Looking back at the Federal Reserve Board’s attempts at self-justification after the Great Depression in Free to Choose, Milton and Rose Friedman concluded that the Fed “blames all problems on external influences beyond its control and takes credit for any and all favorable occurrences.” Critics of Ben Bernanke, including John McCain, suspect that not much has changed at the Fed, and that the time has come to hold Bernanke accountable for the mistakes that led to our most recent economic crisis.
This nomination should be about the future — how Bernanke will lead the Fed in his next term. And Bernanke’s recent statements and actions show that he does not deserve confirmation. He has failed to recognize the mistakes that led to the crisis, and he has shown a tin ear to calls for more transparency at his agency.
In a speech to the American Economic Association early this month, Bernanke pointedly refused to acknowledge that that the Fed’s loose monetary policies played any significant role in the housing bubble or the financial crisis. Stanford University economist John Taylor responded in the Wall Street Journal with the simple fact that “the real interest rate during this period was persistently less than zero, thereby subsidizing borrowers.” Bernanke’s failure to see this raises the possibility that he will allow monetary policy to cause future bubbles — and future crises.
Bernanke has also been tone-deaf to calls from the left and right for making the Fed more transparent. Both sides of the political fence were disturbed by the various aspects of the bailouts, including the inconsistency of banks holding AIG’s credit-default swaps getting paid 100 cents on the dollar while bondholders in the auto-company bankruptcies got less than 50 percent of the face value of the bonds. They want to know more about the decision-making process that led to these outcomes.
Rep. Ron Paul sponsored the “audit the Fed” bill, which gained bipartisan support and ended up being included in the financial-reform bill that passed the House in December. But Bernanke, until very recently, fought tooth and nail any attempt to audit the Fed instead of working to reach a reasonable compromise. The Competitive Enterprise Institute was one of many groups to sign onto a left-right coalition letter calling for delaying his confirmation until the Fed was subject to an audit by the Government Accountability Office, as nearly every other facet of government is.
The Obama administration may very well choose someone worse if Bernanke withdraws or is defeated. But Bernanke clearly does not deserve a second term.