Alford: “Why Bernanke Should Resign”

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.

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  1. attempter

    Those who think “Heckuva job” Bennie is well qualified to lead through the crisis are those who simply want more of the same, since it’s clear he learned nothing and forgot nothing.

    The hype that Bernanke is an “expert” on the Great Depression is just one of those lies that the media sound machine repeats ad nauseum to the point that everyone is supposed to assimilate its truthiness rather than examine whether or not it is in fact true.

    But a little examination reveals how he’s simply a monetarist flat earther. The dogma that the economy was basically sound, had a hiccup, and just needed liquidity easing, is a lie meant to obscure the fundamental contradiction of useless, concentrated wealth stolen from a putative consumer base no longer wealthy enough to consume.

    And today the black magic of infinite exponential debt is supposed to keep that going. I guess Bernanke hopes we’ll soon make contact with extraterrestrials who are heavy savers with an economy based on cheap exports. Who else will be able to perform the miracle he and his colleagues propose, of somehow levitating this utterly destroyed consumer debt market?

    He’s the same Wall Street financialization apparatchik he was from day one, and his only idea is to look for new bubbles to reflate to enable further top-down looting. The whole thing, bubbles, Bailout, and the same going forward, is history’s biggest police riot.

  2. Glen

    We all know that Bernskanky should never have been reappointed let alone elected to the position in the first place but he’s there and getting all cut up about it isn’t going to change anything. Until someone can produce a conclusive piece of hard evidence (even when it was it didn’t do much) then all the conjecture in the world will not dislodge him from office. Keep up the rage but we’re going to have to work alot smarter.

  3. stevenstevo

    “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.”

    Huh? What about Greece? And Portugal? And that little thing we call Europe? Nearly every country in the world is in a recession just as bad as ours is–many countries are worse off than we are actually. The ones that have fared well never suffered much in the first place.

    And our financial system is stable, very stable actually. And we never experienced total collapse. The Lehman bankruptcy froze our capital markets for a week or so, but we recovered. Did Bernanke not stabilize the markets, just short of collapse?

    1. Richard Smith

      “Huh” straight back at you stevenstevo.

      Try again when you’ve grasped the difference between a financial system collapse and a recession.

  4. stevenstevo

    “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.”

    Anyone who doubts Bernanke because he failed to predict the worst recession in 80 years, then they are stupid.

    Not sure who the “so many others are” that Who are these people? I can only think of a couple. Literally. That’s it, which is absolutely nothing compared to the millions of investors, homeowners, journalists, economists, etc. who did not see it coming. Merely looking back in hindsight, through 20/20 eyeglasses, and realizing that there were signs does not mean you should have seen it coming. Unless you shorted the hell out of the market ala John Paulson, then you cannot say you saw the recession coming.

    In addition, these signs did not show up until right before the financial crisis. At that point, the only thing Bernanke could do was keep rates low.

    And what is this exit plan? TARP is being repaid rapidly. Surely this is not implying interest rates should be raised. It’s far too early for that. And no one has a clue whether we will have problems with inflation several years from now, or even sooner. Bernanke’s actions in the future will be largely dictated by the direction of our economy. The plan is obvious: once the economy starts picking up, with improvements in employment, GDP, etc., Bernanke will raise rates. If inflation starts showing warning signs, he will raise rates even more.

    The future of our economy occurs in the future. Embedded in life and in the future is an element of what’s commonly referred to as randomness. No one can predict the future. Period.

    1. Yves Smith Post author

      You have just revealed you are not very well read. There was a very large cohort that decried the global credit bubble and said it would end VERY badly.

      The FT from late 2006 onward, daily, was saying how extremely overvalued all asset markets were. Jeremy Grantham declared every asset class to be a bubble. Marc Faber and Jim Rogers saw this coming. Bob Shiller, Raghuram Rajan, and William White all warned the Fed and were ignored. I can add 20 names to this list without thinking very hard.

      If you want to keep putting your foot in your mouth and chewing, I must tell you it is not a pretty spectacle.

    2. Clampit

      “No one can predict the future. Period.”

      Well after jumping from the plane sans parachute…your future is reasonably assured.

    3. Hugh

      I admit I came to the housing bubble late. I first became aware of it in late 2005. (The housing bubble blew up on August 9, 2007 with the freeze of the BNP Paribas funds and the subsequent panic.)

      I started writing about price manipulations in oil in 2006-2007. I suppose you could say I was late on this as well since such speculation had been going on since 2004. (Oil prices spiked to $140/bbl in June 2008.)

      Oh, I did say back in the late summer of 2007 that the economy was going to go into recession. (The NBER places the beginning of the recession in December 2007.)

