Judging Bernanke

We mustn’t assume that all problems are solvable in the short period.  There are problems that we cannot solve or which trying to solve them quickly may do more harm than good.

– Friedrich von Hayek on “Meet The Press”, June 22, 1975

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

– Henry Hazlitt, Economics In One Lesson

There is a lot of discussion today about Bernanke and if he should get reappointed when his term expires on Jan 31, 2010.  There was a front page story in The New York Times: “Bernanke, a Hero to His Own, Can’t Shake Critics“, Edmund Andrews, The New York Times, August 20, A1.  CNBC is asking all day if Bernanke should be reappointed and ran a Call of the Wild segment on this subject.

It’s a complicated subject with many different angles. 

First, financial markets and the overall economy do seem to be better, certainly more stable, than they were a year ago.  Much of the credit for that has to go to Bernanke and his radical policy actions at the Fed.

Second, Bernanke has to be commended for his non-partisan approach to policy.  His genuine concern always seems to be what’s right for the economy, regardless of politics.

But it also should not be forgotten that history’s final verdict on Bernanke is not yet in.  As The New York Times article well points out, Bernanke’s job is only half complete.  At some point, he will need to phase out all of the Fed’s radical new lending programs and raise interest rates.  Can he do that without precipitating another drop in the economy? 

Further, we won’t know for many years the long term effect on the dollar and inflation of Bernanke’s radical policies, including taking the Fed Funds rate all the way down to 0% and holding it there for what looks like will be a long time.  Buffett addressed this very issue yesterday in his much read New York Times op-ed.   

My personal feeling is that Bernanke is the best we can hope for given the current debased state of our politics and culture.  Any Fed Chairman will be subject to the overwhelming imperative of the present.  No prudence for consideration of future consequences will be tolerated by a Congress and Administration solely concerned with approval ratings and re-election.  A truly independent and heroic Fed Chairman in the vein of Paul Volcker is probably no longer possible.  If we are going to have a statist, Bernanke might be the most competent, honest and non-partison we can hope for.