Don't just reappoint Bernanke, make the decision soon...

Posted By David Rothkopf Friday, August 14, 2009 - 5:46 PM Share

It used to be that the Chairman of the Fed was regularly referred to as the most powerful man in the world. This was back in the day of Alan Greenspan and, at the time, it seemed it was in spite of the fact that people seldom understood what he was saying. Subsequently, we learned it was precisely because of the fact that we didn't understand what he was saying. And then, subsequent to that, we also learned ... largely because he had the good grace to admit it ... that he himself didn't understand what he was talking about.

The downward spiral of Greenspan from philosopher king of the global economy to mere mortal caught his successor, Ben Bernanke, in its vortex. He was handed an economy in which the doors and wheels were coming off as we drove and nothing like the power he needed to deal with it. Indeed, as the current crisis unfolded we saw that the Fed chair was not the most powerful job in the world, that title was reserved for current or former ceos of Goldman Sachs. This must be so because for a while people wanted to fire Bernanke after one term in office primarily because he had inherited a mess whereas when you screw up the global economy as the current or former ceo of Goldman Sachs, people want to help bail you out or make you Treasury Secretary or both. 

I kid. It is highly unlikely any ceo of Goldman Sachs is Treasury Secretary again for quite some time. Possibly years. 

And Bernanke did earn some of the flack he got initially, largely because he was swept along in the groupthink of Washington economic honchos, buying into the "leave it to the markets" regulatory philosophy that got us into the mess we faced for far too long. But when it became clear that approach not only did not work but that real change was needed, the quiet academic stepped up and became perhaps the leading dependable voice of reasonable change. That's why there is a consensus emerging today that Bernanke, who against all odds seems to be restoring the notion of Fed Chairman as Washington's most trusted economic oracle, should be reappointed when his term in office ends. Steven Pearlstein, in a typically thoughtful piece in today's Washington Post, gets on this bandwagon and adds a few suggestions as to how to modify the Fed (as well as an absolutely justified endorsement of David Wessel's terrific new book on the economic crisis called, "In Fed We Trust.")

The growing momentum of this bandwagon has put in doubt the once conventional wisdom that Larry Summers had accepted the reins of the National Economic Council as an interim step on his way to the Fed chairmanship. But Summers has done such a good job elevating the National Economic Council to unprecedented prominence in the day-to-day operations of the White House and has so effectively earned the president's trust, that it is now almost certainly better for all concerned (including those of us out here in tax-payer land) that he stay right where he is. If there was ever a situation that called for the president to have a strong economic quarterback at his immediate side in the White House, it is this one and in Summers, Bernanke, and Geithner, Obama has got a first-rate team that has the number one criteria you need for success in each of their respective jobs -- the trust of the president.

Now, as readers of this blog know, I don't think every move they have made is perfect. I am disappointed by the speed of regulatory reform here in the United States and internationally. I think they have not done enough to address some of the underlying causes of the crisis such as the creation of massive pockets of risk in the global economy related to the development of opaque derivatives markets. I think they have cut deals with Wall Street that are too sweet for the bankers. I think they have spent too much, bought into ideas (like tax cuts) in the stimulus that amounted to political pandering and they sure haven't given the president the kind of clear guidance he needs on how to sell the health reforms that are perhaps the economic reforms we most urgently require.

That said, their job was first to stop the bleeding and to stabilize the patient. It was no easy task and what they did in terms of swift and sweeping intervention, while imperfect ... almost necessarily imperfect given the speed at which they were operating ... has seemed to work. I still fear a second dip of the recession ... the "W" rather than the "V" shaped recovery. But today's papers show Germany and France creeping out of recession. Japan may too. Economists (a group with limited credibility at the moment, I must admit) seem to think we are at least plateauing here in the United States too. So I think it is fair that this team get credit for their efforts. 

Frankly, I hope that the initial success they seem to have achieved emboldens them. If anything they have seemed too deferential to the Congress and to Wall Street and once stability seems assured aggressive measures to rein in the budget deficit, further strengthen regulatory oversight and strengthen international regulatory mechanisms will be called for with the same urgency that stimulus measures were called for earlier this year. 

