No sooner had the New York Times released an initial story that "Opposition Grows Against Second Term for Bernanke," noting opposition from Sens. Feingold and Boxer, than Sen. Harry Reid made a Friday evening announcement that he would support Bernanke.
With presumed White House urging, Reid was hoping to head off further erosion in Bernanke’s support. But it may not be enough.
One unconfirmed vote count late Friday suggested there were still up to 59 Senators undecided, with those supporting/opposing split about 25/16. That was before Reid’s announcement.
The fact that over half the Senate doesn’t know what to do about Bernanke speaks volumes. For such an important position, and with so much already known about Bernanke’s record, you’d think Bernanke’s fate would be known by now.
While Mrs. Greenspan may want to spin this as scapegoating Bernanke, and Chuck Todd may think Tuesday’s MA Senate election changed everything, I think the more important story lies in an answer Bernanke gave last December to UC Berkeley economist Brad DeLong [a strong Bernanke supporter; see update links below], who asked why the Fed wasn’t temporarily raising its inflation target to 3 percent. His answer undermined whatever basis for support he had at the time.
The question was designed to determine whether Bernanke’s Fed would be willing to tolerate more inflation in the short run as a means to stimulate economic growth and reduce unemployment. From The Economist:
Why haven’t you adopted a 3% per year inflation target?
And Mr Bernanke responded:
The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.
I can’t imagine getting a more direct answer from the chairman than that. Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk.
Personally, I think that Mr Bernanke owes us all a better explanation of why he has opted to place so much more emphasis on the price stability aspect of his mission than the full employment aspect. And, there should be a policy debate on this question, the resolution of which should inform the choice to reappoint (or not) Mr Bernanke.
Bernanke’s answer puzzled, disappointed, and/or shocked even those who might have supported him. Matt Yglesias, later echoed by DeLong and Paul Krugman, summed it up:
When I complain that it’s inappropriate of Bernanke to be prioritizing inflation-fighting over unemployment-fighting, people always . . . say there’s nothing more Bernanke can do. But as you can see from Bernanke’s answer, Bernanke doesn’t think there’s nothing more he can do. Bernanke thinks there’s something he could do that would probably reduce unemployment but might make it more difficult to control inflation in the future.
I think it’s a bizarre reading of the relative risks and relative benefits. But it’s one that’s in keeping with the class interests of the wealthy, and it’s hardly shocking to learn that’s what matters most to conservatives like Bernanke. I just wish we could get more attention front and center for what it is that’s happening here. Unemployment is high in large part because the policymakers with primary responsibility for achieving full employment don’t want to use the tools at their disposal to achieve that goal.
Until that point, the debate had been between those, like Dean Baker and others, who argued that Bernanke’s failure to see and head off the housing bubble and regulate the banks before the crisis should cost him his job . . . and those who argued that, "okay, but he did a competent job rescuing the economy from the brink once the crisis became acute, and besides, who else is there?"
As long as folks were focused on escaping the brink of disaster, the latter argument was probably enough to get Bernanke through, but as the concern faded and folks had time to learn more about how negligent a prudential regulator the Fed had been for years, the argument lost much of its credibility. If he missed the massive risk to the economy the first time, why should he be trusted again?
But Bernanke’s December statement, which followed his apparent confusion over the adequacy of the stimulus, provided a more powerful argument against a second term.
The Administration is struggling to redefine itself in populist terms; it must escape the impression/reality it has protected banks instead of the public. So the last thing they — and the country — need is a Fed Chairman that Congress and the public identify with bailing out the banks with insufficient conditions or care for the suffering on Main Street.
And when Bernanke’s answer to DeLong showed he didn’t think there was anything he should do to help the 10 percent unemployment problem, it sent a signal to Senate Democrats that he was exactly the wrong
man person to help Main Street recover, no matter how competent anyone thought his Wall Street crisis management was.
FDL/David Dayen, Bernanke: Yes To Social Security Cuts, No to New Jobs Bill
Yglesias, Bernanke’s Plan for Unemployment: Do Nothing
Paul Krugman, The Bernanke Conundrum, with pro/con links to DeLong (Don’t Block Ben) and Calculated Risk (We Can Do Better)
See, FCIC Hearings, Sheila Bair testimony
Mother Jones/Joseph Stiglitz, Moral Bankruptcy
Base Line Scenario/Simon Johnson, Questions Bernanke Must Answer
HuffPo/Sam Stein, How Bernanke Became a Toxic Asset
FDL/Jane Hamsher, Will Reid and Dodd Ignore Hold (Petition for Fed audit)
Dean Baker, Bernanke’s approval is clearly on the ropes
Baseline Scenario/Simon Johnson, Paul Krugman for the Fed
Brad DeLong, Responds to Krugman, and see other links to various views on his site.