      In 2008, I and others sat around trying to predict which were the next shoes to fall and wondering when the whole house of cards would go. (The meltdown hit on September 15, 2008.)

      I said last fall that the stock market represented a fully mature bubble and could go at any time. I would have expected it to go this winter, but I underestimated the effect of Bernanke’s low interest rates in propping it up. Even so, it has been going sideways the last while and will go at some point.

      I consistently discounted all the talk of greenshoots and recovery. I suppose I am different from others in that I don’t see this as a double dip recession. I thought we would hit a plateau or a period of slower fall before further descent.

      I said that no second stimulus was likely this year, but since 2010 is an election year I predicted a lot of piecemeal efforts to keep things together and give the appearance of action to get incumbents through November. I thought this would keep the economy, if not the Democrats, from collapse through November.

      I have written repeatedly about how our elites are incapable of either real reform or effective action. 2011 continues to look like a horror show to me in economic terms.

      When I started out on this, I had no background and little interest in economics. I never had any special access to technical data. What I did get is freely available to anyone on the internet. The one advantage I have I suppose is that I have a better understanding of the intersection of politics and economics than most pure economists or market followers. And, of course, I did not have the ideological baggage of most contemporary economists.

      My opinion may be overly harsh but I think the only people in the markets who didn’t see this coming are A) lying, B) stupid, or C) were blinded by their own greed.

    4. Fed Up

      I recommend this article titled “No One Saw This Coming”:
      Understanding Financial Crisis Through
      Accounting Models”

      See page 9 of the article/page 10 of the .pdf. I believe the person has added to the list.

      I would like to know more about bernanke’s mortgage because if he can’t do personal finance, he’ll never get debt deflation/defaults.

  5. Richard Smith

    “No one can predict the future. Period.”

    Well, you seem to take a shot at it in the previous paragraph. Tip: work on your attention span.

  6. Bill

    Now I can’t access comments……….that “html fix” suggested recently might be the problem, the site was working fine before.

  7. APM

    The extent to which the US Government and the Fed have been captured by the Financial Industry (and several other Industries too) is truly appalling. Any pretense of independence is gone. There are no precedents in history for a system in such a state of crisis and with such a level of corruption to have reformed itself without a major exogenous shock such as a revolution or a war. This time will be no different, the question is only when: in 3 years, in 10 years, … In the meantime it will be more of the same intertwined by timid efforts to reform the system that will be rendered mostly void by the stakeholders that have the most to lose. Other regions of the world such as Europe and Japan are facing similar economic and social challenges but at least they are facing a lower level of Government capture by Business (that does not mean it will end necessarily well though as there are so many other things that could go wrong).

  8. justaslakker

    I repeat my comment of Jan 25 when there was talk of Bernanke not being confirmed: Bernanke is going to be shoved down our throats whether we like it or not.

    The financial predators are much more entrenched than we realize. They control the white house, the congress, the military, the media, face it the entire country (as well as others). Their strategy is deception. As is illustrated in this one commentary, one player Bernanke is a complete fraud.

    As for war and revolution, we are already at war. It will simply be continually expanded and shifted to other areas of the world (Iran).

    Revolution? The politico’s would like nothing better than riots in the streets. They can then declare martial law and bring the troops home to fight Americans on their home turf.
    Paulson tipped his hand when he blackmailed Congress into giving him complete authority to bail out the banks.

    There is a solution, but it does not fit present economic theory, and would be ridiculed by academia, and I dare say everyone one this blog. The solution is to replace our debt based money with debt free money. It is an idea that gained popularity during the last great depression and has been ridiculed and ignored ever since it was introduced. That simply tells you that it is a sound idea that would effectively break the bankers strangle hold on our society.

    1. Fed Up

      “There is a solution, but it does not fit present economic theory, and would be ridiculed by academia, and I dare say everyone one this blog. The solution is to replace our debt based money with debt free money. It is an idea that gained popularity during the last great depression and has been ridiculed and ignored ever since it was introduced. That simply tells you that it is a sound idea that would effectively break the bankers strangle hold on our society.”

      Actually, I agree. Maybe present economic theory is bunk or just “works” for the spoiled and rich under supply constrained conditions.

  9. asphaltjesus

    That “who really owns America” link is disjointed declarations strung together to create a bogeyman.

    I believe American economic and political power is concentrated. I just don’t think it’s as fantastical as writers like that make it out to be.

  10. Simon

    LOL, this is like the wimp coming up with some great comeback lines at home in bed after the bully belittled him on the school playground.

