In deciding to reappoint Ben Bernanke as Federal Reserve chairman, President Obama is exercising the most selective of memories. Indeed, the president is choosing to remember only Bernanke’s valiant role over the past nine months in pulling the economy from the brink and in preventing the country’s worst economic and financial crisis in the postwar period from morphing into a second Great Depression. What the president is blithely choosing to forget, however, is the role that Bernanke might have played during his first two years as Fed Chairman in creating the very economic and financial conditions that got us into the mess in the first place.
At the very time that the Federal Reserve is going to need the most judicious of leaderships, President Obama is choosing to turn a blind eye to Bernanke’s all too many errors of judgment in 2006 and 2007. Among the matters that the president is choosing to forget is that it was on Bernanke’s watch as Fed chairman that the worst of the sub-prime mortgage lending was made and that the worst excesses of the housing market and credit market bubbles occurred, without as much as an expression of concern from the Fed. The president is also choosing to forget how slow Bernanke was to comprehend the seriousness of the bursting of the housing market bubble and how slow he was to begin cutting interest rates to provide much needed support to the economy.
Bernanke’s main challenge during his second term will be to prevent the Fed’s massive injection of liquidity into the financial system from leading to an unwelcome bout of inflation. Exiting from the Fed’ recent massive monetary policy easing will require the most careful exercise of judgment as to timing. If the Fed moves too soon to mop up liquidity and to raise interest rates, it will risk aborting the incipient economic recovery. If the Fed moves too little and too late, as seems more likely, it risks letting the inflation genie out of the bottle.
In a country of 300 million people, one would have thought that President Obama could have found someone other than Bernanke with his track record of poor judgment to lead the Fed at this delicate juncture. However, now that the president has made his decision, one can only hope that the gods smile favorably on Bernanke and that his second term in office proves decidedly more successful than his first.