By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.
There was a long period of time during which I believed that Mr. Bernanke should have resigned the Chairmanship of the Board of Governors of the Federal Reserve System. Subsequently, I came to believe that he would not be nominated for a second term as Chairman -a satisfactory outcome from my perspective. However, he was nominated for a second term. For a while, it appeared possible that the Senate (post the Massachusetts election) would not confirm him for a second term- an unsatisfactory outcome from my perspective. Now, Bernanke has been confirmed by the Senate-albeit with a record number of Senators voting nay. And I am back to my original position- I believe that Bernanke should resign. In fact, the arguments for a resignation are more compelling than ever.
The reasons that I believe Bernanke should resign and the reasons behind my “I was for a Bernanke departure, before I was against it and now I am for it again” position are straightforward.
The Chairman of the Board of Governors of the Federal Reserve System must be able to function as a leader. Not only must he be a leader of the Board of Governors and the FOMC, he also must be able to use his position to influence the financial markets, the real side of the economy, the course of regulation and supervision of financial institutions, and insulate the Fed from election- cycle-political pressures. Unfortunately, Mr. Bernanke has abdicated any claim to leadership.
The Bernanke Fed has time and again stressed the importance of talk as a policy instrument to be used to influence expectations and the course of the economy. However, given his forecasting record and policy stances, it is unlikely that Mr. Bernanke will have the influence and stature that the Chairman ought to possess. The markets will not have confidence in someone who denied the existence of the housing bubble and then said the aftermath of the housing bubble would be well contained. He also has stated the obvious: the worst recession since the Great Depression took him by surprise. It will be difficult for Mr. Bernanke to influence market expectations of inflation and growth, given that he failed to see the underlying financial and economic imbalances that so many others saw.
Furthermore, a significant number of mainstream economists (as well as market participants) are now of the belief that interest rates were too low for too long. Given that Mr. Bernanke does not acknowledge even the possibility that this is true, it will make it difficult for many in the market to believe that Mr. Bernanke will commence the as yet undefined exit strategy at the appropriate time.
Also given the recent record of the Fed on bank regulatory matters and the animus towards Bernanke in the Congress, it will be difficult for him to influence the course of regulatory reform. This is unfortunate as most of the world is leaning towards regulatory systems with some role for the central bank as a bank or systemic regulator. This is complicated by the absence of any evidence that Mr. Bernanke attached any weight to regulatory concerns prior to the crisis.
From a Federal Reserve perspective, given the animosity towards Mr. Bernanke by many in the Congress (especially since the revelation about the AIG bailout), it is unlikely that Bernanke will be an effective spokesman for a Fed independent of election cycle politics This is especially true since he went hat in hand to the Hill asking Senators for their support as parts of his efforts to win reconfirmation.
Defenders of Mr. Bernanke argue that he was and is uniquely qualified to head the central bank during this period of financial stress. However, it seems with the possible exception of Iceland that every country has found someone capable of stabilizing their financial system short of total collapse.
Furthermore, none of the policy prescriptions undertaken by the Fed are unique or outside those recommended by mainstream economists. The most salient aspect of Mr. Bernanke’s uniqueness is that he has become a lightning rod for all the criticism that the Congress can offer.
All that said, it would have been counterproductive to have had Bernanke’s nomination rejected in the politically charged aftermath of the election in Massachusetts. Ever since Greenspan assumed the Chairmanship, the Fed has become progressively more involved in issues that are properly left to the Congress and the Executive Branch. If the president had decided against nominating Mr. Bernanke, it would have been in keeping with a pre-determined calendar and entirely appropriate. If prior to Scott Brown’s election, a majority of the Senate had been publicly opposed to a Bernanke renomination, then I would have supported the Senate denying Bernanke the reappointment. However, given the appearance of the flight from Bernanke based primarily on short-term political expediency, I had to step back. Under those conditions, denying Bernanke the appointment would have dragged the Fed further into the political quagmire. The odds of the Fed becoming the next Fannie or Freddie are already too high.
A Bernanke resignation would allow for (but not guarantee) an effective leader; diffused much of the criticism directed at the Fed; and allowed for the perception that Fed policymakers are responsible for major policy mistakes without turning the Fed into a political football.
The country, the economy, the financial markets and the Fed itself deserve a Chairman who can marshal the support of Main Street and Wall Street and artfully deal with the Hill. Bernanke cannot do it. It would be best if at some point in the near future Mr. Bernanke steps aside. To aide in the process, a draft press release announcing Mr. Bernanke’s resignation is provided below:
After pondering deeply the general trends in the financial markets and the actual conditions obtaining in our economy today, I have resorted to another extraordinary measure.
To strive for price stability, the common prosperity and happiness of all as well as the security and well-being of our financial markets is the solemn obligation implied by the Fed’s mandate.
Indeed, I declared war on inflation and deflation out of a sincere desire to insure sustained growth at full employment and the stabilization of the price level, it being far from my thought either to compromise financial stability or to inflate a housing bubble.
But now we are faced with prolonged financial and economic dislocations. Despite the best that has been done by everyone–the efforts of the economists at the Federal Reserve, the diligence and assiduity of the Treasury Department and the efforts of the Congress and the President-the TARP and stimulus package–the economic and financial situation has developed not necessarily to America’s advantage.
This is the reason why I have take the step necessary to allow the President to appoint a new Chairman.