Sunday, January 31, 2010

Mr. Bernanke and the Perplexing Populism of a Naubel Laureate

Now that Ben Bernanke has been confirmed by the Senate for a second four-year term as Fed Chairman, averting a potentially major financial market turmoil and the embarrassment of this country in the eyes of the world, it is high time to focus on two memorable quotes by two high-profile public figures during the heady week recently when opposition to Mr. Bernanke's confirmation seemed to be gathering steam.

It was hardly surprising to hear Senator Barbara Boxer (D-Calif) declare on January 22 that, despite her professed regard for the Fed Chairman, she would vote against Bernanke's confirmation because " is time for Main Street to have a champion at the Fed"- whatever Main Street's champion at the Fed exactly entails. Such a decision and rationale could have easily been brushed aside as standard populist rhetoric by a professional politician up for re-election this year and fighting for her political life.

But it was an entirely different, and somewhat disturbing, matter, to read the following in Paul Krugman's op-ed column in The New York Times, on January 26, where he was explaining why the most he could muster to offer to his former colleague at Princeton was a very tepid endorsement.

"And then there's unemployment. The economy may not have collapsed, but it's in terrible shape, with job-seekers outnumbering job openings six to one. Nor does Mr. Bernanke expect any quick improvement: last month, while predicting that unemployment will fall, he conceded that the rate of decline will be "slower than he would like". So what does he propose doing to create jobs?

Nothing. Mr. Bernanke has offered no hint that he feels the need to adopt policies that might bring unemployment down faster."

Now, this is serious double-take material.

What kind of policies should the Fed have adopted to "bring unemployment down faster"? Bring short-term rates down to zero and keep them there for 14 months now, while still promising to keep them at that level "for an extended period"? Already done. Set in place an unprecedented array of programs to inject an enormous amount of liquidity, providing the "raw material" that banks- once they are past their critical survival phase- will have available to extend more lending? Done, too.

The most disturbing part though is this: Doesn't Mr. Krugman realize that measures specifically designed to create jobs and bring the unemployment rate down are the exclusive domain of fiscal policy and that the Fed is not part of either the Executive or Legislative branches of the government that shape such policies ? Doesn't he realize that the Fed has no legal power, whatsoever, to mandate banks to increase lending against their will? Doesn't he realize that Mr. Bernanke's view that the rate of decline in the unemployment rate "would be slower than he would like" is not a reflection of indifference on his part toward the social impact of a 10% rate but simply a realistic assessment of the economic trajectory ahead and the Fed's own ironclad limitations in regards to affecting that outcome?

It does not take a Nobel Laureate in Economics to understand those simple facts and Mr. Krugman is certainly more than qualified to recognize them fully. Then, what one is to make of the promotion of such populist, and misleading, arguments against Bernanke on a high-profile forum like The New York Times?

As we have argued before, Bernanke carries a very major responsibility for the Fed's lax supervision of the banking system while the imbalances that led to the financial crisis were brewing, and he has repeatedly acknowledged that himself. But attacking him on the grounds that, as a central banker, with the record of the measures he has taken in the last 18 months or so, he is not doing enough to bring the unemployment rate down is dsiturbingly off-base.

Populism has its role in the public discourse in any democracy but it is always disheartening to see it popping up in the most unexpected of places.

Anthony Karydakis