Should Bernanke have been re-nominated as Fed Chairman?

By Money Matters Editors

Should President Barack Obama (D-Illinois) have re-nominate Ben Bernanke as chairman of the U.S. Federal Reserve?

Ask three economists and you’re likely to get three different answers. From  political and public policy standpoints, the decision to re-nominate Bernanke was not a slam-dunk. But the more-important values of expertise, performance, and continuity have won out, and that represents a victory for investors, and for American taxpayers. Here’s why:

History has a way of placing the right person in the right position at an appropriate time, and that’s been the case with Bernanke. A Princeton economist who has spent a lifetime studying the Federal Reserve’s responses, successes, and failures during the last global financial crisis, the Great Depression, little did Bernanke - or policy makers, for that matter - know that his academic specialization would prove to be invaluable preparation for world’s second, major credit trauma, the current financial crisis. Perhaps more than anyone, Bernanke has a keen grasp of the 1930s Fed’s mistakes and monetary tools that did work during that crisis. This time, backed by an army of Fed economists and researchers, and via accessing Bernanke’s knowledge, the Fed has been able to steer a path to financial stabilization.

First hurdle cleared

And that’s the main reason for Bernanke’s re-nomination: we’re not out of woods yet - far from it - regarding the credit crunch, but U.S. banking system and the global financial system has not collapsed and has been maintained. That may not seem like much to investors, but based on where we were a year ago, in September 2008, that’s an awful lot. There have been mistakes - the decision not to, at minimum, stabilize Lehman Brothers was perhaps the biggest - but the Fed, in conjunction with other, major central banks, including the European Central Bank, Bank of England, Bank of Japan, has move adeptly to provide essential liquidity to credit markets, especially commercial paper, to keep the lifeblood of commerce - capital - flowing. To be sure, small/medium sized businesses still aren’t able to borrow enough capital to expand their operations, but the Fed’s liquidity interventions and term auction facilities have maintained bond market and broader credit market liquidity. Again, that may not seem like much, but it is an enormous achievement. Consider this: a half-year ago the industrial giant General Electric (GE) was having trouble accessing short-term capital in the commercial paper market.

True, Bernanke’s actions have not been without blemishes. Some have argued that the Fed has been too forth-coming with liquidity, or too accommodative, and that will lead to rising U.S. inflation in the quarters ahead, and some are calling for an immediate decrease of that monetary flow. But given the scope of the liquidity crunch - and historical precedent - one can understand why the Fed would rather err on the side of too much liquidity than too little.

A second criticism concerns the $700 billion Troubled Asset Relief Program (TARP), the bank bailout, and whether the U.S. taxpayer will be repaid in full, but that is more-properly an issue for the U.S. Congress. As of this juncture, it’s an open question whether the government will be able to obtain even 60-70% of its invested money back, and much will hinge on how the U.S./global recoveries affect the value of distressed assets.

But one thing is certain: the U.S. and global financial systems are healing. As noted, much work remains to free-up more credit for businesses and individuals, and it’s unlikely credit markets will ever be ‘normal’ in a pre-financial crisis sense (numerous structural and regulatory changes will occur), but the flow of capital and the modern banking system that’s essential to commerce has been maintained. The first hurdle of the financial crisis - avoiding a degeneration into the barter system - has been mounted, and Chairman Bernanke is a key reason investors and economists can concentrate on the second hurdle.