THE BLOG

Ben Bernanke Deserved Confirmation

04/05/2010 05:12 am ET | Updated May 25, 2011

That was a close one. Despite growing furor over his handling of the US economy, prudence beat populism as the Senate confirmed Dr. Ben Bernanke for a second term as chairman of the Federal Reserve.

Given the number of challenges he faces, I am half surprised that he was willing to take the job again in the first place. His Federal Reserve continues to monetize government borrowing, known elsewhere as seigniorage but in advanced industrialized states as quantitative easing, as both our public and private sectors remain mired in unsustainable levels of debt. Unemployment is in the double digits. Our entire fiscal solvency depends on continued Chinese willingness to finance our deficits. And the primary driver of institutional change, the legislative process, waxes between ambivalence and hysteria about the problems that face our country today.

These are trying times, which further underscores the need for chairman Bernanke's continued presence as Fed chief. America dodged a bullet when we confirmed chairman Bernanke for a second term. Here is why:

1) Confirmation of Ben Bernanke ensures central bank independence.
One of the most critical tenets of long-term economic growth is the presence of a politically independent central bank. Observers such as Huffington Post's own Sheldon Filger conveniently neglect the importance of insulating the Federal Reserve from short-run political pressures.

The reason why we need an independent central bank is simple yet often misunderstood. Essentially, we do not want elected politicians, subject to the whims of the mass electorate, responsible for monetary policy. Indeed, conducting monetary policy sometimes entails shouldering unpalatable short-run costs for long-run gains. Situations of low unemployment and rising inflation call for higher interest rates to curb economic activity, thereby lowering inflationary pressures and sometimes creating cyclical unemployment.

We need an independent central bank because when the economy does start growing again, the Federal Reserve should aggressively curb its emergency lending provisions enacted during the height of the crisis to diminish inflation expectations. A populist-backed Fed chairman would be less likely to accept this trade-off, which would have far more destabilizing consequences for the economy than simply enduring a period of slightly higher unemployment in the name of price stability.

2) Charges of his errors in judgment are overblown
Certain accounts of the financial crisis cling to some version of this narrative:

Chairman Bernanke failed to anticipate and aggressively pop the housing bubble, keeping interest rates too low for too long. Then, Bernanke foolishly allowed Lehman Brothers to fail, thereby undermining the entire financial services sector and creating the panic that led to the global financial crisis of 2008. His response of monetary loosening further indebts generations of Americans, and his Fed is ill-equipped to prevent another crisis from forming.

Such popular accounts rely on the logical pitfalls of hindsight bias and monocausal reasoning. Yes, in hindsight, it was clear that the risks that had built up in the financial sector could topple the entire global financial architecture. The bursting of the housing bubble could not be contained. But to pin the entire crisis on Bernanke is to ignore the most important takeaway of the financial crisis: our entire society as a whole was a priori blind to the potential of financial meltdown. Homeowners borrowed with impunity; politicians from both parties expanded and encouraged more lending from the housing agencies, Fannie Mae and Freddie Mac; China continued to fuel global imbalances, thereby lowering long-term borrowing costs in the United States; and regulatory oversight, some of which was the Fed's fault, aided and abetted a Wall Street driven by leverage and speculation.

Responsibility for the financial crisis cannot be pinned on one man and one institution, Ben Bernanke and the Fed, anymore than we can blame repressive Arab governments exclusively for terrorism, or Barack Obama for the failure to close the Guantanamo detention center. Social outcomes like economic cycles depend on multiple causal pathways, of which monetary policy is one part.

3) Bernanke is simply the best man for the job
As we learned in painful detail during the height of the crisis, the entire global economy depends on confidence. Without confidence in the financial system, consumers do not save, banks do not lend, and economic activity could halt altogether. Any nascent economic recovery will depend on market confidence in the chairman of the Federal Reserve. Given his experience of the tumult of the crisis, he is in a unique position to see the American economy through to recovery. Any other potential replacement would lack this unique vantage point. For our regulators, experience is everything, and we should not undervalue the benefit of Bernanke's continuity on the macroeconomic psyche of the global economy.

This is not to say that Bernanke is flawless. His notable reticence on the need for stronger financial regulations and on US fiscal profligacy challenges his credibility. But by and large, Bernanke deserved a second term as Fed chairman.

As Americans come to terms with the realization that our economic challenges will not be solved overnight, our politicians must also resist the urge to favor expedient political payoffs over long-term economic gains. The confirmation of Bernanke shows that our political system does have this capacity for restraint in the name of prudence. For the sake of our country, let's hope that Bernanke's confirmation is a sign of things to come, instead of a blip on our legislative radar.