Amidst this tenuous economic recovery, President Obama must reconstitute the new Fed Board swiftly into a more intellectually balanced monetary policy making operation open to diverse views before decisions are made, by replacing Benjamin Bernanke with Janet Yellen, his Vice Chair. He must also at the same time appoint Christina Romer, his former CEA Chair and the wife of economist David Romer who had accompanied her to Washington for a temporary position at the International Monetary Fund (IMF); Kenneth Rogoff, adviser to John McCain in 2008; and the husband-wife team of Vincent Reinhart and Carmen Reinhart of the American Enterprise Institute (AEI) and University of Maryland respectively to the Fed Board.
Before his re-election in November 2012, President Obama will be making history, by preparing the Fed for its 100th year of existence in December 2013, by appointing Janet Yellen – a former Fed economist and governor, Chair of a Clinton CEA, wife of Nobel Laureate George Akerlof and student of another Laureate Jospeh Stiglitz – as the first woman Chair of the Board of Governors of the Federal Reserve System.
Benjamin Bernanke, appointed to the Federal Reserve in 2003 by George W. Bush, has done well, to the best of his ability, first as a governor on the 7-member Washington Board and then as Chairman after a brief ritual stint at the President’s Council on Economic Advisers (CEA), the vetting ground for future Fed Chairs which tests their mettle for political communication of economic policy in the Congress and The White House.
His move from the academia to public policy has been bumpy, stress testing both his academic thinking on and real time application of monetary economics. The former professor of monetary economics at Princeton, with experience leading the Princeton economics department, similar to any other Ivy league economics department of first among equal academics, served during the Fed’s transition from the long tenure of the legendary Alan Greenspan, toeing Greenspan’s line while experimenting to strike out on his own, and therefore, succeeding later than earlier.
The Chairman of the bailouts has, in the end game, better late than never, succeeded by trying to gaze, in futility and un-creatively, into the back box of monetary transmission.
Ben Bernanke raised interest rates beginning in 2003, influential at first when Alan Greenspan was Chairman, and later as Chairman himself in and after 2006, in a departure from Fed practice since 1987, during a bubble. After that he was slow in responding to the unfolding crumbling of the housing cards on Wall Street. Since 2003 he has exhibited a dismal lack of ability to communicate effectively with the financial markets, unlike Greenspan, to be able to read the tea leaves of Wall Street which is under no obligation to be transparent, except under law and that too only when it is enforced.
The markets called for ever lower rates, as the crisis climbed from the subprime market to the global markets for US debt, when the subprime crisis could have easily been quarantined in 2008 to avert the decline of global confidence in US financial markets and US debt by contagion. Instead, Bernanke preferred to continue to supply money to the financial markets, for the markets to recover the economy top-down, by first betting on reinvigorating the derivatives market with the Term-Asset Backed Lending Facility (TALF) over which the Fed has little or no regulatory control, the effectiveness of any new regulations since being dubious in the worst case and doubtful in the best.
US economy is tentatively recovering from the 2007 recession. Unemployment, a critical part of the Fed mandate, continues to remain elevated. The Fed is more transparent in communication though not quite there yet, technically – the purported bailiwick of Ben Bernanke.
Bernanke’s longevity in the Washington game of political-economic survival depended on his wisdom. He has been unwise despite the extraordinary tolerance of the lawmakers in Congress and the support of the Federal Reserve Act (FRA), not to forget the forbearance of his former colleagues in the academia.
Presumptive Republican Presidential nominee Mitt Romney has already called for Bernanke’s replacement at the Fed.