Why Obama is Appointing Bernanke to a Second Fed Term

[HamdenRice]

Source: Time

Before Ben Bernanke was chairman of the U.S. Federal Reserve, he was an ivory-tower economist who trained at Harvard and MIT, taught at Stanford and Princeton and may have learned more about the Great Depression than anyone else on the planet. One thing he learned was that he never wanted to see another one.

So when financial markets melted down in 2008, the mild-mannered, consensus-minded, professorial ex-professor vowed to avoid the errors of omission the sluggish Fed made in the 1930s, and do everything possible to prevent crisis from becoming calamity. He blasted a fire hose full of dollars at the U.S. economy, exercising unprecedented powers, sidestepping the democratic process, figuring that desperate times called for desperate measures. And while the blaze hasn't been extinguished, it's starting to look like it's under control, which is why President Barack Obama will reappoint Fireman Ben to a second term today. According to prepared remarks that have appeared on Politico Tuesday morning, not only will Bernanke be at the president's side when he makes the announcement, but he will hear Obama say that he's "led the Fed through one of the worst financial crises that this nation and this world have ever faced."

<end quote>



Read more: http://www.time.com/time/politics/article/0,8599,1918422,00.html

---

Good news as far as I'm concerned. Some people seem to confuse his policies with those of Paulson and Geithner.

Bernanke, who spent his entire life studying the Great Depression, and was not a banker but a professor, was the right person in the right place at the right time.

[lamp_shade]

1. I couldn't agree with you more. K&R

[Skink]

2. Interesting he was appointed the first time...

like maybe they knew what was about to happen?

[HamdenRice]

3. Man, that's the question I didn't want to ask for sounding paranoid!

How on earth did the Bush administration manage to make such a good appointment? Did someone suspect that a crash might be coming?

It's a question I've asked myself many times.

[Champion Jack]

4. K & R

[pjt7]

5. Let's audit the Fed &

then decide how good a job he did.

[No Elephants]

17. Not if Bernanke has anything to say about it. Good

point, though.

http://www.cbsnews.com/blogs/2009/07/28/business/econwatch/entry5193539.shtml

[UpInArms]

6. Remarks by Governor Ben S. Bernanke

Before the National Economists Club, Washington, D.C.
November 21, 2002

Deflation: Making Sure "It" Doesn't Happen Here

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.9 There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).

why, in 2002, was this guy proposing the printing press (which he has used "liberally") to all the problems.

I guess when you think that your only tool is a hammer, everything else looks like a nail.

[Odin2005]

25. What is wrong with what he said?

He said that the cure to deflation is increasing the money supply, that's basic monetary theory. I think to many on the left have fallen victim for the Libertarian paranoia about inflation that makes no sense when the problem is the opposite, DEFLATION, when the money supply is CONTACTING! When the money supply is contracting you pump money into the economy via government spending and low interest rates (and, if necessary, qualitative easing) to counteract the deflation.

[angryfirelord]

43. While it's good to be skeptical of libertarian paranoia

they are right in this case. The money supply hasn't just been expanded. It has been expanded by astronomical amounts that are unsustainable.





The other problem is that Bernanke simply continued Greenspan's policies of trying to prop up the housing bubble. Need I remind people that Bernanke said that it wouldn't be a problem?

http://www.washingtonpost.com/wp-dyn/content/article/2005/10/26/AR2005102602255.html

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

I wounder who else said that the "fundamentals of the economy were sound?" This guy is simply full of BS.

[tnlurker]

26. The problem with this is that we are seeing wage deflation

and price inflation. I am still waiting for helicopter Ben to fly over my house. (He once said he would drop money out of helicopters to stimulate the economy if he needed to.)

[No Elephants]

7. Not such a big fan of Hanky Panky Unconditional Bailout Bernanke. "Sidestepping

the democratic process?"

WTF has he done that is so brilliant?

Roosevelt was no professor, and he had a SCOTUS that tried to block him at every step of the way. Further, he had no model for the Great Depression. Nonetheless, he knew how to create jobs, to fight Depression with spending and to protect the future by creating the SEC, amending bankruptcy laws, etc.

