Ben Bernanke: The Defender

by: John M. Mason

Guess what?

Ben Bernanke may not be Chairman of the Board of Governors of the Federal Reserve System at this time next year!

Next year at this time, Ben Bernanke may not have the "bully pulpit" of the annual Kansas City Fed get-away at Jackson Hole, Wyoming, to justify his case.

Therefore, with such a huge, worldwide audience anxiously awaiting his remarks… why not start to defend his record.

Why might Mr. Bernanke not be the Fed Chairman next year?

Well, Mr. Bernanke has been the Fed Chairman since February 1, 2006. Before that he was Chairman of the President's Council of Economic Advisers (June 21, 2005, to January 31, 2006), and before that he was a member of the Board of Governors of the Federal Reserve System (August 5, 2002, to June 21, 2005).

Bernanke has been in government service, at the highest levels, for 10 years!

No one in the government has been through so much for so long except maybe Tim Geithner (who has already indicated that he will step down after the election).

Maybe he needs a break and, if President Obama is re-elected, he can gracefully resign and go back to being an academic, something he is very good at. He has "paid his dues," he did not abandon President Obama during the Great Recession, and he has "stuck with it" in order to fulfill his responsibility. He could leave, therefore, on his terms.

This is, my guess, how he would like to go out.

On the other hand, if Mitt Romney becomes the next president, Mr. Bernanke sees himself as gone because Mr. Romney has already said that he is gone. Although a president cannot remove Mr. Bernanke from the Board of Governors, he can appoint someone else as Chairman. My guess is that Mr. Bernanke would resign from the board in such a situation. He would not like to serve as just a member of the Board of Governors with someone just appointed by President Romney to become the new Chairman.

Since there are no openings on the Board of Governors, President Romney would have to appoint an existing member of the Board as the new Chairman. I believe that, rather than face this possibility, Mr. Bernanke would gracefully step down. There is nothing left for him to do.

Hence, the start of the defense.

Mr. Bernanke begins his talk at Jackson Hole:

Today I will review the evolution of U.S. monetary policy since late 2007.

And, he does so. He spends the next couple of pages discussing the events of 2007 and 2008 and examines the use of the Federal Reserve's balance sheet.

Then he discusses how the Fed, during his tenure, has created greater transparency and openness concerning the conduct of monetary policy.

His defense is under way.

I am not going to spend any time examining this defense today. People who read this blog have a fair idea of where I stand with respect to the effectiveness of the Fed Chairman. And, I don't need to go into specific incidents at this time, like the Lehman Brothers incident. (See my post, "The Bailout Plan: Did Bernanke Panic?")

The one thing I will mention today is Bernanke's reference to how effective the Federal Reserve's actions were on the economy. He writes:

A study using the Board's FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred. The Bank of England has used LSAPs in a manner similar to that of the Federal Reserve, so it is of interest that researchers have found the financial and macroeconomic effects of the British programs to be qualitatively similar to those in the United States.

If the Federal Reserve accomplished this much through monetary policy, the question then becomes, "What, if anything, did the Obama stimulus do for the economy?" Already, the Obama administration is back on its heels trying to show that it did "something" to get the economy back to where it is today.

Now, we learn that most of the recovery can be attributed to the Federal Reserve monetary actions and not to the economic policies of the Obama team. The "finger pointing" has already begun.

This whole idea of Bernanke leaving sometime in 2013 raises another question. Given the lag in effect of monetary policy, there is nothing the Federal Reserve can do to impact the state of the economy before the election or for the rest of the year. What incentive is there for the Bernanke Fed to do anything dramatic between now and the time Mr. Bernanke decides to leave the Fed?

Even if this is true, Mr. Bernanke needs to talk up the possibility of doing something so as to keep the financial markets optimistic.

If we are in the last months of the reign of Ben Bernanke at the Federal Reserve, how does this add to the uncertainty that already exists concerning the future of the monetary and fiscal policy of the nation? In my mind, it adds a lot!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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