What would happen if Ben Bernanke withdrew his name from consideration as Fed chairman, and Barack Obama picked up the phone and asked Paul Krugman to step into the breach? Bruce Bartlett reckons that “Paul has enough sense not to accept the position even if it is offered–just as Milton Friedman rejected Reagan’s offer for him to replace Volcker in 1982″ — but I’m not so sure. After Simon Johnson proposed the idea, Krugman said that it was “crazy” — but he did so without saying that he would refuse the job if offered. I think he’s sensible to leave the door ajar: it’s really hard to say no to a president who asks you to serve your country by taking what Matt Yglesias calls “the single most important domestic policy job in the country”.
Take another look at that Krugman blog entry: most of it is taken up with reasons not to confirm Bernanke. The only reason to confirm Bernanke, in Krugman’s book, is that he’s “a great economist” who acted forcefully at the height of the crisis. But we’re not at the height of the crisis any more, and Bernanke isn’t about to leave the FOMC any time soon — in fact, he’d probably stay on as chairman* more or less indefinitely, as Krugman or any other potential successor wended their way through a long and inevitably partisan nomination process. Would he lose power and influence as a lame duck? Not if the new nominee was public in supporting his policies, as Krugman probably would be.
Krugman asks the key question:
Does it make sense to deny Bernanke reappointment simply in order to appoint someone who would follow the same policies?
The answer, I’m beginning to think, might actually be yes. Right now, the FOMC isn’t really doing very much: it’s keeping rates at zero, and trying to wind down some of the extraordinary measures which it implemented during the crisis. But there’s a very good chance that the biggest job of the next Fed chairman is not going to be monetary policy: instead, it’s going to be bank regulation, once some kind of financial-reform bill has been passed in to law. And on the regulatory front, Bernanke — who opposes the creation of a Consumer Finance Protection Agency, and who sat meekly by as the Fed allowed all manner of mortgage abuses during the subprime boom — looks very much like the conservative Republican that Yglesias says he is.
In an ideal world, then, it might well make sense to have Bernanke stay on the FOMC — as he will, his term as governor doesn’t expire until 2016, and he could easily be re-nominated as a governor at that point — while Krugman, as chairman, steered the Fed as a whole towards an approach to bank regulation which is much closer to the Obama/Volcker/Warren view of the world than to the Bernanke/Summers/Geithner view of the world.
The problem, of course, is that it’s incredibly hard to get there from here, and given the obstacles to getting anything done now that the Republicans in the Senate can block anything they want, it doesn’t make a lot of sense to put a huge amount of political capital into trying to get a partisan like Krugman through the confirmation process.
The base-case scenario is still that Bernanke gets confirmed as Fed chairman, and that when some version of financial regulatory reform finally gets signed into law, the Fed’s powers of regulatory oversight will be boosted substantially. At that point, the nation will need the Fed to be a strong regulator which takes its new responsibilities seriously and is proactive about restraining Wall Street’s natural tendencies towards societally-dangerous behavior.
I’m not convinced that Bernanke is the best person to run such an organization — after helping to engineer, during the crisis, a series of mergers which only exacerbated the problems of too-big-to-fail banks, he has done nothing to counteract the effects of his actions, nor has he indicated that he would like to do so in future. As Krugman says, he seems to have “been assimilated by the banking Borg”. The Fed is the organization best placed to be a tough and effective regulator — but it can only fulfill that role if it has the willingness as well as the ability to rein in America’s biggest banks.
On the other hand, there are now four conceptions of financial regulatory reform floating around Washington — Treasury’s, Frank’s, Dodd’s, and Volcker’s. It’s a mug’s game to presume to predict how they’ll all coalesce into a final law, which means that it’s a bit silly to start nominating a Fed chairman in the expectation that the job will, in future, include a lot more regulatory oversight than it does at present. And on the monetary-policy front, Bernanke is as good a choice as anybody could hope for.
*Update: Either that, or Donald Cohn, his vice-chair, would take over as chairman.