Bernanke’s the One

BERKELEY – William McChesney Martin, a Democrat, was twice reappointed to the job of Chairman of the United States Federal Reserve by Republican President Dwight D. Eisenhower. Paul Volcker, a Democrat, was reappointed once by the Reagan administration (but not twice: there are persistent rumors that Reagan’s treasury secretary, James Baker, thought Volcker was too invested in monetary stability and not invested enough in producing strong economies in presidential years to elect Republicans). Alan Greenspan, a Republican, was reappointed twice by Bill Clinton. And now Barack Obama has announced his intention to re-nominate Republican appointee Ben Bernanke to the post. As this history suggests, it is more remarkable for a US president not to reappoint a Fed chairman named by the opposite party than to reappoint one who wishes it. Reagan’s failure to reappoint Volcker and Jimmy Carter’s failure to reappoint Arthur Burns are the main exceptions. The Fed chairmanship is the only position in the US government for which this is so: it is a mark of its unique status as a non- or not-very-partisan technocratic position of immense power and freedom of action – nearly a fourth branch of government, as David Wessel’s recent book In Fed We Trust puts it. The reason, I think, that American presidents are so willing to reappoint Fed chairmen from the opposite party is closely linked to one of the two things that a president seeks: the confidence of financial markets that the Fed will pursue non-inflationary policies. If financial markets lose that confidence – if they conclude that the Fed is too much under the president’s thumb to wage the good fight against inflation, or if they conclude that the chairman does not wish to control inflation – then the economic news is almost certain to be bad. Capital flight, interest-rate spikes, declining private investment, and a collapse in the value of the dollar – all of these are likely should financial markets lose confidence in a Fed chairman. And if they occur, the chances of success for a president seeking re-election – or for a vice president seeking to succeed him – are very low. By reappointing a Fed chair chosen by someone else, a president can appear to guarantee financial markets that the Fed is not too much under his thumb. And that can be a very valuable asset for an incumbent Fed chair – one that no other candidate could much.But US presidents seek more than just a credible commitment to financial markets that the Fed chair will fear and fight inflation. They seek intelligence, honor, and a keen sense of the public interest and the public welfare. Presidents’ futures – their ability to win re-election, to accomplish other policy goals, and to leave a respectable legacy – hinge on the economy’s strength. It may or may not be true, especially these days, that what is good for General Motors is good for America and vice versa, but certainly what is good economically for America is good politically for the president.It is here, I think that President Barack Obama has lucked out. Ben Bernanke is, I think, a very good choice for Fed chair because he is so intelligent, honest, pragmatic, and clear-sighted in his vision of the economy. He has already guided the Fed through two very tumultuous years with only one major mistake – the bankruptcy of Lehman Brothers.Bernanke’s deep knowledge of the Great Depression and of financial crises is exactly what America – and the world – needs in a Fed chair now. And his commitment not to err on the side of underestimating either the difficulty of the situation or the value of keeping employment high would make him, I believe, one of the best possible choices for the position, even if he were not now the incumbent. J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a Research Associate at the National Bureau of Economic Research. Copyright: Project Syndicate, 2009.www.project-syndicate.org

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Bernanke’s the One