Stephen Foley: Helicoptor's blades may not cut it

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The Independent Online

US Outlook: It is the political parlour game of the summer on Wall Street and in Washington, handicapping Ben Bernanke's chances of a second term as chairman of the Federal Reserve.

This week we learnt that, in a straw poll, 43 out of 46 private-sector economists want him reappointed. If you fancy playing along in the UK, you could take a punt with Intrade, the spread betting firm, which is showing a 66 per cent chance of Helicopter Ben surviving to fly another day.

That is certainly the conventional wisdom, the result of Mr Bernanke's genuinely impressive performance navigating the US economy and the global financial system through its biggest test since the Great Depression. I don't think his reappointment is inevitable, though, and I don't think it is particularly desirable, either.

The case for Mr Bernanke is built on his stewardship of the financial system over a period of little more than a year, beginning with the collapse of Bear Stearns in March 2008 and culminating in the "stress tests" of the country's most important banks, which were published this May and which were the final element in the effort to restore confidence in – and among – financial institutions.

In this Crisis Management period for central banking, it was a case of cometh the man, cometh the hour. Mr Bernanke is the foremost scholar of the Great Depression. He knew instinctively that the Fed must use every lever it could get its hands on to prop up systemically important banks, to shower money on the credit markets (hence the Helicopter Ben nickname) and to persuade government to spend on an economic stimulus package. He has spent his life studying what happened when the Fed and the Hoover administration didn't do this in response to the crash of 1929. Future Bernankes will be writing scholarly books in praise of the Fed's swift and creative responses to the waves of crisis that crashed over that year-long period.

The current Mr Bernanke's reappointment must be decided, though, on an examination of an only slightly more distant past – and on a judgement about the future. We are moving from the Crisis Management phase into something different for the Fed, a period of Economic Management + Crisis Prevention, and in these areas, Mr Bernanke's track record is hardly exemplary.

The first two years of the Bernanke chairmanship of the Fed were characterised by a fundamental misreading of the interconnection between the housing market, the unsupervised credit derivatives industry, and the wider economy – a misreading that persisted well after it was clear that the sub-prime mortgage market meltdown was going to have profound consequences.

With the credit markets screaming in distress for most of 2007, it wasn't until September that Mr Bernanke made his first reduction in interest rates, still believing the sub-prime mortgage problem would be largely "contained". A stock market panic the following January prompted an unedifying U-turn, bouncing him into an emergency 75 basis point cut, eight days before the Federal Open Market Committee was due to meet.

I certainly don't think a smoother performance could have prevented the 2008 crisis, but it might have made it less severe. Regardless, it was a horrible, deer-in-the-headlights performance, which should be examined just as closely as the much more confident chairmanship we have seen since the economy moved on to Mr Bernanke's familiar, proto-Depression territory.

So we can weigh two bad years against one good. More important, what sort of chairman does the Fed need in the coming period? Numerous economists, in academia, government and even at the regional Feds match up to Mr Bernanke in their thinking on economic management, and some have begun to do more work on the extra levers that the Fed might pull to prevent bubbles growing and destabilising the economy.

In the area of crisis prevention, someone with direct experience of Wall Street might be appropriate, if politically tricky right now, because it is between the nuts and the bolts of financial innovation that crises grow. In one form or another, the Fed is going to be taking on big new responsibilities for monitoring the financial system as a whole, and the next chairman will be reshaping the organisation, something which may require a more activist manager than Mr Bernanke.

If only people didn't dislike Larry Summers so much.

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