Yes, Roosevelt got into trouble when he started listening to the Republicans whining about the deficit and trying to placate them, but Bernanke is not as good

[HamdenRice]

9. Bernanke isn't president

But FDR's Fed did just what Bernanke did -- it bought commercial paper to keep the remaining employers afloat.

In fact, Bernanke relied on New Deal Fed powers -- powers that hadn't been used much since the New Deal -- to do what he did.

[No Elephants]

10. I understand that. Point is, FDR did it first, without a Great Depression to study.

And, presumably, Obama has been listening to Bernanke and his protege Geithner.

Still not seeing what Bernanke did that was so brilliant or so original that warrants his keeping his job, or warrants praise here.

I'm also not thrilled that Obama reinforces the stereotypes that Dems are for crap when it comes to money and national defense by the way he staffs his cabinet and the Fed

[HamdenRice]

12. Geithner is not Bernanke's protege

Geithner is Paulson's protege. In fact, I was under the impression that Bernanke and Geithner don't agree on much.

Even Nouriel Roubini has said that Bernanke did a brilliant job.

[No Elephants]

13. Still not hearing what Bernanke did that was creative or brilliant above and beyond

what was done in the past by others--and done better, IMO.

Also think Geithner would have had input in re-appointing Bernanke.

Paulson and Bernanke, probably Geithner, too, worked hand in hand on the TARP.

It may be simply that you and I just disagree here, which is fine.

[HamdenRice]

16. Oh, I misunderstood your question. His greatest accomplishment was "commercial paper program"--jobs

The Fed is kind of like a bank for banks in normal times. It does not deal directly with the public or with non-financial companies.

One financial service that corporations need is a "commercial paper" market. Commercial paper is a form of very short term loan -- usually 30 days -- almost in the form of a legally kited check. The corporation writes a piece of commercial paper for $10,000. It sells it for maybe $9,900. 30 days later the buyer presents it and gets $10,000, earning $100 interest (my rates are off to make it easier to understand).

Corporations use commercial paper to smooth out cash flow. One of the main functions of commercial paper is to meet payrolls, which come periodically and not smoothly. It is also used to fund inventory (when a department store or grocery chain needs to buy a lot of stuff all at once).

The buyers of commercial paper are generally money market funds. In turn, money market funds get their money mostly from regular depositors -- they are like uninsured bank accounts.

In September, there was a panic in the commercial paper/money market.

There was a week or so in which almost no corporation could sell commercial paper and a run by depositors on money market funds.

Because commercial paper is used to fund payrolls and inventory, there was this scary week when thousands of employers across the country might have had to lay off millions of workers.

That would have had a chain reaction, causing the recession to turn into Great Depression 2

Bernanke used a power that had not been used since the Great Depression. The Fed bought about $1.4 trillion in commercial paper directly from corporations. That kept hundreds of thousands, perhaps millions, of people employed who otherwise would have been laid off. And the Fed actually made money on the deal because the commercial paper was redeemed with interest.

I don't think any Fed chairman in recent history would have been bold enough to do that.

Here's Roubini's take:

http://www.nytimes.com/2009/07/26/opinion/26roubini.html?_r=1&ref=opinion

The Great Preventer

By NOURIEL ROUBINI
Published: July 25, 2009

LAST week Ben Bernanke appeared before Congress, setting off a discussion over whether the president should reappoint him as chairman of the Federal Reserve when his term ends next January. Mr. Bernanke deserves to be reappointed. Both the conventional and unconventional decisions made by this scholar of the Great Depression prevented the Great Recession of 2008-2009 from turning into the Great Depression 2.0.

Mr. Bernanke understands that in the Great Depression, the collapse of the money supply and the lack of monetary stimulus during contractions worsened the country’s economic free fall. This lesson has paid off. Mr. Bernanke’s decision to keep interest rates low and encourage lending has, for now, averted the L-shaped near depression that seemed highly likely after the financial collapse last fall.

...

