Pruning Shears

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NOTE: Shortly before I finished this post Ben Bernanke was confirmed by the Senate for a second term as Fed chairman. I’m posting this anyway because I think it was a terrible decision that will only look worse with time, and maybe if we are lucky he will not serve his full term - in which case the post is relevant again. Stranger things have happened; you never know.

In December I made the case for Kansas City Fed chairman Thomas Hoenig to succeed Ben Bernanke. It was a mostly speculative post based on Bernanke’s less-than-inspiring Senate appearance and scattered rumblings among activists. Scott Brown’s surprising victory last week appears to have been a “come to Jesus” moment for Washington Democrats, though, and now the astounding unpopularity of Wall Street has made everyone a populist.

The Obama administration is issuing cool assurances that Bernanke will sail through, but opposition has grown. If nothing else, rejecting him would imply a small measure of responsibility. During his tenure he presided over the popping of a huge speculative bubble, the economy went into a tailspin, and conditions remain terrible. People want a scalp, and they want a senior one - not some low level schmuck who was left holding the bag and didn’t have the savvy to cover his tracks.

The tepid support for Bernanke outlined in my previous post has remained lukewarm. Paul Krugman favors it “only because rejecting him could make the Fed’s policies worse,” and after laying out his case concludes it is “not a ringing endorsement, but it’s the best I can do.” He then writes the following, which sums up the corrosive and unworkable conventional wisdom that seems to have set in on even liberal economists: “If Mr. Bernanke is reappointed, he and his colleagues need to realize that what they consider a policy success is actually a policy failure.”

It is hard to imagine a more depressing formulation. He calls for reappointment and then admonishes Bernanke to change course, which gets it exactly backwards. The onus is on Bernanke to admit his policy was a disaster prior to being reappointed. It is pure madness to send the architect back to his post based on the hope, supported by no evidence whatsoever, that he will change course. If Bernanke had gone before Congress, frankly admitted his failure, and outlined what aggressive steps he was planning to correct them if he were fortunate enough to win another term, that might be a different matter. (Might.)

He did no such thing though, and the sensible conclusion is that firmly intends more of the same. We would be better off with not just another nominee but one with another economic philosophy entirely. (The soundness of doing so was further endorsed in the form of egregious dumbass Tim Geithner’s dire warnings against it.)

For those who care about this issue, it is extremely important to get some other names out there immediately. MIT professor of economics Simon Johnson recommends Hoenig. In his Bernanke piece Krugman mentions San Francisco Fed chairwoman Janet Yellen, as has the economics blog Calculated Risk. She may well be a fine candidate, even better than Hoenig, but I heard her name floated just this week. Since I have not had time to familiarize myself with her I will restate the case for Hoenig.

First, the caveats. Hoenig, like Bernanke, privileges inflation over employment. There is no reason to think he would substantially depart from the current fantastically exaggerated fear of it. He could regard the current double digit unemployment rate as undesirable but inevitable. Moreover, he sees inflation in an undifferentiated way; in a 2005 speech on it he noted “businesses may face higher labor cost pressures, and depending on competitive conditions, these costs may increasingly be passed on to consumers.” That such higher labor cost pressures translate into a better standard of living for the labor in question, a situation once known as “The American Dream,” does not seem to matter.

That same speech utters not a word about real estate. It would have been nice to know he was at least aware of that massive time bomb as it ticked towards detonation.

These drawbacks may actually make him a better nominee, though. Last year’s speech “Too Big Has Failed” outlines an attitude towards large financial institutions that twenty years ago would have been unexciting, boilerplate economic conservatism, but now has a revolutionary ring to it. That may be about as sharp a break as the capitol can handle. Maybe it would be more acceptable if accompanied with a dose of familiar, soothing DC orthodoxy and washed down with a cup of Wrong On Housing Too.

There are probably many nominees who would serve the country well. I first became acquainted with Hoenig because of “Too Big Has Failed” and have tried to learn more about him since. People whose judgment I greatly respect like Yellen as a first choice, so she would probably be great too. There does not need to be unanimity on a successor, just that it not be another victim of cognitive regulatory capture.