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Simon Johnson

Simon Johnson

Posted: January 28, 2010 07:16 PM

Bernanke's Reappointment: A Colossal Failure Of Governance

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When representatives of American power encounter officials in less rich countries, they are prone to suggest that any failure to reach the highest standards of living is due in part to weak political governance in general and the failure of effective oversight in particular. Current and former US Treasury officials frequently remark this or that government "lacks the political will" to exercise responsible economic policy or even replace a powerful official who has clearly become a problem.

There is much to be said for this view. When a minister or even the head of a strong government agency is no longer acting in the best interests of any country - but is still backed by powerful special interests - who has the authority, the opportunity, and the fortitude to stand up and be counted?

Fortunately, our Constitution grants the Senate the power to approve or disapprove key government appointments, and over the past 200 plus years this has served many times as an effective check on both executive authority and overly strong lobbies - who usually want their own, unsuitable, person to be kept on the job.

Unfortunately, two massive failures of governance at the level of the Senate also spring to mind: first, the strange case of Alan Greenspan, which stretched over nearly two decades; second, Ben Bernanke, reappointed today (Thursday).>

Greenspan, as you recall, was worshiped as some sort of economic magician. Even his most asinine comments were seized upon by a legion of acolytes. Instead of providing meaningful periodic oversight, every Senate hearing was essentially a re-coronation.

And now we can look back over 20 years and be honest with ourselves: Alan Greenspan contends for the title of most disastrous economic policy maker in the recent history of the world.

Some on Wall Street, of course, would disagree - arguing that the financial sector growth he fostered is not completely illusory, that we have indeed reached a new economic paradigm due to the Greenspan tonic of deregulation, neglect, and refusal to enforce the law. Prove the ill-effects, they cry.

What part of 8 million net jobs lost since December 2007 do you still not understand?

And now the same Greenspanians and their fellow travelers rally to the support of Ben Bernanke's troubled renomination. Certainly, they concede that Bernanke was complicit in and continued many of Greenspan's mistakes through September 2008. But, they argue, he ran a helluva bailout strategy after that point. And, in any case, if the Senate had refused to reconfirm him - financial sector representatives insist - there would have been chaos in the markets.

Take that last statement at face value and think about it. Have we really reached the situation where the Senate as a body and individual Senators - accomplished men and women, who stand on the shoulders of giants - must bow down before financial markets and high-ranking executives who are really just talking their book?

Here's what markets really care about: credible fiscal policy, sufficiently tough monetary policy, and the extent to which big banks will be allowed to run amok - and then get bailed out again.

Reappointing Ben Bernanke solves none of our problems. In fact, given his stated intentions, a Bernanke reappointment implies larger bailouts in the future - thus compromising our budget further with contingent liabilities, i.e., huge payments that we'll have to make next time there is a crisis. What kind of fiscal responsibility strategy is this?

Rather than messing about with a meaningless (or damaging) freeze for part of discretionary spending, the White House should fix the financial system that - with too big to fail at its heart - has directly resulted in doubling our net government debt to GDP ratio from 40 percent (a moderate level) towards 80 percent (a high level) in a desperate attempt to ward off a Second Great Depression.

If you think we can sort out finance with Ben Bernanke at the helm, it was sensible to reappoint him. But when the time comes for members of the Senate themselves to be held accountable, do not be surprised if people point out that pushing Bernanke through - come what may - was the beginning of the end for any serious attempt at reform.

Ultimately, sensible democratic governance prevails in the United States. Sometimes it takes a while.