Mr. Bernanke also introduced a wide range of other programs, like those to maintain the functioning of the commercial paper market (which makes short-term loans to companies so they can cover operating expenses like payrolls). The Fed was involved directly in the rescue of financial institutions like Bear Stearns and American International Group. It lent money to foreign central banks to ease a global shortage of dollars. The Fed even committed to purchasing up to $1.7 trillion of Treasury bonds, mortgage-backed securities and agency debt to reduce market rates. These are all radical actions that had almost never been undertaken before.

[No Elephants]

19. How does his using a New Deal power contradict what I've said?

I've been postinall long this was done before and better in the New Deal and, then, they did not have the "Great" Depression or the New Deal to use as a model, as Bernanke has had. And "almost never" does not equal never. He's not done anything original.

[HamdenRice]

23. You were asking what he did that was brilliant or original that merits reappointment

My answer: dusting off the power to purchase commercial paper saved hundreds of thousands, and perhaps millions, of jobs. I don't think any other recent Fed chairman would have done that.

I'm not saying he is somehow better than FDR or the New Deal. I'm saying he's better than any recent Fed chair -- and certainly better than any other possible candidate for the job.

[Odin2005]

28. Ugh, I remember all the DUers that were pushing Libertarian "let it fail" BS during that crisis.

That proved to me that most DUers are as economically illiterate as right-wingers. We were trying to get the patient stable and people were saying that we should let the patient die because the means to stabilize the patient didn't fit with their ideological shibboleths.

[HamdenRice]

31. The "Let it fail!" rallying cry was depressing and scary.

I had no idea that so many were so callous about the suffering of millions. There were people who wanted to "let it fail" because they didn't think the bailouts would work (fair enough, but I disagreed), but there were others saying "let it fail" because they thought a great depression and the complete collapse of "they system" was a good thing.

The other half of the let it failers weren't libertarians, but Trotskyites who wanted "permanent revolution" or some such nonsense.

There were people saying that it would be good for the banks to fail because anyone who had any money in the bank -- even a thousand dollars -- was a "fat cat" who deserved to lose it.

Very depressing to see the level of intelligence and empathy some people have.

As time passed, though, and I began to distinguish various posters, it seemed that this was a small vocal minority -- as it is with most issues where DU seems to go completely off the rails of sanity.

[Odin2005]

32. There does seem to be a disturbing infiltration of right-Libertarian memes into our side.

I think it started with Libertarians getting alienated from the GOP because of the Neo-Cons' authoritarianism and thus took common cause with our side against said authoritarianism. this lead to Libertarian Austrian School notions starting to rub off on many progressives, helped on by fears about inflation, which lead the Austrian School nuts to start screaming off the top of their lungs. The, of course, there was the Ron Paul Fan Club.

[scentopine]

8. I'm so happy -let's send 2 or 3 trillion to wall street pocketes

without demanding any accounting or checks or balances. I mean really, what else could we do?

Same is the new change.

[girl gone mad]

11. Heckuva job, Bernanke!

It would be funny if it wasn't all so grotesque.

But at least there will be no Secretary Summers (for now).

[Po_d Mainiac]

20. U mean Chairman Summers? n/t

[lib2DaBone]

14. We need jobs.. bring our jobs home from China and Mexico...

...Haven't heard a word about getting out of NAFTA. Just the opposite... more talk about letting unlicensed Mexican trucks roll through America and more tax breaks to build cheap inferior products in China.

NAFTA gave us the SHAFTA

[groovedaddy]

15. Alan Greenspan, former chair, "didn't see it coming," thinking that deregulation would be a

good thing and that corporations, particularly the financial ones, wouldn't "game the system" out of greed.
Lets hope Benanke has a firmer grounding in reality than his predecessor.

[madokie]

18. I trust the President to know what he's doing

and in doing what he knows is the right thing to do

[INdemo]

21. Remember when the former Fed Chairman Greenspan admitted he

made some of his decisions based on his ideological beliefs?..he was a Bush Republican Whatever GW wanted he got..such as phony economic reports to keeps GW's approval numbers higher...He contributed to this current crisis by allowing the regulations dropped and the list goes on..Greenspan later admitted he made some false statements about the economy..
So given the history with Greenspan anyone with an economic background would be an acceptable improvement.

