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In announcing Ben Bernanke’s nomination to another term as Federal Reserve chair, President Obama said he "approached a financial system on the verge of collapse with calm and wisdom." This seems a fair characterization of Bernanke’s personal demeanor, but an odd description of the Fed’s response to the financial crisis. Several of the Fed’s rate cuts and interventions in 2007 and 2008 were more panicky than calm.

The question now is how Bernanke and the Fed will handle the winding down of the Fed’s money printing machine in the coming years. Here, the danger is that Bernanke will wait too long to tighten credit, for fear of triggering another recession. As a student of the Depression, which was exacerbated by tight money, Bernanke seems much more comfortable flooding the economy with money than cutting back.
In a bank, the person who makes a loan is never the same person as the one who negotiates with the borrower if things work out badly.  The skills needed for the two jobs are quite different, and banks fear that the loan officer will not be able to make an objective decision when to cut a borrower off. The same may hold true for the Fed. Although Bernanke’s performance surely warrants a second term, he may need to be pushed to step down in favor of a new, unsentimental chair—Larry Summers?—when the time comes to seriously tighten credit. The question is whether anyone will have the gumption to do the pushing.


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Comments ( 2 )


Don't know if you have an opinion on this, but do you think the hyperinflation crowd or deflation crowd are right about the future?

Steve, I don't have an especially intelligent opinion-- I'm definitely not an expert on any of these issues-- but I worry a lot more about inflation than deflation. Some of the arguments that inflation is unlikely and deflation more of a concern seem plausible. If unemployment stays high, as unfortunately seems likely, labor costs won't put pressure on prices. But I still have to imagine that with the huge amount of debt we've taken on, the inflation threat is going to kick in at some point not too far down the road.