Felix Salmon

Should Krugman replace Bernanke?

By Felix Salmon
January 24, 2010

What would happen if Ben Bernanke withdrew his name from consideration as Fed chairman tomorrow, and Barack Obama picked up the phone and asked Paul Krugman to step into the breach? Bruce Bartlett reckons that “Paul has enough sense not to accept the position even if it is offered–just as Milton Friedman rejected Reagan’s offer for him to replace Volcker in 1982″ — but I’m not so sure. After Simon Johnson proposed the idea this morning Krugman said that it was “crazy” — but he did so without saying that he would refuse the job if offered. I think he’s sensible to leave the door ajar: it’s really hard to say no to a president who asks you to serve your country by taking what Matt Yglesias calls “the single most important domestic policy job in the country”.

Take another look at that Krugman blog entry: most of it is taken up with reasons not to confirm Bernanke. The only reason to confirm Bernanke, in Krugman’s book, is that he’s “a great economist” who acted forcefully at the height of the crisis. But we’re not at the height of the crisis any more, and Bernanke isn’t about to leave the FOMC any time soon — in fact, he’d probably stay on as chairman* more or less indefinitely, as Krugman or any other potential successor wended their way through a long and inevitably partisan nomination process. Would he lose power and influence as a lame duck? Not if the new nominee was public in supporting his policies, as Krugman probably would be.

Krugman asks the key question:

Does it make sense to deny Bernanke reappointment simply in order to appoint someone who would follow the same policies?

The answer, I’m beginning to think, might actually be yes. Right now, the FOMC isn’t really doing very much: it’s keeping rates at zero, and trying to wind down some of the extraordinary measures which it implemented during the crisis. But there’s a very good chance that the biggest job of the next Fed chairman is not going to be monetary policy: instead, it’s going to be bank regulation, once some kind of financial-reform bill has been passed in to law. And on the regulatory front, Bernanke — who opposes the creation of a Consumer Finance Protection Agency, and who sat meekly by as the Fed allowed all manner of mortgage abuses during the subprime boom — looks very much like the conservative Republican that Yglesias says he is.

In an ideal world, then, it might well make sense to have Bernanke stay on the FOMC — as he will, his term as governor doesn’t expire until 2016, and he could easily be re-nominated as a governor at that point — while Krugman, as chairman, steered the Fed as a whole towards an approach to bank regulation which is much closer to the Obama/Volcker/Warren view of the world than to the Bernanke/Summers/Geithner view of the world.

The problem, of course, is that it’s incredibly hard to get there from here, and given the obstacles to getting anything done now that the Republicans in the Senate can block anything they want, it doesn’t make a lot of sense to put a huge amount of political capital into trying to get a partisan like Krugman through the confirmation process.

The base-case scenario is still that Bernanke gets confirmed as Fed chairman, and that when some version of financial regulatory reform finally gets signed into law, the Fed’s powers of regulatory oversight will be boosted substantially. At that point, the nation will need the Fed to be a strong regulator which takes its new responsibilities seriously and is proactive about restraining Wall Street’s natural tendencies towards societally-dangerous behavior.

I’m not convinced that Bernanke is the best person to run such an organization — after helping to engineer, during the crisis, a series of mergers which only exacerbated the problems of too-big-to-fail banks, he has done nothing to counteract the effects of his actions, nor has he indicated that he would like to do so in future. As Krugman says, he seems to have “been assimilated by the banking Borg”. The Fed is the organization best placed to be a tough and effective regulator — but it can only fulfill that role if it has the willingness as well as the ability to reign in America’s biggest banks.

On the other hand, there are now four conceptions of financial regulatory reform floating around Washington — Treasury’s, Frank’s, Dodd’s, and Volcker’s. It’s a mug’s game to presume to predict how they’ll all coalesce into a final law, which means that it’s a bit silly to start nominating a Fed chairman in the expectation that the job will, in future, include a lot more regulatory oversight than it does at present. And on the monetary-policy front, Bernanke is as good a choice as anybody could hope for.

*Update: Either that, or Donald Cohn, his vice-chair, would take over as chairman.

7 comments so far | RSS Comments RSS

“And on the monetary-policy front, Bernanke is as good a choice as anybody could hope for.”

No, I think Ben Stein also could create both an asset bubble and a liquidity trap.

Posted by maynardGkeynes | Report as abusive

Krugman to head the FED? Felix, have you lost your mind?

Krugman is singularly unqualified because he is so bitterly partisan. So much so that Krugman’s politics pour through his economic analysis, almost as though the conclusions derive first from his politics and then the rational is manufactured afterwards. Socialism is the goal? No problem, let’s manufacture some rationales for why socialist economies are superior to market-based ones and ignore all evidence to the contrary.

Krugman has spent more time in his columns spewing venom at the political party he opposes than doing sound economic analysis. I for one don’t think that someone who most distinguishing feature in life is his partisanship has any place as FED chairman.

Posted by DanHess | Report as abusive

Krugman is extremely eloquent when writing, but is not likely to perform well in a confirmation process.

Also, out of pure self interest: It would be terrible to loose such a great insightful blogger.

Posted by JoddeHaa | Report as abusive

“But we’re not at the height of the crisis any more”

Famous last words. Our cache of energy drinks is gone.

http://www.commercialappeal.com/news/201 0/jan/19/feds-retire-red-bull-duo/

Posted by Uncle_Billy | Report as abusive

Bernanke sat idly watching the printing presses fly at full speed while all the while professing nothing wrong here folks. Anybody who thinks he has done anything other than a poor job is a complete idiot. He’s done the job Wall Street hired him to do plain and simple. Krugman is in the 5% category of editorial economists who actually properly assessed the coming economic storm beforehand and the true magnitude of the employment problem. The other 95% of the cheerleaders out there blew it miserably. A better choice for Fed Chairman would be William Poole.

Posted by Woltmann | Report as abusive

Paul Krugman has forgotten more about economics than most economists ever learn…and that’s exactly the problem with Krugman.

Posted by DeeBee9 | Report as abusive

Thanks for the laugh. Bernanke and his cadre of inflation targeters may not be very healthy for the world economy, but Krugman? Printing money faster and subsuming more of the private economy into the government are now ancient economic ideas with little evidence to credit their continued existence. One hopes that the U.S. either stays with the devil it knows and forgoes academics with brilliant minds that appear bitterly frozen in 1938; or hires someone who reads books other than those of Keynes.

Lazy Jack

http://www.thanksforthelaughs.wordpress. com

Posted by LazyJack | Report as abusive

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/