  11. But What Do I Know?

    Someone I read put it very well–the Fed is like the World War I generals who couldn’t bring themselves to believe that the nature of warfare had changed and the machine gun and improved artillery had made the close-formation bayonet charge obsolete. For four years Haig, Joffre, et al. (and also some in the German high command) continued to maintain their image of a great calvary charge that would break through the enemy lines and bring the war to an end. Bernancke, the lickspittle, and the scholastic Fed economists are still waiting for that magical interest rate cut to “reignite” the economy, and they’ll do their best to frustrate any attempts at solutions which undermine their ability to remain in “command” of monetary policy.

    Clemenceau said, “War is too important to be left to the generals.” Monetary policy is too important to be left in the hands of a Bernancke Fed.

  12. Hugh

    Re Bernanke, I think financial players are perfectly happy with him. They fully expect Helicopter Ben to keep interest rates low so they can keep their bubbles in stocks and commodities inflated. As for meaningful regulation, they already feel comfortable they can kill any on their own. They certainly know Bernanke is going to propose, let alone enforce any.

    1. jdmckay

      I think financial players are perfectly happy with him.

      Yes, me too. Actually, I think the underlying point of author’s article here is that he, Geithner and Summers are one w/those guys… or more directly, the reason we got a bailout instead of a long overdue financial system fix.

      re: “financial players perfectly happy w/him”, one of my more enduring memories along the way of this debacle was (from memory) around Spring ’09: a time when those paying attention (even including most in financial crowd who didn’t see it coming) knew that the “crisis” was on it’s way, but that it hadn’t quite bit the general public in a big way yet. Dow had lost thousands, home values were dropping, but pain hadn’t hit hard yet and retirement funds and such hadn’t realized their losses.

      I was watching CNBC one evening, they had a panel of derivative fund managers. These guys all had lost massive amounts, mostly tied to various mortgage bond incarnations. They were all dressed to perfection, relaxed, smiling, looked confident.

      They were the “markets are god” crowd, the guys who demanded regulation inhibited financial “innovation” etc.

      To a man, each of these dudes said not to worry, everything’s going to be fine, because we still have a deep untapped source of capital that will carry us through: THE US TAXPAYER.

      And, that’s exactly how it played out.

  13. RebelEconomist

    It is possible that Bernanke genuinely did not see the danger of a bust; a less charitable but probably more realistic suggestion is that he did, but that he preferred not to be a party pooper. Ditto Greenspan. The truth is that rigorous central bankers have been more valued in theory than in practice. Even Volcker, with success to show for his hawkishness, was dispensed with once he had served his purpose.

  14. scharfy

    Even if Bernanke got axed, nothing would change.

    What would replace him? Would he have a DEEP and understanding of the great depression? Deeper? PhD in inflation? Doctorate in deflation? Would he be the biggest supergenius on the planet? Straight A’s from birth? As smart as Obama? Smarter?

    As long as monetary policy is run by technocrats, plutocrats, or other -crats, expect further turbulence passengers…

    I am in favor of returning the power to regulate money, and the value thereof, back to congress. This is in our constitution, until it was amended in 1913, delegating it to the Fed.

    This is too awesome a responsibility for 12 men, never mind the moral implications.

    1. Fed Up

      “I am in favor of returning the power to regulate money, and the value thereof, back to congress. This is in our constitution, until it was amended in 1913, delegating it to the Fed.”

      I’d rather see the power returned to the people; NOT the fed, NOT congress, NOT the rich.

  15. kievite

    While Bernanke is definitely not a saint by as attempter aptly put it “Wall Street financialization apparatchik” the key here is to understand that it is the ideology of “free market fundamentalism” that drove the economics of the country off the cliff.

    It’s like case against Soviet Politburo. It’s naive to thing that the General Secretary of Politburo is the source of all
    evil but other members and the ideology behind the organization are minor factors. In reality it was
    ideology that was the main factor and that helped to drive those, often pretty capable men to commit crimes and stupidities that they did.

    So far the carrier of the ideology like a carrier of the virus is the
    large part of Republican party ("the wrecking crew" of Bushists and
    neocons as a core)  and “Wall Street affiliated” wing of Democratic party.

    So in this chess game Bernanke is just one of figures, and probably not the most important. 
    He was moved into this position by forces beyond his control just by
    virtue of being an active promoter of the ideology in question. His
    sycophantic admiration of Milton Friedman probably served him well.

    Actually great Russian Anarchist Duke Kropotkin one said “People are better then institutions”.

    So attack on Bernanke is to certain extent is like witch hunt: burning the sick person
    in case of epidemics instead of eliminating the source of infection and creating
    hygienic measures preventing its spread.

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