Obama Renominates Federal Reserve Chairman Ben Bernanke
Tuesday, August 25, 2009; 1:00 PM
Simon Johnson, MIT Sloan Professor and co-founder of The Baseline Scenario blog, was online on Tuesday, August 25 at 1 p.m. to discuss President Obama's renomination of Federal Reserve Chairman Ben Bernanke.
A transcript follows.
Simon Johnson is a professor at MIT's Sloan School of Management. He is also a senior fellow at the Peterson Institute for International Economics in Washington, D.C., a co-founder of BaselineScenario.com, a widely cited blog on the global economy, and is a member of the Congressional Budget Office's Panel of Economic Advisers.
Read Johnson's post this morning on Bernanke's reappointment: Which Bernanke? Whose Bubble?
Simon Johnson: Welcome to the chat - I'm happy to take any questions you have on Ben Bernanke's renomination today, or related matters...
New York: Chairman Bernanke is credited with staving off a Depression by propping up the banks. Why, however, is it necessary to keep the executives that created the financial problem? Is it because there are no other qualified people to take over?
Simon Johnson: New York: this is a good question. Bernanke gets a very favorable assessment in terms of what he did from September 2008 onwards. But in terms what he did before, the views are much more mixed. I'll cover "other qualified people" in a separate reply.
Arlington, Va.: Professor Johnson, Bernanke has made several statements in addition to his written remarks on what he views as the possible over-politicization of the Fed. When the time comes for him to step off the accelerator of cheap and plentiful money do you anticipate a conflict with the likes of Summers and Geithner not to mention the President?
Simon Johnson: Arlington: yes, there will be political conflict on exactly this point. The Fed chair's job - traditionally - has been to "take away the punchbowl" when the economy is threatening to overheat. You would expect a lot of pushback from Congress (publicly) and the administration (quietly) when/if Bernanke tries to do that, down the road.
Falls Church, Va.: How will Bernanke unwind the bubble that he has shifted from personal irresponsibility and defaults in housing by "speculators" to the national level by way of bailouts and forced alliances and federal reserve lifelines orchestrated for the survival and creation of zombie banks? Also, what lessons does he leave for the future -- the federal reserve bails out the irresponsible financial institutions?
Simon Johnson: Falls Church: this is the heart of our/his problem. When it was "collapse or rescue" this fall, Bernanke went all in for "rescue". But now the big banks (and hedge funds, etc) know this is what he will do. Ideally, you would tighten regulation in this kind of situation, as was done in the early 1930s. But there is no sign that this will happen.
Fairfax County, Va.: Excited to see Ben Bernanke will continue. One thing I've always been curious about, though, is whether his expertise in the economic history of the Great Depression has actually informed his decisions, actions, understanding, or any aspect of handling the current crisis? Or is it just a cool but essentially irrelevant coincidence since the world is so different now than in the 1930s?
Also, did his academic research teach him much about the political aspects of governing during such a crisis, as well as the purely economic policy side?
Simon Johnson: Fairfax: His academic research seems to have had a big impact on his policy approach from September 2008, i.e., he thought that a Second Great Depression could stem from a big financial collapse, and acted to preempt this. He sees strong similarities between the world now and in the 1930s, and perhaps he was right in fall 2008. But going forward, given that we are not in Depression territory, how will he handle things? Will he keep interest rates low and for too long? Will he do anything about renewed financial market speculation? Not so clear.
Montreal, Quebec: Is the re-nomination of Ben Bernanke a way to simply reassure the financial markets; to basically avoid any noise by changing the Fed chief? Or, do you think that it shows a strong commitment on President Obama's behalf?
Simon Johnson: Montreal: The goal is definitely to reassure financial markets. The administration likes what Bernanke has done - so far quite complementary to their fiscal approach. Also, many of their nominations (for other jobs) have run into various kinds of difficulties in Congress; why take the risk of that, particularly as the healthcare debate is going to be messy.
Washington, D.C.: Dr. Johnson,
In your post today you mention that employment concerns will keep interest rates low for some time. In his comments today, Chairman Bernanke did not mention employment but only "prosperity in an environment of price stability." Do you think that deflation still worries the Fed and that they trust fiscal stimulus to create jobs?
Simon Johnson: Washington: I doubt that deflation (falling price level) is seen as a likely outcome, but the Fed definitely still thinks the economy will grow slowly and there will be a great deal of unemployment. In their view, this justifies low interest rates, i.e., this won't cause inflation. And, as for financial market excess, they (and Bernanke) still think this is primarily not their job to prevent.
