Stephen Foley: Helicoptor’s blades may not cut it

This week we learnt that, in a straw poll, 43 out of 46 private-sector economists
want him reappointed. If you fancy playing along in the UK, you could take a
punt with Intrade, the spread betting firm, which is showing a 66 per cent
chance of Helicopter Ben surviving to fly another day.

That is certainly the conventional wisdom, the result of Mr Bernanke’s
genuinely impressive performance navigating the US economy and the global
financial system through its biggest test since the Great Depression. I
don’t think his reappointment is inevitable, though, and I don’t think it is
particularly desirable, either.

The case for Mr Bernanke is built on his stewardship of the financial system
over a period of little more than a year, beginning with the collapse of
Bear Stearns in March 2008 and culminating in the “stress tests”
of the country’s most important banks, which were published this May and
which were the final element in the effort to restore confidence in ? and
among ? financial institutions.

In this Crisis Management period for central banking, it was a case of cometh
the man, cometh the hour. Mr Bernanke is the foremost scholar of the Great
Depression. He knew instinctively that the Fed must use every lever it could
get its hands on to prop up systemically important banks, to shower money on
the credit markets (hence the Helicopter Ben nickname) and to persuade
government to spend on an economic stimulus package. He has spent his life
studying what happened when the Fed and the Hoover administration didn’t do
this in response to the crash of 1929. Future Bernankes will be writing
scholarly books in praise of the Fed’s swift and creative responses to the
waves of crisis that crashed over that year-long period.

The current Mr Bernanke’s reappointment must be decided, though, on an
examination of an only slightly more distant past ? and on a judgement about
the future. We are moving from the Crisis Management phase into something
different for the Fed, a period of Economic Management + Crisis Prevention,
and in these areas, Mr Bernanke’s track record is hardly exemplary.

The first two years of the Bernanke chairmanship of the Fed were characterised
by a fundamental misreading of the interconnection between the housing
market, the unsupervised credit derivatives industry, and the wider economy
? a misreading that persisted well after it was clear that the sub-prime
mortgage market meltdown was going to have profound consequences.

With the credit markets screaming in distress for most of 2007, it wasn’t
until September that Mr Bernanke made his first reduction in interest rates,
still believing the sub-prime mortgage problem would be largely “contained”.
A stock market panic the following January prompted an unedifying U-turn,
bouncing him into an emergency 75 basis point cut, eight days before the
Federal Open Market Committee was due to meet.

I certainly don’t think a smoother performance could have prevented the 2008
crisis, but it might have made it less severe. Regardless, it was a
horrible, deer-in-the-headlights performance, which should be examined just
as closely as the much more confident chairmanship we have seen since the
economy moved on to Mr Bernanke’s familiar, proto-Depression territory.

So we can weigh two bad years against one good. More important, what sort of
chairman does the Fed need in the coming period? Numerous economists, in
academia, government and even at the regional Feds match up to Mr Bernanke
in their thinking on economic management, and some have begun to do more
work on the extra levers that the Fed might pull to prevent bubbles growing
and destabilising the economy.

In the area of crisis prevention, someone with direct experience of Wall
Street might be appropriate, if politically tricky right now, because it is
between the nuts and the bolts of financial innovation that crises grow. In
one form or another, the Fed is going to be taking on big new
responsibilities for monitoring the financial system as a whole, and the
next chairman will be reshaping the organisation, something which may
require a more activist manager than Mr Bernanke.

If only people didn’t dislike Larry Summers so much.

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