Bernanke Vs. Summers?

Gerald Herbert / AP Photo Nominating Ben Bernanke to a second term as Fed chairman may have been politically expedient for Barack Obama, but it will leave Larry Summers seriously disappointed. Jeff Madrick on the ruffled feathers and future fiscal course.

It is by no means obvious that President Obama should have nominated Ben Bernanke to a second term as chairman of the Federal Reserve. But it is surely politically expedient, and this administration seems dedicated to ruffling as few political feathers as possible in almost all policy matters, from international affairs to defense, the health-care debate, and financial re-regulation.

How long Summers will be satisfied being the head of the White House economics team will now be an intriguing question.

Not that Bernanke should automatically be rejected. He is unusually bright, forthright compared to former chairmen, and he has been innovative and courageous. But it took him too long to understand how serious the cascading crisis was, in part because he carried so much ideological baggage with him. He did not understand, in fact, until his failure to cut rates in early August 2007 was greeted miserably by the markets. Then he changed tune, adopting moderate rate cuts. Only by early 2008, however, did the Fed start cutting rates aggressively. And only by March 2008, along with the Bear Stearns bailout, did Bernanke open the discount window wide to commercial banks and to the large investment banks like Morgan Stanley and Goldman Sachs, so that the besieged bankers could borrow at will.

This was late in the game for someone who had at his disposal the Federal Reserve’s investigatory authority and enormous, intelligent Fed staff to delve deeply into and digest the books of the financial community. By the fall of 2005, delinquencies on mortgages were rising rapidly and getting worse throughout 2006. By early 2007, a major bank in Europe warned about its earnings. By the spring of 2007, many on Wall Street were already worried about full-scale “meltdown,” judging by internal emails. Bernanke did not wake up until the late summer.

Once he did act in 2008, however, Bernanke was aggressive, creative, and determined. But even here there were blemishes, in particular he and Treasury Secretary Henry Paulson allowing Lehman Brothers to go bankrupt in September. But again, Bernanke recovered quickly with new programs. The achievement is not a small matter, and I think he will be rewarded with a gold star in economic history. Should he be reappointed for this reason?

Not necessarily. There will be life after this crisis, and the question is whether Bernanke will retreat to the same policies he so heartily believed in and helped promulgate before the ship sank. I would be comforted to be told that Obama or someone on his team discussed future policy with Bernanke, as well as his past mistakes, and learned that there has been a change in thinking or at least a newfound humility. That would presume, of course, the administration also had a clear understanding of past ideological errors, misplaced faith in markets, and the need to regulate firmly. I haven’t read or heard of any such discussions.

The leading candidate for Bernanke’s job had long been thought to be Larry Summers, the former Treasury secretary, Harvard president, and current head of the White House National Economic Council. Summers was quicker than Bernanke to recognize recessionary possibilities back in 2007. It was easier for him, of course, as a Democratic critic of the Bush administration. He may be less of an inflation hawk than Bernanke as well, but probably only marginally so. He was an undiluted supporter of Greenspan during the Clinton presidency and a leading advocate of financial deregulation.

How long Summers will be satisfied being the head of the White House economics team will now be an intriguing question. The administration claims he remains the right-hand man of the president on economic matters. But in terms of prestige and perhaps influence, Bernanke is now at least his equal. This will require patience and self-effacement from a man accustomed to dominating the economic-policy discussion. Is he prepared to wait another four years? Or perhaps he has his eye on the chairs of the World Bank or the International Monetary Fund. The World Bank post, at least, still seems to go to Americans. This, he knows, is second-best choice for the Democrats’ key economic man. Or perhaps the Bernanke reappointment means it’s the end of the Washington line for Summers. Bernanke not only will have to handle economic uncertainties but also a disappointed and powerful rival.