November 7, 2011


Obama's Flunking Economy: The Real Cause (Ezra Klein, 11/24/11, NY Review of Books)

Of course, the most straightforward path to energizing the Fed isn't adding two new members to its Board of Governors, but replacing its chairman. And the White House had an opportunity to do so in 2010, when Ben Bernanke's term expired. Instead, Obama chose to renominate Bernanke. The thinking was that Bernanke had pursued an extraordinary set of activist policies during the worst of the crisis--he probably deserves more credit than any single person for preventing a second Great Depression--and he was respected in the institution and by the markets. Reappointing him would thus help with confidence and ensure that the White House had an able partner if the economy turned south again.

But Bernanke has been much more cautious in accelerating the recovery than he was in combating the initial crisis. When the financial markets were collapsing, he went far beyond the traditional limits of the Fed to support the financial markets, purchase depressed assets, and inject liquidity directly into the banking system. But he has not been nearly as aggressive in his efforts to support the recovery. The second round of quantitative easing could have been much bigger. The Fed's commitment to employment--even at the cost of modest inflation--could have been communicated directly to the markets. Unorthodox policies, such as targeting a specific level of nominal GDP growth, have been left untried.

At this point, even quite mainstream voices have come to worry over Bernanke's apparent timidity. In September, Charles Evans, the president of the Chicago Federal Reserve, gave a pointed speech in which he asked:

Imagine that inflation was running at 5 percent against our inflation objective of 2 percent. Is there a doubt that any central banker worth their salt would be reacting strongly to fight this high inflation rate? No, there isn't any doubt. They would be acting as if their hair was on fire. We should be similarly energized about improving conditions in the labor market.

This raises the question of whether the Obama administration made a mistake in reappointing Bernanke. If it had managed to install a more activist chairman at the Federal Reserve, then its inaction might have been more effectively offset by the Fed's actions.

If inflation were running at 5 percent the Fed wouldn't be doing its job.  When the employment rate is 64%+ it is.

Posted by at November 7, 2011 6:57 AM

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