Today, President Barack Obama interrupted his vacation on Martha’s Vineyard to nominate Federal Reserve Chairman Ben Bernanke for a second term. Bernanke’s first term ends on January 31, 2010, and his reappointment will require confirmation by the Senate Banking Committee.
During his announcement, Obama praised Bernanke’s action during the current crisis, and looked to the future of financial markets:
We have already seen how lax enforcement and weak regulation can lead to enormous wealth for a few and enormous pain for everyone else. And that’s why even though there is some resistance on Wall Street from those who prefer things the way they are, we will pass the reforms necessary to protect consumers, investors, and the entire financial system. And we will continue to maintain a strong and independent Federal Reserve.
I think there are some definite advantages to reappointing Bernanke. He has been admirably non-ideological, and the Fed under his guidance has taken very necessary steps to fight the economic crisis, particularly once the traditional Fed tool (cutting interest rates) was exhausted. He was slow in both noticing and reacting to the housing bubble and burst, but once the Fed was in full swing its actions helped to mitigate the worst of the downturn. I agree with Brad DeLong that there is no obvious better choice.
That said, his appointment makes the regulatory reform effort more difficult, even with Obama’s firm committment to it. Bernanke has been critical of many of the ideas that the administration has put forth, particularly the proposal to create a Consumer Financial Protection Agency (CFPA). He still has a very bank-centric notion of regulation, and he has jealously guarded the Fed’s consumer protection turf, even though the Fed undeniably failed in that duty.
As National Journal reported, in opposing the CFPA the financial service industry is “focusing on regulators’ qualms to make their point instead of emphasizing complaints of the industry that stands to come under tighter scrutiny.” So the administration has now given even more credibility to the prevailing view of the regulators, providing the industry with even more ammunition. Also, Bernanke’s reappointment will probably provide some jet-fuel to the effort to audit the Fed, and the plan to bestow the Fed with responsibility for regulating systemic risk will give Congress even more pause than it did before.
In re-upping with Bernanke, the administration chose macroeconomic policy over bringing in someone more sympathetic to its views on regulation or who could ease concerns over giving the Fed more power. Bernanke may be the right person to untangle the Fed from its various economic rescues and for promoting a recovery, but it may come at the expense of meaningful changes to the system.