Stephen Foley: It's time for Bernanke to leave the Fed

US Outlook: I promise to throw my cap in the air when the parade rolls by
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The Independent Online

I hope they give Ben Bernanke a ticker-tape parade down Broadway at the end of his tenure as Federal Reserve chairman. I'm not being sarcastic. They call it the Canyon of Heroes, where sporting and military achievements are celebrated, and this mild-mannered economist's quick-witted and creative rescue of the financial system saved us from a repeat of the Great Depression. Fittingly, the parade route would take him right past Wall Street.

The authorities in Manhattan can pull a ticker-tape parade together in short order, which is just as well, since Mr Bernanke might be boarding his open-top bus next weekend.

As support ebbed away from him on Capitol Hill yesterday, the only thing that seemed to be standing in the way of his departure was the fear of the financial markets' reaction should politicians take so drastic a step. It was the same fear that lay behind President Barack Obama's ill-advised decision to nominate Mr Bernanke for a second term back in August.

We'll have to see how things play out over the weekend, but opponents of Mr Bernanke's reappointment need not be cowed. The markets will get over it, assuming the administration can find a non-ideological, fiercely independent successor. In the meantime, there is no problem with the pragmatic vice-chairman, Donald Kohn, stepping into the breach.

It is worth restating the case against Mr Bernanke – or at least my case against him, because some of the other opposition is based on a false reading of the Wall Street bailout of 2008. The financial crisis has taught us a very great deal about the operation of financial markets, about the failures in economic modelling and the dereliction of duty by regulators in the preceding years. A clean break at the Fed means that its leadership will be focused on honing and implementing these lessons, free of having to justify or explain away their previous positions.

First, Mr Bernanke entered public life as a result of a paper declaring that central banks cannot identify, and must not try to pop, asset bubbles as they inflate; but that is something that clearly must now be key to central bankers' work. Second, at no point in his two stints at the Fed – as a governor and then as chairman – did he seem interested in the regulation of mortgage lending that might have prevented the widespread abuses underlying the financial crisis – at least until it was far too late.

And third, Mr Bernanke's performance until early 2008 had been pretty miserable, including a failure to spot the oncoming tsunami in credit markets, followed by a panicked response to one-day market moves.

Bernanke the Hero emerged as the banking crisis moved into territory familiar from his academic work, namely the ways a financial collapse can lead to devastation in the real economy. As President Obama said in August: "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." True, but not reason enough to reappoint him.

If Mr Bernanke is to be hanged, it is for the wrong alleged crimes, and for that one has to feel sympathy. But that's politics, and these are volatile times, as Senator Dodd's recent decision to step down and the upset in Massachusetts election this week attest. An angry public believes the bailouts favoured Wall Street at the expense of Main Street, which has not seen any benefit. As the man funnelling trillions into the credit markets, Mr Bernanke is tethered to Wall Street in the public imagination, and is therefore an obvious scapegoat. Maybe the White House can still save him – it will certainly be embarrassing to have to let him go – but I'm not sure it has the political capital to spend any longer. Certainly, if its determination to get headlines from Wall Street-bashing is anything to go by, I'm not sure it will want to spend it in any case.

I promise to throw my cap in the air when the parade rolls by.

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