The US Senate's decision on approving Ben Bernanke for a second term as chair of the Federal Reserve Board is coming down to the wire and the Wall Street crew is once again pulling out all the stops. To get the 60 votes they need for Senate approval they are reaching into the treasure chest of tall tales they used to push through the troubled asset relief programme (Tarp). They are once again telling the American people that the world will end if we don't do exactly what they want.
The main story they are pushing is that if Bernanke is not approved then the markets will panic and send the economy tumbling. Both parts of this story deserve some serious scepticism. First, there undoubtedly will be some uncertainty in the financial markets if Bernanke is not reappointed. Markets like continuity. A new Fed chair means a break in continuity. Therefore, we can expect to see some decline in the stock market, probably about the same as we get when there is a worse-than-expected jobs report.
However, focusing on day-to-day movements in the stock market is no way to make economic policy. For practical purposes, the daily movements in the market have no impact on the economy. Furthermore, there is no way to move the economy away from its current Wall Street bubble-driven growth path to one built on a productive economy without at least some temporary decline in stock prices.
Such a decline is inevitable if for no other reason than the fact that Goldman Sachs, JP Morgan and the rest account for a substantial portion of the value of the stock market. If we can never do anything that even temporarily hurts stock prices then we can forget about reining in Wall Street.
Interestingly, the bond market, which is far more important for the economy than the stock market, has been rallying in recent days as Bernanke's nomination faces increasing difficulty. Bernanke's troubles may not be the case of this rally, but they have not prevented the 10-year Treasury rate from falling considerably.
It is also worth pointing out that one supposed source of bad news - a declining dollar - would actually benefit the economy. The country has a huge trade deficit because the dollar is over-valued. If the dollar were to decline as a result of Bernanke not being reappointed, it would give a boost to our exports and cause domestically manufactured products to displace imports.
Bernanke's troubles don't seem to be depressing the dollar at the moment, but if the Wall Street fear mongers and their allies push this line, we should realise that they are once again spouting nonsense. A lower-valued dollar is good news for the economy.
To briefly summarise the case against Bernanke, at the top of the list is the fact that his failures at the Fed (both as chairman since 2006 and as a governor since 2002) brought the economy to the brink of a second Great Depression (Bernanke's assessment, not mine). Anyone else who had failed so completely at their job would be fired in a minute.
Only in Washington and on Wall Street could such a disastrous record be rewarded with another term in office.
Second, the focus of his bailout was to return Wall Street to health while leaving the rest of the country reeling. Bernanke rightly tapped the Fed's virtually unlimited resources to keep the financial system from collapsing, but he gave money to the banks at below market interest rates with no strings whatsoever.
They were able to use this money to restore themselves to health, but were not required to do anything about compensation practices, risky trading, or helping homeowners facing foreclosure. Nor were their shareholders and bondholders required to incur any losses. In effect, Bernanke gave a huge gift from the taxpayers to the Wall Street boys who were responsible for the crisis in the first place.
Finally, to help get the Tarp passed back in October 2008, he told Congress that the commercial paper was shutting down, which meant that even healthy companies would not be able to borrow the money needed to meet their payroll and pay other bills. This would have quickly led to an economic collapse.
Bernanke did not tell Congress that he was planning to set up a special lending facility to directly buy commercial paper. He announced this facility the weekend after Congress approved Tarp. It is not the Fed chairman's job to lead Congress up the garden path. Nor is it his job to bail out Wall Street at the expense of the rest of the country. It is his job to prevent the growth of dangerous bubbles. That's three really big strikes.
Bernanke should be sent out to enjoy his Time "Person of the Year" status in retirement.