Recently there have been a spate of diaries here (some spouting conspiracy theories) calling for the Senate to not reconfirm Ben Bernanke as Fed Chair for another term. Many of those posting such diaries or comments in them do not understand the federal reserve system or the legally defined role of the Fed as opposed to the role of other agencies and the legislative process in the regulation of our economy. Others do not understand why Fed transactions (that is individual transactions) are not a matter of public record, even though the fed balance sheet will be published this Thursday. I am posting this diary to show my support for both President Obama and his reappointment of Ben Bernanke to the Chairmanship of the Federal Reserve Board of Governors.
I believe that Ben Bernanke has not only done a decent job considering the hand he was dealt, but that going forward his expertise in the great depression will be an asset to our economy, as it already has in rescuing us from the brink of economic collapse (that is not saying we are out of the woods yet). We must first accept that by the time Bernanke took office (February 1, 2006), the housing bust was already underway as detailed by these graphs:
And thus, it was far too late for the Fed Chair to reign in the excesses of the housing market, since by that time subprime lending was already being eliminated by banks there was little the Fed could do to stop the housing bubble from popping and thus starting us on our slide into the very deep recession we are now in.
However, there was a second major cause of this recession that is often overlooked and that is the effect that high oil prices had on the economy in 2008. As it was, the recession was relatively mild up until the oil shock in mid-2008 really killed what was left of the consumer and severely harmed US manufacturing (and logistics operations as well). This oil shock is what really sent US GDP into a nose dive (coupled with all of our other problems of course).
Thus, Bernanke was dealing with a situation that was very difficult, as the spike in energy prices would usually demand a raising of interest rates (to ward off inflation), while the collapsing housing bubble (and payrolls) would normally dictate a decrease in interest rates to help shore up the economy. Let us also not forget that following the Bear Stearns bailout, there was a huge uproar about saving that firm (from both right and left) that essentially handicapped the fed from bailing out Lehman (see what happens when politics and populism get involved with economics), which was the final nail in the coffin for the economy and exacerbated the at the time mild credit contraction into something we hadn't seen since the great depression. In light of all of this shit hitting the fan, Bernanke has done a so far great job in stabilizing the economy, preventing massive bank failures, and and even enabling some growth to happen this year (although I do believe the economy will likely stagnate at 1-2% growth for most of 2010). For those accomplishments and his expertise in how to avoid another great depression (which has come in handy), I support our President and his reappointment of Ben Bernake to a second term as Fed Chair.
As an aside, for those that blame Greenspan and his low interest rates from earlier in the decade for our current mess (forgetting of course how the home prices detached from inflation in the mid 90's to start this bubble), I would like to offer you this graph showing the fed funds rate and the 10-year treasury (to which mortgages are tied):
And also offer this article from Brad DeLong wherein he states that
People claim that the Greenspan Federal Reserve "aggressively pushed the interest rate below its natural level." But what is the natural level of the interest rate? Swedish economist Knut Wicksell defined the natural rate of interest in the 1920s: it is the interest rate at which, economy wide, desired investment is equal to desired savings and hence in which there is neither upward pressure for consumer price, resource price, and wage inflation to accelerate as aggregate demand outruns supply nor downward pressure on those three inflation rates as demand falls short of supply. On Wicksell's definition--which is the best, in fact, to my knowledge the only definition--the market interest rate was if anything above the natural interest rate in the early 2000s: not accelerating inflation but rather deflation threatened. The natural interest rate was very low because, as Ben Bernanke explained at the time, the world had a global savings glut (or, rather, a global investment deficiency).
I would encourage you to read the entire article though, as it shows great insight into exactly what our economy was facing following the dot com collapse.