The US economy needs a third term of Ben Bernanke

In the event of another shock to the financial system, there’s really only one person we want to be running the show.
In the event of another shock to the financial system, there’s really only one person we want to be running the show.
Image: AP Photo/Richard Drew
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Ben Bernanke’s second term as chairman of the US Federal Reserve ends at the end of January 2014. Speculation has begun about whether President Obama leans toward reappointing him and whether Ben Bernanke would accept reappointment. At his March 20 press conference, Bernanke said he had spoken to Obama “a bit” about his own future without directly addressing the question of whether he would be willing to serve a third term if asked. But he emphasized that he did not see himself as indispensable, saying “I don’t think that I’m the only person in the world who can manage the exit [strategy]” from the stimulus the Fed has been providing to the economy. Given Bernanke’s reticence, the Wall Street Journal provides an important tea leaf  when it reports that “Many of [Bernanke’s] friends and associates believe he will want to leave after his current term expires.”

Though the stresses Ben Bernanke has faced during his time as chairman of the Fed—and the princely speaker fees and book advances available to former Fed chiefs—would make a desire to retire at the end of his current term understandable, I hope that Obama will ask him to serve a third term and that Ben Bernanke will accept—and that the Senate will confirm him by a wider margin than it did for his second term. Of these decision-makers, the hardest to persuade might be Ben Bernanke himself.

As Bernanke said, if all goes well, and the economy is firmly on the road to full recovery, many possible Fed chiefs could manage a reasonably graceful exit from quantitative easing and interest rates hovering around zero. But I do not think the economy will be out of the woods by January 2014. Many dangers will remain, particularly dangers to the US economy from troubles in the rest of the world and from the difficulties of reining in the US national debt without bringing the US economy to a halt.

Though not by any means a close confidant, I have known Ben Bernanke for a long time from meetings of the Monetary Economics group in the National Bureau of Economic Research. We economists are quick to take the measure of one another, and I have always had the highest respect for Ben Bernanke’s thoughtful approach to economics. Through the news, and from reading David Wessel’s wonderful book about the Fed’s response to the financial crisis, In Fed We Trust, I have studied with interest each official move that Ben Bernanke has made as chairman of the Fed. Instead of Monday morning quarterbacking, I have asked myself at each point what I thought should be done, given what I knew at the time, and compared it to the decisions that Bernanke made at that time. I know I could not have done better than Bernanke. And Greg Mankiw, former chairman of the Council of Economic Advisors, who was on the same short list for appointment as Fed chairman as Bernanke, has similarly said that “he very much agreed with Bernanke’s policy decisions over his tenure.”

I can say with clarity that Bernanke’s biggest failure—not foreseeing the gravity of the coming financial crisis—was a failure of the entire economics profession and hardly his alone.  Economists did see the housing bubble and worried in advance about a collapse in housing prices. But what we didn’t know—in large part because the needed data was not collected from them—is what huge bets the big banks and other big financial firms had taken on the overall level of house prices in the US. So when housing prices fell all across the US, the big banks and other financial firms got into trouble, and dragged the world economy down with them. Ever since, Ben Bernanke has been laboring mightily to get the US economy and the world economy out of the hole that the financial crisis put them in.

In addition to wielding the emergency powers of the Fed to prevent an even worse financial meltdown, Bernanke has played a central role in adding quantitative easing to the standard toolkit of monetary policy in the US. In other words, Bernanke did a lot to help convince his colleagues in the Fed, and some fraction of the public, that when the interest rate on three-month Treasury bills has fallen to zero, the Fed can and should still stimulate the economy by buying other assets instead of three-month Treasury bills.  Bernanke has acted according to the slogan I use in my blog post “Balance Sheet Monetary Policy: A Primer,”

When below natural output: print money and buy assets!

And when one kind of asset already has a zero interest rate, buy some other type of asset. Bernanke has done so, in the face of often-savage criticism. (It is only in the last few years that “End the Fed!” has become a slogan for a substantial minority of the US population—many of whom reliably show up as energetic commentators on websites.) In all of this, the Bernanke Fed has been significantly more vigorous than other major central banks, and as a result, the US has done better economically than Japan, the UK or the euro zone as a whole. (China is a whole different story.)

Although there are a few other economists who might match Bernanke in their monetary policy judgments, through his years at the helm of the Fed, Bernanke has developed an unparalleled skill in explaining and defending controversial monetary policy measures to Congress and to the public. The most important ways in which US monetary policy has fallen short in the last few years are because of the limits Congress has implicitly and explicitly placed on the Fed. Negative interest rates could be much more powerful than quantitative easing, but require a legal differentiation between paper currency and electronic money in bank accounts to avoid massive currency storage that would short-circuit the intended stimulus to the economy. (See my column: “How Paper Currency is Holding the US Recovery Back.”) That would require legislation. Lending directly to households would require legislation. (See my column: “More Muscle than QE3: With an extra $2,000 in their pockets, could Americans restart the US economy?”) And creating a US Sovereign Wealth Fund as a sister institution to the Fed to give the Fed running room and help stabilize the financial system would require legislation. (See my column: “Why the US needs its own sovereign wealth fund” and also: “How to stabilize the financial system and make money for US taxpayers.”)

If we are to have a hope of adding these tools to the monetary policy toolkit—tools that one way or another, we will need someday—we need a Fed chief who not only has the skill that Bernanke has gained at explaining monetary policy to Congress and the public, but also the prestige that will come when we finally get out of the economic mess we are in and people realize that, in important measure, it was Ben Bernanke who got us out of that mess. But the biggest reason we need a third Bernanke term is that nasty economic shocks may not be through with us yet. And no other potential head of the Fed has as much experience in responding to nasty shocks with solidly creative monetary policy as Ben Bernanke.

I join Greg Mankiw, who happened to be my graduate adviser, in calling Ben Bernanke a hero. Though he might be tempted to cut it short, I don’t see any way that Ben Bernanke can complete the hero’s journey that history has appointed him without a third term.