Statement on Ben Bernanke's Re-Approval

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 bought 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.