Bernanke Watch?

There seems to be quite a cloud of dust being kicked up over a number of concurrent and intertwined themes concerning the Federal Reserve Board: there are matters of its secrecy, its competence, its role in the future of bank regulation and now also its management. Simultaneously as we head into Fall we will be caught up in the debate about how to re-regulate the banking sector.

At the center of all this is Ben Bernanke the Fed Chairman who’s term in that role expires in January.

Let’s pick this all apart to get some perspective:

1. I agree with Joe Stiglitz that we should have a healthy debate about whether to re-appoint Bernanke. The point being that among the issues we need most strongly to confront is that the crisis underlined the extraordinary ‘group think’ endemic throughout our financial elite, whether they are in the banks or in the regulators or academia. Bernanke is very representative of this group think – which relies far too much on so-called market forces and not enough on regulation. It would be healthy to open up our thought processes, and having a different Fed chairman would signal that intent.
2. That raises the obvious problem: given group think is there a candidate of sufficient caliber not cut from the ‘market knows everything’ mould? And therein lies the rub. No one leaps off the page as being qualified, except for Janet Yellen out in San Fransisco. Given some of her recent speeches I am sure she’d cause quite a few raised eyebrows as Fed Chairwoman.
3. On the contrary side: I would oppose Larry Summers. He’s a very bright guy, but is absolutely and resolutely a Wall Street buddy. He just doesn’t seem able, yet at any rate, to get the point about how dangerous the big banks have become. They own us. That has to stop. They profiteer at our expense. That has to stop. They are behaving in an anti-social manner. That has to stop. They used our money to pay out dividends and bonuses. That has to stop. In all these confrontations Summers hasn’t been able to muster the courage to oppose the big banks. Either he isn’t strong enough, or he is on their side. Both conditions make him a bad Fed chairman.
4. Geithner would be worse. He’s a Wall Street fan. He seems very vocal about reform, but he is far too aligned with big banking and that group think.
5. As for the Fed itself. It needs to be reformed. Those who want a close Congressional control are ignoring the value of independence. All the evidence suggests the economy will benefit from an independent central bank. So monetary policy and its market manifestations such as the discount window operations etc need to be kept away from the natural tendency of politicians to favor inflation as a cure all for excess.
6. Having said that the Fed made a meal of regulation. It should give up its regulatory role in favor of a focus on monetary policy. I doubt this will happen given Bernanke’s and Geithner’s efforts to make the Fed the center of our new ‘systemic’ regulatory regime. There may be organizations less well equipped for that role, but they don’t spring readily to mind.
7. More broadly: our entire regulatory set up needs an overall to rid it of ‘regulatory capture’. We need to refresh the independence and solidarity of the regulatory system so it cannot be ‘gamed’ by bankers moving themselves from one part of the system to another to get a softer regime. Frankly the rabbit’s warren of regulatory bodies needs total trashing and replacement with a new set – maybe even just one organization – that has to manpower and clout to resist Wall Street. The current set up is antiquated and embarrassing and works only to the advantage of the bankers. The bureaucratic infighting has broken out into the public domain as the various regulators defend their turf. Hey guys: none of you succeeded in preventing the crisis. So let’s have less bashing each other and more conversation about what the new regime will look like.
8. Going back to Bernanke: I do not see a role for him in such a comprehensive arrangement as a regulator. But his record as a central banker would suggest he could stay at a trimmed down Fed.

Meanwhile: critics of the Fed would be better advised to focus on the arcane and outmoded way the Fed is run, rather than on auditing its success. The current Fed system is skewed towards an economic reality circa 1913: it is comprised of member banks representing areas of the country that were far more important a century – the farm belt is too influential and California is underrepresented. Plus the member banks are run by people well tied to local banking. Which means that the New York Fed is essentially a Wall Street annex: its current boss is a Goldman guy. It is the presence of these banker ties that destroys any vestige of true independence that the Fed may have vis a vis regulation. It is not uncommon for employees to move from the Fed to a bank and then back again during the course a career. That’s acceptable, even to be encouraged, for central bankers. Not so much for regulators.

Finally on auditing the Fed: I think this idea is simply political grandstanding. On what basis would an audit be conducted? and against what criteria would the Fed be ‘scored’? The whole concept seems dumb. We are better off getting a new regulatory regime in place rather than in wasting time chasing down opinions over whether the Fed gets through an audit well.

Meanwhile the Bernanke watch heats up.

My vote?

Kick him out if the Fed stays substantially unaltered. Keep him if it is reduced to more of a central bank and less of a regulator.

Addendum:

Dean Baker chimes in and is much less flattering than I have been.