Boston: What makes everyone so certain that we have avoided a Depression?
Unemployment in the 30s did not reach 25% overnight...
Aren't we still in the middle of the largest experiment in central banking ever?
Simon Johnson: Boston: good point on the Depression taking time to unfold. But the financial system did collapse after the stock market crash of 1929 - bank runs, closures, etc. And any modern version of that we can see now has been averted. Plus the government sector is so much larger now than then, the economy has almost definitely stabilized. Still unemployment could stay high for quite a while.
The Basement Of The Pentagon: You mentioned this:
"Ideally, you would tighten regulation in this kind of situation, as was done in the early 1930s. But there is no sign that this will happen."
Why is tightening regulation an ideal action? I remember Bernanke saying his actions were based on avoiding some of the actions that worsened the great depression. How does regulation fit here?
Simon Johnson: Pentagon Basement: The problem is - what are you going to do if/when financial markets again engage in the kind of speculative behavior that led to subprime mortgages, etc? Bailing out the banks is going to cost us (in terms of additional government debt issued) about 40% of GDP. That's a huge cost and not something we can afford to face again in the near future. The Fed won't use interest rate policy to reign in financial markets. And if you don't regulate in a tough and effective manner, we'll re-run the same bubble-bust-bailout sequence sometime soon.
Washington, D.C.: Professor Johnson,
If new bubbles are on the way (given that we will keep the same chairman of the last bubble and we are living in this "two-state economy"), how are we supposed to control them or pop them early? Or how can we identify them and not confuse them with "fundamentals" or a "rebound" to take advantage?
Simon Johnson: Washington: This is the key issue. Spotting bubbles is very hard - one person says "bubble" and another says "new fundamentals are emerging"; see, for example, the discussion around emerging markets (e.g., Asia) today. The point is to regulate your financial markets so that massive collapses can't happen (or threaten to happen). This requires tougher regulation and higher capital requirements than we have today. There is no sign these are coming and the Fed is not exactly pushing in this direction.
Washington, D.C.: Do we want Bernanke as regulator-in-chief? There are lots of complaints about the proposed role of the fed, but few (other than Alice Rivlin) who have offered concrete counter-proposals.
Simon Johnson: Washington: Someone has to take responsibility. The administration is proposing more of a committee-type approach, with the Fed having a leading role. We have too many regulators and authority is too diffuse. The banks run circles around regulators, and this situation has only gotten worse over the past 9 months. Unless the Fed shows leadership, no one else will step up.
New York: What is (or should be) the set of criteria for the nomination? For example, how should one think about the choice of Ben Bernanke vs. Larry Summers, Paul Volcker, Joseph Stiglitz, John Taylor?
Why is it at all important to ensure continuity of the Fed leadership given that it completely missed the beginnings of the crisis?
Simon Johnson: MrM: Unfortunately, everyone missed the origins of the crisis - and that includes the Democrats who previously worked at the Greenspan Fed, as well as Larry Summers and other Clinton Treasury officials. The markets love continuity - and they really like Bernanke's bailout efforts. We'll see where this takes us.
Boston: Bernanke (and Greenspan) is primarily responsible for the mess the economy is in today. Why in the world would the President reappoint such an utter failure to another term?
Simon Johnson: Boston: Bernanke definitely shares some responsibility. But he gets to keep his job because (1) the economy is stabilizing, (2) this is partly due to what he did since September, and (3) the administration wants a relatively expansionist hand on monetary policy at this point - they think Bernanke will help carry them through the 2010 midterms (and the fact that he's a Republican is even better in that context.)
Arlington, Va.: Having lost my job in commercial real estate this spring I would love to believe that we are going to experience a nice recovery but for the life of me I cannot see how this is going to happen in a vastly deleveraged environment. Aren't we seeing something of a bubble in equities developing again? I mean, Fannie/Freddie are still insolvent from any realistic standpoint and just look at what their stock prices have done the past week or so.
Simon Johnson: Arlington: yes, I think we are seeing two tracks appear in the economy, one struggling and the other bubbling. This has some worrying implications. For more, see:
New Haven, Conn.: In your opinion would Joe Stiglitz or Janet Yellen have made a better pick?
Simon Johnson: New Haven: Janet Yellen would have been a strong candidate; her resume is impressive.
But the timing wasn't right for this administration, given what they are trying to achieve (see my earlier replies). Joe Stiglitz is a great economist, but he's also a tough critic of this administration.
