Bernanke’s legacy

Barack Obama recently indicated that he is unlikely to reappoint Ben Bernanke as chairman of the Federal Reserve when his term expires next January.

Understandably, the media is focused on who might succeed Bernanke to lead the US central bank. After all, the chairman of the Federal Reserve is often described as the second most powerful person in America.

Before speculating on potential successors, however, we should consider Bernanke’s tenure and what it can tell us about the qualities we should look for in his replacement.

Bernanke has been an outstanding steward of American monetary and financial policy.

During the sub-prime crisis, the Fed moved swiftly and surely to support a financial system facing its gravest threat in more than 75 years.

Bernanke’s sure hand was due in part to his understanding of history. Speaking at the 90th birthday celebration for Milton Friedman who, along with Anna Schwartz, famously wrote about how misguided Federal Reserve policy worsened the Great Depression, Governor Bernanke addressed Friedman directly: “You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

True to his word, the actions of Bernanke and his colleagues at the Fed are rightly credited with having avoided a rerun of the worst economic catastrophe the US has ever known.

In the years since, Bernanke has championed innovative policy measures that have promoted the recovery. When near-zero short-term interest rates were not doing the job, the Fed responded by reducing long-term interest rates via three rounds of “quantitative easing,” which have supported the recovery.

When the markets expressed concern that the Fed’s easy monetary policy might be temporary, the Fed took the unprecedented step of announcing that short-term interest rates would remain near zero for another year.

In a further move, last December the Fed announced that monetary policy would continue to be expansionary until the unemployment rate fell to 6.5%.

Part of Bernanke’s effectiveness has been as communicator-in-chief. An advocate for greater transparency at the central bank, Bernanke is the first Fed chair to hold regular press conferences, something his successor will have to continue.

Bernanke’s argument for transparency is powerful. Instead of having others guess what the Fed will do—and make decisions, possibly bad ones–on the basis of those guesses, the Fed announces what it will do. Eliminating the guesswork makes policy more effective.

Bernanke has been everything a central banker should be.

He is a brilliant theoretical macroeconomist, but also a pragmatist, who has been willing to use all the tools in the central banker’s kit to promote recovery. This has been particularly important given the inability of our elected representatives to agree on a coherent fiscal policy that will support the recovery.

He also has been studiously non-partisan. Although a Republican, Bernanke has not, in contrast to some of his predecessors, used the power of his office to indulge his partisan sympathies.

Finally, instead of trying to remain in the job forever, the media reports that Bernanke wants to leave. This is to his great credit.

Presidents have an incentive to reappoint the Fed chairman. Financial markets are happy with the status quo so reappointing an outgoing chairman is often the path of least resistance.  Yet, this status quo strategy carries a serious risk.

The average length of service on the Fed’s main policy making body, the Federal Open Market Committee, is less than six years. Having a Fed chairman stay in the job too long risks entrenching one person—and one viewpoint—longer than is healthy.

Bernanke’s predecessor, Alan Greenspan, was chairman for 19 years. By the end of his term, he was a revered figure with disproportionate influence. The focus on Greenspan was so intense that journalists speculated that the size of the briefcase he carried into meetings signaled the future course of interest rates. And we now know that the deeply flawed policy during Greenspan’s last years as chairman helped generate the subprime crisis.

Bernanke has made it clear that he does not think of himself as indispensable to Fed policy, saying, “I don’t think that I’m the only person in the world” who can manage the next stage of Fed policy.

The US economy is fast approaching the point where it will need to dial back monetary expansion. This will require a talented leader who shares Bernanke’s pragmatic, innovative approach to monetary policy and commitment to transparency at the Fed. If the next Fed chair has these qualities, the country’s monetary policy will be in good hands.

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