Today we learned that the Obama administration is going to re-nominate Ben Bernanke to head the Federal Reserve. This is a very positive development because Bernanke has demonstrated that he is more than capable at the job. There are several reasons why he should be given a second term.
First, a bit of history is in order. One of the primary reasons for the Great Depression was the banking crisis of 1929-1933. Over these years, there were three banking crisis which essentially froze the country leading to a mammoth contraction in GDP. This Great Contraction (as labeled by Milton Friendman) was a primary reason for the Great Depression.
This lesson was not lost on Bernanke. As a graduate student he studied the Great Depression. In fact, his collection titled "Essays on the Great Depression" is available for purchase. If you were going to write a fictitious resume for a central banker to deal with the situation it would probably read a great deal like Bernanke's. In short, he is literally a near perfect match.
Now consider this video from Representative Paul Kanjorski:
On September 15 of last year, the US was literally hours away from a financial meltdown. Had this happened, the entire financial system would have fallen apart. The economic ramifications would have been a disaster - as in we would be in the middle of another depression.
This is the primary reason why the Troubled Asset Relief Program (TARP) was rushed through so quickly. Regardless of the ways the economy got to that point - and there were a number of major contributing factors - curing them at that time would not have been prudent. Think of it this way. If someone gets drunk and drives their car into a pole, lecturing them about alcoholism in the emergency room is not a good idea. At that time, the goal is to keep them alive. And that's exactly what the Federal Reserve proposed and did.
But that's not all. Bernanke and the Fed came up with a number of programs to ease the credit crisis and promote liquidity. Most of these names are familiar by now. But the point is that short-term interest rates as measured by the A2/P2 spread are now back to far more normal levels.
In addition, a changing of the guard right now would not be a good idea, especially with the economy in a very fragile place. The markets have learned to trust Bernanke; getting traders used to another Federal Reserve head would not be in our best interest.
The primary knock against Bernanke is that he didn't see the crisis coming. This is true. In fact, the only people who really got the call right were bloggers. However, once the problem became apparent Bernanke thought outside of the box and worked as quickly as possible to deal with the problem. Simply put, he did a good job.
I was originally wary of Bernanke. I was also critical at times. However, the proof is in the pudding. The economy is bottoming and a recovery (albeit a weak one) is in sight. This is not the time to change partners - especially considering Bernanke was instrumental in preventing a complete financial meltdown. He should be appointed for another term.