the era of excess. The derivatives’ explosion, extreme leverage of regulated and shadow banks and excesses of mortgage lending were all flagrant abuses that both Mr Bernanke and Mr Greenspan could have said no to. But they did not. As a result, a complex and unstable system veered dangerously out of control.
Who wants to argue with that? And let me say how surprising it is, nearly every time you read Roach, to think that he’s employed by a major Wall Street bank.
Roach goes on to point out that these green shoots have shallow roots, that a post-bubble recover, especially from one as bad as this one, is always dicey.
And the final twist of the knife, in the kicker:
Yes, he reacted strongly after the fact in taking actions to avoid the pitfalls highlighted by his own research. But he lacked the foresight and courage to resist the most reckless tendencies of the era of excess. The world needs central bankers who avoid problems, not those who specialise in post-crisis damage control. For that reason, alone, he should not be reappointed. Let the debate begin.