Tuckerton, N.J.: Mr. Johnson, Thanks for taking questions. I am extremely disappointed (but not surprised) Obama renominated Bernanke. I consider this the "Fifth Greenspan term". For example, in 2008, the Fed loaned over $500 billion in central liquidity swaps to unnamed foreign financial institutions. As far as I can determine this money has never been accounted for. And it looks like Federal Reserve Inspector General Liz Coleman is either uninterested or unable to conduct audits and effective oversight of the Fed's expanded balance sheet. Shouldn't Bernanke bear some responsibility for this?
Simon Johnson: Tuckerton: I agree that, based on what we see today, this looks like a 5th Greenspan term. Unless Bernanke breaks with his former mentor on key issues, I am worried about the future. However, the "swaps" issue you mention is something of a red herring - these are claims on other central banks and providing liquidity in this way is OK. On transparency, you should push the Fed more on its various off-balance sheet activities (the "Maiden Lane" vehicles) and also for more detail on who is borrowing now and on what terms. They won't tell you much.
Boston again: Prof. Johnson:
At one point, you argued that Obama should emulate Teddy Roosevelt, and break up institutions large enough to threaten the system. "Too big to fail is too big to exist", etc.
Do you still feel this way? Would not the threats posed by financials -- from systemic risk to regulatory capture -- be reduced simply if the banks were smaller?
Do you think this idea has ever occurred to Ben Bernanke?
Simon Johnson: Boston (again): yes, the Teddy Roosevelt principle applies here - big banks have too much political power (and this was Roosevelt's problem with railroads-banks, etc, 100+ years ago). Making the banks smaller is not necessarily a panacea, but it would help. Bernanke would tell you that this is not his job - the ball is in Congress's court. I would say that if the Fed doesn't show leadership on this, who will?
Peekskill, N.Y.: I enjoy your blog and your research with Acemoglu/Robinson . . .
Why is this not a repeat of Clinton's reappointment(s) of Greenspan? While I understand the reasons why one does not want to politicize the Fed, 30+ years of governors with conservative/libertarian (perhaps including Volcker) who have been inflation hawks seems a clear rightward/pro-finance tilt.
While Bernanke did respond aggressively once the crisis was clear, is there any reason to believe that Greenspan, etc. would have done differently? Since depression-magnitude financial crises are rare events, shouldn't we be as concerned about monetary policy during "normal times"?
Simon Johnson: Peekskill: yes, we should worry about "normal times" - or post-bubble bursting times (like 2002-2003). Bernanke and Greenspan were very much in agreement at that time. The pro-finance tilt has increasingly become a problem; this was Greenspan's huge blind spot and it has cost us dearly.
Philadelphia: The Obama Administration has stated they recognize they need to spend now to stave off the length of the recession and then they will put the brakes on to lower the long term debt. Is there any indication as to how they intend to accomplish this and what the role of the Fed is expected to be?
Simon Johnson: Philadelphia: we are still waiting to see how the "fiscal consolidation" will take place. The administration hopes that a rapid recovery will help, but this is wishful thinking. They want the Fed to keep interest rates low - this keeps their debt funding costs down. But if this feeds another financial bubble, then the costs of even more bailouts come onto the public balance sheet. Again.
State College, Pa.: Prof. Johnson, You've touched on a few reasons that the Obama administration re-nominated Bernanke. Why do you think he shouldn't be re-nominated? And, besides yourself, who would you rather see in that position?
Simon Johnson: State College: You put your finger on the problem. Who is there who has (1) the relevant experience, in terms of jobs, (2) made the right calls before the crisis, i.e., did anything that was helpful in terms of preventing the financial sector from running amok. Unfortunately, there is essentially no one who meets both criteria.
Salem, Mass.: If the Fed loses an appeal of Monday's FOIA ruling and is fact forced to reveal emergency loan details, Do you think anything damaging to his confirmation will be revealed?
Simon Johnson: Salem: Very interesting question. My guess is that we'll see more about the web of Fed-Wall Street connections. But, at this point, how much of this would really shock you? After all, the chairman of the NY Fed traded stock in Goldman, after it was under Fed supervision; and apparently this was OK with the Fed.
Arlington, Va.: Thank you for that link to the "two-track economy" scenario. I agree. Moreover, we're also starting to see the offshoring of jobs to low wage areas like India in the areas of legal services and insurance underwriting. The CEO of my former company was actually bragging in the Q2 results conference call about continuing to "leverage" offshore employees while at the same time laying off US employees in a massive fashion. At some point don't you think this is going to have huge political ramifications as increasingly these are well-paying white collar jobs that are moving offshore?