[Odin2005]

22. The Ben-bashing is ridiculous.

Bernanke is an old-school Keynesian who made his academic career criticizing Neo-Classical "everything will work itself out" and "let it fail" nonsense.

Bernanke IS NOT Greenshit.

[HamdenRice]

24. I agree. Many people don't seem to get where on the spectrum Bernanke is

He's a Keynesian who spent his entire career figuring out how to avoid the Great Depression, and was the right person, in the right place at the right time when he was desperately needed.

The only mystery is why Bush appointed him.

[Odin2005]

27. I've always wondered why, as well.

Did one of the more pragmatic folks in *'s inner circle realize that Greenspan was full of crap?

[No Elephants]

29. "Bernanke also failed to detect early on the scope of

potential damage from high-risk mortgages. In June 2007, he declared that troubles in the subprime mortgage market were "unlikely to seriously spill over to the broader economy or the financial system."

http://www.latimes.com/business/nationworld/wire/sns-ap-us-bernanke-another-term,0,7560089.story?page=2

By 2007, many people were saying the opposite.


And then there is the Lehaman Bros. failure.

and

"To prevent another crisis, Bernanke has said Congress should create a way to safely wind down a big financial institution. And he think "too big to fail" institutions should be subject to stricter regulation."

First, thanks for the hindsight. Second, wrong answer, Not only should they be subjected to greater regulation--which they used to be subjected to--but they should not be allowed to get so big in the first place that taxpayers have no choice but to bail them out. That too, used to be part of our law and regulations, but our Congresses and Presidents dismantled it, just as they did many of the safeguards FDR put in place.

[Odin2005]

30. Nobody's perfect.

That's why bubbles happen in the first place. Just because Bernanke is a good economist (unlike Greenshit) doesn't mean he is superhuman and all-knowing.

[ro1942]

33. the fat cats

are doing fine. while all benefits are being cut.

[HamdenRice]

34. "while all benefits are being cut"--I thought unemployment was extended by Obama

and that the "fat cats" are paying back their TARP and Fed bailout monies.

[ro1942]

38. banks

are paying it back with 35$ over draft fees and sucking off the poor

[Hugin]

35. If they have to publish stories about why it's a good thing...

then IMHO, it isn't.

[BREMPRO]

36. good choice.

he's the right man at the right time. He's been more transparent and public about what he has been doing and why than any other FED chair in history. HE's been very public about his disgust for the irresponsible risky and unchecked behavior of wall street and has vowed to put in regulation so it never happens again. You may not like the FED,or his beard, but he's from a modest background, not a wall street baron, a smart guy, and knows the depression inside out. The only thing i worry about him is that he may be too much in theory and not enough practice in the halls of power. He's in the ring now!

[Speciesamused]

37. What happened to CHANGE? I find him unacceptable.

We certainly have not seen anything in the line of
fixing a broken system. We just keeping pouring
money into the same system. Without changing
the way things are managed at present we are doomed
to repeat the past. We could audit the fed.
I doubt anything constructive would come of it.
Just like any other audits or investigations done on our government appendages.
There is a memo and no further action. I want young fresh ideas for our financial system.
"Someone once said about economists that they use economic data the way a drunkard uses a lamppost
--for support rather than illumination."

[scheming daemons]

39. You change that which is broken... NOT that which isn't

Bernanke is part of the solution, not part of the problem.



Good for Obama.

[Odin2005]

42. +1

[Davis_X_Machina]

40. Hey, what happened? We was robbed!

That was supposed to be Kucinich's job, especially after he didn't get State -- or HHS, or Souter's seat on the Court.

[harun]

41. Great Depression was Farms and Banks. Economy is a lot more diverse now.

Consolidation and corruption in the Financial Industry is what needs fixing. Throwing money at the problem stopped a catastrophe but they need real changes in terms of out of control consolidation. I don't see any politicians with the will to do that now.

[Jim Sagle]

44. The looting will continue until the economy improves.

We are a disempowered, indeed disemboweled people. The only recovery we shall ever experience is the recovery of the remains of our eaten and discarded body politic.