January 28, 2010
January 28, 2010
For Immediate Release: January 28, 2010
Contact: Alan Barber, (202) 293-5380 x115
Washington, D.C.– The following statement by economist and CEPR Co-Director Dean Baker was released following Ben Bernanke’s confirmation hearing:
“The Senate approval of a second term for Ben Bernanke as Fed chairman sends exactly the wrong message to the Federal Reserve Board and the country. First and foremost, Mr. Bernanke failed in his job about as spectacularly as is humanly possible. He sat back and watched the housing bubble grow to a level where its collapse jeopardized the stability of the U.S. economy.
The financial crisis and the economic downturn of the last two years were entirely predictable outcomes of this collapse. Yet, Mr. Bernanke insisted that there was no problem with the housing market, first in his capacity as a governor of the Federal Reserve Board since 2002 and then in his capacity as chairman since January of 2006.
Attacking the bubble would have been politically difficult since it required going after a source of enormous profit for the financial industry. Nonetheless, a responsible Fed chair would have used all of the Fed’s tools and power to prevent the bubble from expanding to such dangerous levels, even knowing that he would face fierce opposition from the financial industry.
Bernanke opted not to go this route, and tens of millions of people are now facing the consequences in the form of unemployment, foreclosures and/or lost savings. If he can get reappointed in spite of this lapse in responsibility, it is difficult to see why any future Fed chair would ever confront the financial industry under similar circumstances.
In addition to sending the wrong message with Bernanke’s reappointment, there were also several aspects to the debate around his reappointment that set a discouraging precedent. First, Bernanke’s supporters repeatedly referred to the drop in the stock market in response to concerns that his approval could be blocked as a reason for approving Bernanke.
No serious economist would advocate setting policy around fluctuations in the stock market. Economists from across the political spectrum argue that policy must be focused on getting the economic fundamentals right. It is unfortunate that Mr. Bernanke’s supporters felt that they had to use such a fallacious argument to advance their agenda and even more unfortunate that this argument was apparently effective.
The second troubling aspect to the debate was the effective creation of a false counter-factual. Many of Bernanke’s supporters praised his policies for turning around the economy quicker than had been predicted. It is easy to show that this is not true. The January 2009 projections from the Congressional Budget Office, the Obama Administration and most private forecasters proved to be overly optimistic. The economy has done worse, not better than expected. The claim that Bernanke’s effective management in the post-Lehman era led to a quick turnaround is a pure invention by his supporters.
Finally, it was disturbing to see that President Obama was apparently able to get senators who opposed Bernanke to vote for cloture, when he has apparently been unable to accomplish a similar feat with health care and many other pieces of legislation. This suggests a prioritizing of Bernanke’s reappointment that is not in any way justified by his importance to the economy or the country.
Even with all the pressure brought to bear, Bernanke was approved by the smallest margin for any Fed chairman in history. There was strong opposition from members of both parties. It would be encouraging if Bernanke’s opponents could press forward with the demand for a full audit of the Fed. This would be an important step towards having a Fed that is not exclusively accountable to the financial industry.”
