Bernanke reappointed for second term

Ben Bernanke was reappointed on Tuesday by President Barack Obama for a second four-year term as chairman of the Federal Reserve. The president also hit back at Mr Bernanke’s critics, defending the central bank chief’s actions – and policies put in place by his own administration – as ”steps of necessity, not choice”.

It follows Mr Bernanke’s extraordinarily aggressive efforts to fight the economic crisis, including radical interest rate cuts, loans to non-bank financial institutions, Fed-led bail-outs of AIG and Bear Stearns and gigantic asset purchases – exploiting the Fed’s powers to their legal limits in an effort to prevent a second Great Depression.

Tuesday’s announcement could deflect attention from other less market-friendly news. The White House is set to raise its 10-year budget deficit projection by $2,000bn to approximately $9,000bn.

Economists, investors and fellow central bankers overwhelmingly favor Mr Bernanke’s reappointment. However, some others saw this is a very shortsighted decision. While America’s head central banker deserves credit for being creative and courageous in orchestrating an unusually aggressive monetary easing program, it is important to remember that his pre-crisis actions played an equally critical role in setting the stage for the most wrenching recession since the 1930s. It is as if a doctor guilty of malpractice is being given credit for inventing a miracle cure. Maybe the patient needs a new doctor.

Mr Bernanke made three critical mistakes in his pre-Lehman incarnation: First, and foremost, he was deeply wedded to the philosophical conviction that central banks should be agnostic when it comes to asset bubbles. Second, Mr Bernanke was the intellectual champion of the “global saving glut” defense that exonerated the US from its bubble-prone tendencies and pinned the blame on surplus savers in Asia. Third, Mr Bernanke is cut from the same market libertarian cloth that got the Fed into this mess. The derivatives’ explosion, extreme leverage of regulated and shadow banks and excesses of mortgage lending were all flagrant abuses that both Mr Bernanke and Mr Greenspan could have said no to.

Notwithstanding these mistakes, Mr Obama may be premature in giving Mr Bernanke credit for the great cure. No one knows for certain as to whether the Fed’s strategy will ultimately be successful. There is still good reason to believe that the US recovery will be anemic and fragile. US consumers are in the early stages of a multi-year retrenchment as they cut debt and rebuild retirement saving. The unusual breadth and synchronicity of the global recession will restrain US export demand from becoming a new growth engine.

The Bernanke reappointment is a welcome chance for a broader debate over the conduct and role of US monetary policy. Ultimately, these decisions boil down to the person – in this case, Mr Bernanke – who is being charged with the awesome responsibility as America’s chief economic policymaker. As a student of the Great Depression, he should have known better. Maybe the world needs central bankers who avoid problems, not those who specialize in post-crisis damage control.