Wednesday, August 08, 2012

Sack Ben Bernanke? Damn right, yes!

The decision to reappoint Ben Bernanke as the Chairman, Federal Reserve, will further escalate sloppiness, says Gyanendra Kumar Kashyap

Had it not been for old age, the octogenarian Alan Greenspan would have continued to be at the helm of Federal Reserve. Adept at the political game, Greenspan, for 18 consecutive years (August 1987 to January 2006) managed to portray an image that he was his own man and also a lickspittle of the powers in the White House. It takes no rocket science analysis to know how he got himself re-appointed and survived the times of Reagan, Bush Senior, Clinton or for that matter Bush Junior. However age had the better of Alan and a Princeton economist, Ben Bernanke, was sworn in as the Chairman of Federal Reserve on February 1, 2006. Pundits doubted Bernanke’s ability to create a cult of personality around him and become a virtual economic czar (much like his octogenarian predecessor). Thence, Ben’s August 25, 2009 reappointment came as a surprise for many who doubted Bernanke of lacking Greenspan’s mystique; Bernanke is seemingly all set to carry on the legacy of his predecessors, Paul Volcker included.

Well so much for legacy, what is worth pondering over is the question: why in heavens did President Barack Obama interrupt his vacation on Martha’s Vineyard to nominate Ben Bernanke for a second term at the Federal Reserve? Especially given the fact that August 25, 2009 and January 31, 2010 (the day when Ben Bernanke’s first term expires) are months apart? And what about all those reports that commented that Lawrence Summers – the current Director of Barack’s National Economic Council, a close confidante and also a former Treasury Secretary (during Clinton’s time) – was being considered a sureshot Fed Chairman in waiting? There, one guesses Obama called the goose before the eggs hatched. When the White House Deputy Press Secretary Bill Burton was queried, he said, “There’s been a lot of speculation out there, and the President wanted to put it to rest.” The President chose to traverse clear of Carribean waters when he said, “Ben Bernanke has led the Fed through one of the worst financial crises that this nation and the world has ever faced.

As an expert on the causes of the Great Depression, I’m sure Ben never imagined that he would be part of a team responsible for preventing another. But because of his background, his temperament, his courage, and his creativity, that’s exactly what he has helped to achieve. And that is why I am re-appointing him to another term as Chairman of the Federal Reserve.”

Critics may not exactly buy the logic – they argue (we do too) that the crisis could have been averted or at least mitigated in the first place but for Ben’s seat of the pants interest rate logic. It is a fact that once Bear Stearns failed, the Fed and the Treasury could and should have recognised the extreme fragility of the financial system and responded to it accordingly. Bernanke’s acknowledgement that Fed underestimated the seriousness of the financial crisis at the outset, including the danger posed by sub-prime mortgage lending, yet remaining reluctant to relinquish his role as a consumer advocate, is evident financial hypocrisy. Despite signals of falling standards (considering the fact that the sub-prime mortgage originations jumped to $600 billion in 2006 as compared to $310 billion in 2003), he was reluctant to raise interest rates to slow down credit growth. However, Ben ‘Helicopter’ Bernanke continued with his pet policy that “Fed should drop money from helicopters.” As a matter of fact, as early as October 2007, when the first cracks began to appear in the financial market, but before the economy itself began feeling the fallout, Bernanke began to aggressively slash interest rates. So much so that the collapse of US financial system in September 2008,which wounded behemoths like Lehman Brothers, Merrill Lynch, Washington Mutual, Fannie Mae, Freddie Mac, AIG, Citigroup et al, perchance was primarily Ben’s fault than anyone else. Visualise the proceedings of the next Federal Open Market Committee meeting to be held on September 22-23, 2009, wherein Bernanke dominates.


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