Why "Helicopter Ben" doesn't deserve to be the chairman of the Federal Reserve.
As he seeks reconfirmation as chairman of the U.S. Federal Reserve's Board of Governors, Ben Bernanke has some things going for him. He is as knowledgeable and smart as he was when he became chair in 2006. His willingness to make aggressive use of unorthodox liquidity programs helped prevent the financial crisis from spiraling into a depression. And behind-the-scenes accounts portray him as hardworking, pragmatic, and dedicated.
Nevertheless, the Senate should not reconfirm Bernanke. Confirmation would reward what was, on balance, a failed tenure as chair. More importantly, Bernanke's recent statements and actions do not indicate that he is the person the United States needs to fix its still-broken financial system.
The principle of accountability holds that those responsible for failure should lose their jobs. There can be little doubt that the Federal Reserve of Alan Greenspan and Bernanke bears a significant share of the blame for the financial crisis. I have previously argued that Greenspan is more responsible for the crisis than any other single person -- because he ignored asset price inflation (therefore allowing the housing bubble to inflate), failed to heed warnings that the Fed should crack down on predatory lending, and failed to recognize and curb the risks being taken by bank holding companies under Fed supervision.
Bernanke didn't do much better than his predecessor -- indeed, he didn't do much differently, whether as a Fed governor or as Fed chair, as the Washington Post recently documented. Plus, as late as 2007, Bernanke argued that problems with subprime mortgages would be contained and would not threaten the financial system -- despite having more and better access to bank information than anyone else in the country.
Thus far, Bernanke has not acknowledged the errors of the Greenspan doctrine, which holds that it is difficult to identify bubbles and that monetary policy is the wrong tool to use to fight them. Rather, he has defended them, most recently in a major speech to the American Economic Association (AEA). There, he argued that the housing bubble was not the product of cheap money. Reasonable minds disagree about that. But, as Paul Krugman has pointed out, Bernanke at the very least seems to be repeating some major pre-recession analytical errors -- in particular, focusing on national average housing prices, which moderated and thus hid obvious local bubbles in cities like Los Angeles.
Moreover, Bernanke has argued that monetary policy is less important than regulation: "Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates," he said in his speech. True; but shouldn't the head of the Federal Reserve -- the United States' chief banking regulator -- take some responsibility for the failure of regulation? Bernanke does admit that the Fed did too little, too late regarding predatory lending practices, but fails to add that it botched the oversight of bank holding companies as well.
More important than Bernanke's past record, however, is the question of whether he can adequately tackle the challenges we face today. Here the case against Bernanke is most damning.
What the United States needs today is a powerful regulator to force the megabanks to cut back their risky activities, fix their broken incentive structures, and stop preying on consumers. Since the near collapse of the financial system in 2008, Bernanke has had more than a year to prove that he is up to the job. He has not even tried.
In his AEA speech, Bernanke claimed, "We have further strengthened our commitment to consumer protection." Yet he has lobbied against the creation of a Consumer Financial Protection Agency -- an agency favored by virtually every serious advocate of consumer rights.
The bulk of Bernanke's recent comments on regulation weren't about consumer protection, but systemic risk. This is a transparent attempt to shift the buck. The Federal Reserve would like you to believe that it and other regulators were focused on individual banks, but not on the financial system as a whole, because they lacked authority to manage systemic risk. This conveniently avoids the fact that the regulators also did little to ensure the health of individual banks -- as proven by the glut of bank failures and forced mergers since the bubble burst. Yes, the regulatory structure should take systemic risk into account. But it is at least as important to improve old-fashioned bank oversight, a job in which Bernanke shows little interest.
Most fundamentally, now is the time for the Federal Reserve to stop rolling over before Wall Street. Judging from his actions over the past year, I have seen no evidence that Bernanke even understands that his job is to protect the American people. During the crisis, Bernanke provided Federal Reserve guarantees to bail out sick banks, asking little in return (compared with Sheila Bair of the Federal Deposit Insurance Corporation), rather than insisting that they be taken over and cleaned up. Since then, an announcement months ago that the Federal Reserve would crack down on compensation schemes that encourage excessive risk taking has led to nothing.
Bernanke's job is especially important because in the world of central banking, where the Federal Reserve leads, others follow. Yet Bernanke is falling behind central bankers in Britain, who show more appetite for confronting the megabanks. Mervyn King, governor of the Bank of England, has called for separating the utility aspects of banking from riskier activities such as proprietary trading. Andrew Haldane, his deputy in charge of financial stability, has argued that failing to do so creates a "doom loop" that only gets worse over time. Bernanke has also ignored Paul Volcker, the last Fed chair with his reputation intact, who has argued that financial innovation should be severely constrained.
The financial crisis was the product of both Wall Street and the Washington establishment, which was seduced by the siren song of financial innovation and deregulation. Today, Bernanke is the establishment. President Barack Obama campaigned as the candidate of change. Now, change is what we need.
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