After Republicans triumphed in the 1994 congressional elections, Peter Jennings declared::
Imagine a nation full of uncontrolled two-year-old rage [Jennings meant the rage of a two-year old]. The voters had a temper tantrum last week.
This past week, things were somewhat different. The voters of Massachusetts calmly elected an attractive centrist candidate and the president of the United States had a temper tantrum.
President Obama’s tantrum consisted mostly of telling voters that he is angry and then directing that anger towards banks, in statements that helped deplete the stock market of about 5 percent of its value in three days.
Obama wasn’t solely responsible for last week’s market woes, though. Various Republican and Democratic Senators contributed by saying that they would not vote in favor of Ben Bernanke’s renomination to head the Fed.
The sell-off in the wake of mounting opposition to Bernanke means that Wall Street wants him to remain in his job. But that doesn’t mean that we should.
In fact, there are substantial arguments on both sides of this question. I am persuaded by Stanford economist John Taylor and others that the meltdown of 2008 was caused in significant part by a Fed rate that, from mid-2002 until 2005, held interest rates too low. Bernanake was a policy maker at the Fed during this period, serving on the Board of Governors. By all accounts I’m aware of, he favored the low interest rates set by the Fed. After becoming head of the Fed in 2005, moreover, he did not see the impending danger until it was too late.
On the other hand, even strong critics of Bernanke, such as Senator Cornyn, acknowledge that he has done a good job preventing the collapse of the financial system. Instead of the calamity that seemed so possible in late 2008, we ended up with a bad recession.
The recovery, to the extent we’ve experienced one, has not been robust so far. But I don’t think any decision by Bernanke is to blame. Rather, I believe that structural problems coupled with the uncertainty created by the administration’s antipathy, at times, towards free markets are the culprits.
On balance, I favor retaining Bernanke for three reasons: (1) I think his recent actions are more relevant to his fitness going forward than decisions that were made in the very different environment of 2002-2005, (2) Obama is likely to appoint someone worse and that person is likely to be confirmed, (3) the sacking of Bernanke would signal to his successor that he or she needs to be all-the-more highly attuned to the political winds (Bernanke himself arguably has been too attuned to them at times). The less political winds influence economic decisions the better, in my view, especially since these winds blow towards the left at times..
I have no insight into Bernanke’s prospects, but as of today the word around Washington is that he probably will survive.