Simon Johnson: Arlington: I agree with the link you were making. Even if you were comfortable with jobs moving overseas when unemployment was low, how do you feel about it now? And if the movement of those jobs is facilitated by capital coming out of Wall Street (it's cheap to borrow in the US, if you are big and powerful today), how does that play politically. Look at this link also:
Annapolis, Md.: I don't get it. Can't they find anybody who actually saw the crisis BEFORE it was right in their face? I remember Bernanke and Paulson talking about how fundamentally sound the economy was even while things were falling apart around them.
I am very disappointed in Obama. His definition of change seems to be to throw more money at failing systems and to keep the people in place who didn't see the problem coming.
Simon Johnson: Annapolis: Your recollection on Bernanke and Paulson is exactly correct. President Obama will eventually have to re-regulate the financial system, or we will face very difficult times. Unfortunately, the current proposals before Congress do not do much - although the consumer protection agency for financial products is a good idea.
North Carolina: When Bernanke talks about Lehman isn't he being disingenuous? The Fed has an exigent circumstance clause that allows them to lend unlimited amounts to anyone for collateral IT deems sufficient. Bernanke claims they didn't have good enough collateral but that is a total canard given that the Fed has total unfettered discretion.
Simon Johnson: North Carolina: Fair point - the Fed can, in an emergency, do pretty much anything. Bernanke (and others) did not anticipate what would happen if Lehman failed. It was a mistake, pure and simple. But you understand that our leading political figures do not like to talk in such terms.
Peekskill (Again): One common refrain from Geithner, Bernanke, etc. is that they did not have adequate legal powers to respond to the crisis and have asked for more authority.
However, it seems that many praise Bernanke for his "creativity" in developing new lending facilities, etc. Additionally, the Fed did not seem to have any problem funneling money through JP Morgan to accomplish the Bear Stearns bailout.
Is the problem more a lack of regulations as Geithner/Bernanke suggest or is it the anti-regulatory/pro-market culture of those who regulate?
Also, how does Bernanke's performance compare to other central bankers in the developed and developing world?
Simon Johnson: Peekskill (again): Your point on the invention of new tools is correct. The issue was never about lack of tools or regulations; it is much more about the philosophy/ideology of those in charge. Our economic leadership has been much more pro-financial market over the past 25 years. We are paying that cost now.
Trisenberg, LI: It is widely accepted that Dr. Bernanke rose to the occasion after missing early signs of the asset bubbles in the early 2000's. His success in preventing the deflating of those bubbles from becoming depression 2.0 is also widely accepted. Would you say that Bernanke's work going forward is more difficult/challenging than what he has faced in the past? Is it similar to what the Fed faced in the early 2000's?
Simon Johnson: Trisenberg: it's a different kind of difficult. Bernanke was well prepared, intellectually, to scramble and save the financial system. Now everyone says that he needs to tighten before inflation gets out of control. But I would emphasize that financial markets can go wrong in major ways - and this will cost us dearly; we're in a sequence of bubbles-bailouts. Will the next one cost more or less than this?
Palm Beach Gardens, Fla.: Other than a new speculative bubble in the stock market, what has been accomplished by the rescue of the top tier banks? How long will the Fed be digesting GE commercial paper and what exactly does this do for the real economy other than keep CNBC blowing smoke on the air? When is the government going to stop lying about the 'recovery' and unmask it for the orgy of speculation which it clearly is? The only good thing about the President having reappointed Bernanke is that it kept Larry Summers on the sidelines where the worst thing he can do is blow up the Harvard endowment.
Simon Johnson: Palm Beach: the economy is stabilizing (rate of job loss slowing), but you point on speculative bubble is right - I would stretch this to the entire world; watch carefully what happens in emerging markets/Asia. The government (all relevant parts) want to reflate through rebubbling. I doubt this will lead somewhere good.
Atlanta, Ga.: Has anyone ever pressed Bernanke and Geithner as to why they refused to open the discount window to Bear Stearns yet opened it almost immediately following Bear's demise?
Simon Johnson: Atlanta: David Wessel's new book on Bernanke has some material on this. Back then, they were still trying to be tough on investment banks - with some good reason. Obviously, they changed their minds quickly.
Silver Spring, Md.: Mr. Johnson, as a former Congressional staffer and current federal attorney I concur that Bernanke has done an adequate job as Chair. My concern is the budget deficits (social liberal, fiscal conservative so long as we play at "capitalism"). We aren't getting anything concrete for our tax dollars. No High Speed Rail, no new subways, no dams or solar fields (think new TVA)...we're really just slapping on a band-aid trying to get back to pre-2007. We're not developing the infrastructure necessary for long-term growth. Can you comment on this assessment?