We have seen the dangers of too much deference to the markets, of regulatory indifference, of not believing that government could or should play a significant role in protecting our national interests by identifying and mitigating market risks with broader macro or social consequences. I hope the president makes the early decision to keep everyone where they are so that they can focus on the next wave of reforms that are so urgently needed.

(And to be clear, does the above actually suggest that I want a bigger role for governments in market regulation, stronger global governance mechanisms, tax increases if we need them in addition to substantial spending cuts and that I am a fundamental believer that government also needs to play a much expanded role in ensuring sustainable health care...which optimally would be through a single-payer system that is not even on the table at the moment ... and preserving the environment ... ideally through a simple, straightforward and substantial carbon tax? Yes, it does. Start rolling out your labels if you would like, but if the recent crisis has taught us anything it is that we can't afford the reflexive rejection of government solutions where they are needed ... rather we need to rise to the challenge of figuring out how to make governments more effective in these critical roles that only they can play.)

Spencer Platt/Getty Images

EXPLORE:ECONOMICS, FINANCE, FINANCIAL CRISIS, OBAMA ADMINISTRATION, U.S. CONGRESS, U.S. FOREIGN POLICY
 

BLUE13326

2:51 PM ET

August 17, 2009

Let's see...Obama's going to

Let's see...Obama's going to finish his first year with a $2 trillion deficit, around five times the previous record for deficits, and at least four million jobs lost, right?

That's far and away the worst first-year performance for a president in our history, right?

If that's your definition of success, I'd really hate to see failure.

I guess you could buy the White House spin that things somehow could have been worse. Eh, not really.

 

MOHAIR.SAM

6:00 PM ET

August 17, 2009

I must live on a different planet

Wait a minute -- we actually want to see Bernanke at the helm of the Fed? I guess it's true: In the corridors of power, you can only fail upward. How much more do we have to give to the multinational banks, to AIG, et al., in order to enrich the inept?

Worse than that is Bernanke's insistent opposition against an audit of the Fed, which is indefensible. Given the Fed's obvious power over all our lives, why *wouldn't* one want the Fed audited? No one should be above the law, and the Fed serves at the pleasure of Congress -- or so I thought. Wrongly, apparently.

Yes, Larry Summers ... the man who pushed so hard (along with Rubin) for the repeal of Glass-Steagall and the passage of the deregulating Commodities Futures Market Act, which played a critically important role in getting us into this mess in the first place. Just the man to be advising the president on economics, indeed.

Finally ... *what* stability? The housing market is still a mess, and the commercial bad paper hasn't even landed yet. Incomes are still stagnant (for those who have jobs, I mean), and will remain so for the foreseeable future (Elizabeth Warren has done yeoman's work in showing how bad that's gotten). And we're all--individuals, businesses, governments--leveraged out the wazoo with massive debt and no earthly idea how to go about repaying it. I'm sure there will be several calm spots as the economy continues to go south, but we're not by any means out of the woods yet.

 

JENKIE

11:42 AM ET

August 18, 2009

Wow... disingenuous propaganda

As a new reader of FP I was, up till now, attempting to gather my bearings long enough to identify in which direction the editorial slant leaned. Now I see that it is neither left nor right, rather it is straight up the center, towards the money; namely, the Council on Foreign Relations.
Mr. Rothkopf is clearly bucking towards an invite, if he is not already ensconced in that dreadful and dire society. To suggest that Mr. Bernanke has improved even the smallest portion of our economy through his repeated manipulations and deception of congress is an audacious and bold-faced mis-representation to the American people.
The idea that the American economy has tanked due to lack of regulation in the markets is absurd. A free market (which America hasn't had for many, many years) is defined quite simply as the relations and interaction between suppliers and and consumers. If a given commodity or service is in greater supply than the current demand, the price, naturally and correctly, goes down. When outside forces attempt to "fix" that price, a never-ending cycle of manipulation ensues, in perpetual attempt to correct the unbalance that the original manipulator has unleashed.
Compound that with ridiculously low interest rates, and efforts to convince Americans that debt is normal and expected of them should they wish to realize their dream of a house, summer house, 2 cars and a boat, ie a manipulated demand sector, and you get exactly what we have today. A crisis fueled by immorality and greed, both at the consumer and economic levels.
Despite what conglomerate media would have us believe, there should be nothing more esoteric in our economy than supply and demand, and creating wealth through production of goods. If you're told it's too complicated, you're getting stolen from in a complex way.
Mr. Rothkopf, why don't you explain the cycle of money. How and when is it created? Where does it go from it's point of origin? How about our Income tax payments, where do they go? I doubt we'll see any honest answers, indeed I'm unsure whether this comment will even remain published for any length of time. I suggest every reader who tires of being lied to and manipulated learn to use a high resolution screen-shot application, so they can show the before and after examples of "free press" subversion of public feedback.

