The Wall Street Journal
The politicians turn on a political central banker.
The White House said yesterday it has damped down a political revolt against Ben Bernanke and now has the votes to secure the Federal Reserve Chairmans second four-year term. Whether or not Mr. Bernanke is confirmed the lesson we draw is that overly political central bankers will eventually be undone by politics.
Theres no doubt that some of this reconfirmation panic is nothing but political opportunism. When we opposed Mr. Bernankes reconfirmation on December 3 the facile consensus was that the Fed chief was a master of the universe who had saved the world from depression. But after Scott Browns victory in Massachusetts last week Senate Democrats are suddenly looking for a financial political sacrifice. President Obama doesnt look ready to throw over Treasury Secretary Tim Geithner so Mr. Bernanke is the designated spear catcher.
The Democrats loudest complaint moreover is that Mr. Bernanke and the Fed havent been easy enough in printing money. Majority Leader Harry Reid declared his support for Mr. Bernanke on Friday but not before extracting what he said were concessions about future Fed policy.
The Fed chief promised said Mr. Reid that he would redouble his efforts to make credit available and that Mr. Bernanke has assured me that he will soon outline plans for making that happen and I eagerly await them.
Redouble? The Fed has already kept interest rates at near zero for more than a year and it is buying $1.25 trillion in mortgage-backed securities to refloat the housing bubble among other interventions into fiscal policy and credit allocation. Is the Fed going to buy another $1.25 trillion or promise to keep rates at zero for another 14 months?
Mr. Reids declaration of a confirmation quid pro quo will not reassure global investors who already fear that the Fed lacks the political will to withdraw its historic post-crisis liquidity binge soon enough to avoid new asset bubbles.
Our own view is that Mr. Bernanke is already far too susceptible to political pressure. As a Fed governor he was Alan Greenspans intellectual co-pilot last decade when their easy money policies created the housing mania. When Congress later put political pressure on the Fed to direct credit toward housing and even to student loans Mr. Bernanke (who was then chairman) also quickly obliged.
More ominously for the next four years Mr. Bernanke continues to deny any Fed monetary culpability for creating the mania. Shortly after the New Year even with his nomination pending Mr. Bernanke issued an apologia that was striking for its willingness to play to the Congressional theory of the meltdown by blaming bankers and lax regulators. We wont rehearse our decade-long monetary argument with Mr. Bernanke todaysee Bernanke at the Creation June 23 2009. But the chairmans refusal to acknowledge any mistakes is one reason the dollar is so weak in global capital markets. Investors are hedging their bets in commodities and nondollar assets.
Yes much of Wall Street wants to see Mr. Bernanke confirmed. The Street is currently making a bundle off Fed policy as it borrows at near-zero rates and lends long and the banks dont want that to end. The banks also loved negative real interest rates in the middle of the last decade and we know how that turned out. Wall Street always loves easy moneyuntil inflation returns or the bubbles pop.
Others argue that any alternative to Mr. Bernanke could be worse and that is certainly a risk. Mr. Geithner and White House economic adviser Larry Summers couldnt be confirmed even in a Democratic Senate. In the short term if Mr. Bernanke is defeated Vice Chairman Donald Kohn might run the Open Market Committee and he shares Mr. Bernankes contempt for Fed critics. President Obama could also select San Francisco Fed President Janet Yellen but she thinks the Fed should be even easier.
Still we can think of current or former presidents of regional Fed banks who have hard money credentials. They would also not carry the baggage of whatever Harry Reid extracted as a price of confirmation.
We agree that the Fed needed to ease money precipitously when the financial markets suffered their heart attack in late 2008 and we praised Mr. Bernanke for that at the time and since. But the issue for the next four years is whether the Fed can extricate itself from its historic interventions before it creates a new round of boom and bust. We already see signs that it has waited too long to move.
The Fed as an institution is also under political attack in a way that it hasnt been since the early 1980s and that was when Paul Volcker was being excoriated for being too tight. That criticism has rarely if ever been leveled at Mr. Bernanke. The next Fed chairman is going to need the market credibility and the political support to raise interest rates when much of Congress and Wall Street will be telling him to stay at zero. That is the real reason to oppose a second term for Chairman Bernanke.