Simon Johnson: Silver Spring: I agree we are not getting the infrastructure for long-term growth, although I would probably stress education more than you do.
Novato, Calif.: 1) How is it the Fed claims it did not have the legal authority to prevent Lehman's bankruptcy, but did have authority to intervene in the case of AIG? (After all, if the Lehman bankruptcy led to the AIG collapse, wouldn't the Fed have the ability to intervene earlier?)
2) Why did the Fed payoff the AIG CDS at par rather than at market value, costing the taxpayers $65 billion?
Simon Johnson: Novato: the Fed has authority to do pretty much whatever it wants in an emergency. It thought the situation was dire at the moment of AIG, but not three days earlier with Lehman. The payoff of AIG CDS is one of the big open question. I doubt we will ever really know the answer.
Boston: So I guess Larry Summers took one nap too many?
How long until he resigns, do you think?
Simon Johnson: Nemo: Bernanke's new term is only for four years. Don't rule out Larry Summers yet...
Princeton, N.J.: I am a mathematician, and I do not understand why people put so much faith in economic projections. While the projections of the CBO and the SSA are mathematically sound, since they are projections, not predictions, they are based on assumptions that are just wild guesses. Because of this, they have been pretty consistently wrong in the past. In 1998, the CBO projected that we would have at least ten years of surpluses.
I think we would do better if we consulted a witch doctor with a goat and a sharp knife.
Simon Johnson: Princeton: Economic forecasts are not very reliable and CBO/SSA are symptoms of a broader problem. We should discuss error bands and alternative scenarios more clearly - and the CBO does a good job in some publications. We should also run our economic policy keeping in mind that forecasts are wrong and usually self-serving.
Chicago: In 1983, Ben Bernanke wrote the following:
"Minsky (1977) and Kindleberger (1978) have in several places argued for the inherent instability of the financial system, but in doing so have had to depart from the assumption of rational economic behavior."
"We do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go."
So Bernanke rejected a superior theory of financial crisis in order to preserve an assumption of neo-classical economics. Given that Bernanke has acted on Minsky's advice for stabilizing the economy shouldn't he also acknowledge the theoretical implications for Economics?
Simon Johnson: Chicago: Great question. More fundamental rethinking of economics is obviously called for. Hopefully, Bernanke will take the lead on that also.
Boston (yet again): Prof. Johnson:
I agree that current policies are sowing the seeds of the next crisis. If you had to estimate how long before that crisis comes, would you say months, years, or decades?
Simon Johnson: Boston (yet again): This is definitely unknowable - which is why, from a policymaker's point of view, it is the way to go.
Evanston, Ill.: Why are those on the economic left (who normally deride market efficiency) so adamant for mark-to-market while those on the economic right (who normally preach perfect market efficiency) so opposed to mark-to-market? Is this an example of politics over economics?
Simon Johnson: Evanston: The left want transparency and to reveal what Crazy Finance got up to. The right (although not all of them) want to sweep things under the carpet. The center - which controls this administration - has ordered brand new carpets that can hide even more things than before.
Montclair, Va.: Simon,
Profiles of Larry Summers always include the words "abrasive" and "arrogant." His history of putting his foot in his mouth is well-known. Had Summers been nominated to replace Ben Bernanke, the President would be responsible for Summers' behavior and probably spend a fair amount of time apologizing for things that Summers had said.
Why did so many Fed-watchers think that it would be a good idea for President Obama to nominate Larry Summers to a job he cannot be fired from?
Simon Johnson: Montclair: I'm not sure there was ever strong support for Summers as chair of the Fed. But he remains very influential; the guru of the "recovery".
Palm Beach Gardens, Fla.: Sorry you didn't like my last question. What sort of question would you like? How about this one:
When do you think someone in the Administration will begin telling the truth about either unemployment or inflation?
Simon Johnson: Palm Beach: I don't think they will ever tell it as plainly as you would like.
Simon Johnson: That's all I have time for. Thanks for participating. I think I answered all your question (at least all that show in the editor right now). You can reach me in the future, and post questions/comments at: http:/
Montreal, Canada: Simon;
In a previous answer, you note that spotting bubbles is hard, so we need a financial system that won't collapse when bubbles do.
Looking around the world, who has a sophisticated financial system that can withstand a 1/3 drop in housing prices?
Simon Johnson: Montreal: (definitely the last answer!) We will find this out soon enough. Probably no one is currently able to handle this, but that just means we should all design stronger systems.
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