 

NICHOLAS TREADGOLD

1:23 PM ET

August 19, 2009

An Almost Informed Opinion

Mr Rothkopf, i value your current opinion taken in this article and also agree that Mr Bernanke should remain chairmen. After researching the positions that the four most prominent bankers took before and after the great depression; Benjamin Strong, Emile Moreau, Montagu Norman and Hjalmar Schacht of the US, French, British and German Fed's respectively i have an increased sympathy for Chairman's of any Fed. Bernanke has done almost everything possible to stabilize the system, critics say that he has done nothing to address the problems that caused the recession in the first place, are misguided, you cannot attempt to create architectural changes to a system during a crisis, that would only worsen the downturn through shattering public opinion.

Why is it that comments on websites such as this (1st time visit actually) always slander the righter of an article who expresses an opinion, arguing his view is fundamentally wrong with arbitrary judgement on matters that they have no idea of the complexities involved.

Firstly, blue13326 refers to Obama's creation of a large deficit during a recession and the circumstance that jobs have been lost during his term. My Rothkopf's article is on the Chairmen of the Federal Reserve, not the president. Aside from that, do you have any idea about macroeconomics? Obviously you dont.

Mohair.sam do you have any idea how a futures market works? Or the history behind such a market that has existed for over a hundred years serving your interest of cheaper produce. Obviously not. The issue of auditing the Fed is a difficult one, which i agree with, the Fed should be audited to find out its true position. But under no circumstances should the audit allow congress to dictate what it does, autonomy from the congress is critical in its effectiveness.

Finally, Jenkie, you confuse modern markets with a perfect market. Yes in essence a market is deemed the most efficient method of allocating resources in theory. In practice market distortion is apparent in every market that exists, a perfect market doesn't exist. Regulation in markets is required to reduce market failure, a regular occurrence. Also i would refer to you the fact that people were getting mortgage's for homes they couldn't afford with no assets or job. Obviously such a flawless system needs no regulation.
Again your commentary is relevant to the article, Mr Bernanke didnt issue an edict that one must excessively leverage one's self and accumulate debt like its free.

 

JENKIE

7:10 AM ET

August 22, 2009

Mr. N. Treadgold, I

Mr. N. Treadgold,

I certainly understand the difference between a free market and our current market place. The vast chasm between the two is exactly my point.

I cannot dispute any of the points you make; they are all valid. Autonomy is critical to the Fed's effectiveness, macro-economies are incredibly complex, and people have taken out very irresponsible lines of credit over the last 15 years.

However, you seem to think the Fed being effective in their goals is a good thing. They have skulked around and deceived America from their inception. Indeed, their formation depended on it. If you study our economy since 1913, you may be observant enough to notice the cycle of industrial consolidation occurring with every bubble and bust. This is no accident, a fact that's becoming increasingly obvious to eyes that are not blinded by the scales of partisanship.

Any impartial study at the most cursory level can handily confirm this consolidation of wealth. The fact is that in a free market, banks would not loan to such poorly credentialed consumers. Manufacturers would not create huge surpluses of goods that they can't sell, or they'd go under. Do you know why consumer confidence is so important to our fractional reserve system? Because it's all sleight of hand; there's no money! Only the perception of value in assigned digits.

Here's hoping you a) form opinions from multiple sources, and b) learn to love spellchecker...

 

David Rothkopf is the CEO and Editor-at-Large of Foreign Policy. His new book, "Power, Inc.: The Epic Rivalry Between Big Business and Government and the Reckoning that Lies Ahead" is due out from Farrar, Straus & Giroux on March 1.

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