Ben Bernanke was contrite yesterday, as well he should have been:
“There were mistakes made all around,” Mr. Bernanke said. “I did not anticipate a crisis of this magnitude and this severity.”
We should have required [banks to hold] more capital, more liquidity,” Mr. Bernanke added. “We should have required more risk-management controls.” He also said the Fed was “slow on some aspects of consumer protection.”
All the same, he says, he should continue to have the job he failed at:
“In the area where we had responsibility, the bank holding companies, we should have done more,” he told lawmakers. “That is a mistake we won’t make again.”
I tend to agree with him. It’s true that the litany of accusations against Bernanke is a long one: a loyal Greenspanite during the Maestro era, Bernanke not only failed to see the financial crisis coming, but reacted to it in an ad hoc manner, losing his independence from Treasury in the process. But that just goes to underline how hard it is to construct a strong, proactive regulator. The way to maximize your chances of success when constructing such an entity is to start with the strongest, smartest regulator you have, and then improve it. Clearly, that’s the Fed, with its control of the money supply, its intimate knowledge of national and international capital flows, and its outposts scattered all around the country.
Is Ben Bernanke the right person to lead the Fed of the future? I’m less sure about that, but for the time being it makes sense to keep him where he is. With any luck, by the time his second term has ended, the government will have passed a comprehensive regulatory reform bill of some description, and it will be much clearer what the Fed’s role in general, and the chairman’s role in particular, is going to be. At that point, the president will know exactly what skillset is required. For the time being, it’s hard to see that replacing Bernanke with anybody else would constitute an improvement — especially not when the leading other contender for the job is Larry Summers.