The Bernanke Re-Appointment

Add The Christian Science Monitor to the list of those who grudgingly approve of Ben Bernanke’s re-appointment to chair the Federal Reserve while urging the Senate to put him through the wringer:

As the president said Tuesday, the Fed chief has shown he has the background, temperament, courage, and creativity to try bold solutions. As a Republican nominated by the Republican George W. Bush, he has also shown he can sail past Washington’s political shoals.

Still, the Senate should not give him a free pass. He needs to be pressed about the immense powers and influence that the Fed has gained as a result of the “great recession” of 2007-09. The central bank, supposedly an independent arm of government, has in effect become the fourth branch.

Most of all, senators should ask how Bernanke will avoid risky inflation. He needs to carefully pull trillions of dollars that he pumped into the economy for easy credit before all that money starts to create inflation, especially in certain markets. The last chairman of the central bank, Alan Greenspan, failed to curb the Fed’s easing of credit in 2003-04, leading to the housing and credit bubble that crashed the economy in 2007.

Bernanke was part of the Greenspan team. The public needs more details on this reeling-in of loose dollars.

I honestly have no opinion on whether Dr. Bernanke should be re-appointed. The market hates uncertainty so I have little doubt that the re-appointment will be good for business, at least in that narrow sense.

However, there is a natural human tendency to want to maintain a system under which you have prospered. That builds a powerful status quo-ist inertia into all of our institutions. Economists are no different in this regard than church prelates. That’s benign when things are percolating smoothly along but, when financial institutions are holding on for dear life wondering what in the dickens comes next, it’s not nearly so benign.

I also believe that, when any government institution becomes as powerful and indispensable as the Fed has done over the last several decades, its power should be divided so it’s not quite so indispensable. I can’t imagine keeping all of the same people in charge and making fundamental changes in the system simultaneously.

Another disclaimer: The Federal Reserve is an old client of mine, too.

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