Change vs. continuity at the Fed
President Obama has renominated Ben Bernanke to a second term as the increasingly powerful chairman of the Federal Reserve Board. Widely anticipated in financial circles, the decision reassured markets and prices continued to rise.
Politically, however, many voters will have felt betrayed that a president who had campaigned so effectively for “change” would have sought continuity.
Did such a decision indicate that the true nature of the economic and financial situations is so bad that the president was forced to accept continuity over change?
Given the failure of the Fed to anticipate the recession and effectively to supervise the banks, is continuity in the long-term interest of Americans?
In supporting his nomination, the president described Bernanke as “an expert on the causes of the Great Depression.” He reminded his audience that Bernanke had “approached a financial system on the verge of collapse with calm and wisdom.”
If the president does see real recovery, then these words of praise were misplaced, if not decidedly misleading.
Until recently, Larry Summers, one of Obama’s trusted inner circle, appeared to be the favorite choice for Fed chairman. He not only represented change but he had espoused a key fundamental economic policy that would have crucially altered America’s downward economic spiral.
Since 1971, with President Nixon’s breaking of the U.S. dollar-gold exchange standard, Congress has unleashed an ever-increasing torrent of entitlement programs that have resulted in America consuming three times what it produces, depleting its national wealth and leaving it the largest debtor in history.
Summers proposed key economic restructuring to reverse this situation and potentially return America to prosperity. With financial credibility restored, this could have been the bulwark to enable the United States to rebuff China’s challenge to the crucial “reserve status” of the U.S. dollar.
Such a potentially fruitful change must have seemed almost irresistible to Obama. Indeed, it was this feeling that likely prompted the recent speculation that Summers would replace Bernanke. So, what possibly could have prompted the president to opt for continuation of the status quo when change offered the glowing opportunity of economic rebirth?
Was it that the economic sea continued to look so rough and the black financial clouds lingered so ominously that rocking the boat with a change of helmsman risked disaster?
If not, why would Obama pass up such a golden opportunity for change and opt for a somewhat discredited continuity?
Perhaps the pivotal factor was Bernanke’s reputation in the financial community. After all, under former Chairman Alan Greenspan, Bernanke watched as President Bush doubled the U.S. Treasury debt to $10 trillion and raised the total government debt to a staggering $48 trillion.
He further stood on the sidelines as Greenspan presided over a fall in the dollar’s value of more than 50 percent since 1987. This effectively robbed every holder of U.S. dollars of half their dollar wealth.
More troubling, Bernanke watched silently as the Greenspan-led Fed presided over the largest asset boom in history. It allowed the formation and hugely profitable growth of casino-style behemoth banks that became too big to fail.
In conjunction with the Treasury, Bernanke orchestrated the rescue of the “casino” financial system with trillions of dollars of people’s wealth. Accounting rules were changed further to camouflage the toxic assets held by the banks.
In addition, huge public TARP funds were pumped into the banks, which could borrow from the Fed at zero percent. Furthermore, for the first time, banks were paid public interest on their reserves held at the Fed.
The government, with no spare dollars and only enormous debt, had to rely heavily on the creation of dollars by the Fed to finance the massive bailouts.
To his credit, Bernanke did save the banking system. But the total cost to current and future generations of Americans is likely to prove staggering.
The same behemoth banks have become even larger with the same casino-style managers in charge, continuing to pay themselves multibillion-dollar bonuses.
Is this a condition that America can tolerate when the economic seas are storm-tossed and we head into uncharted waters?
Is it the type of continuity that is in America’s long-term interests?
The recent spate of tea parties and town hall meetings reflect intense frustration and annoyance with the government’s bailout of those highly rewarded gamblers who got it wrong.
In addition, people are angry at the secrecy surrounding the rescue of the banks. There are increasing calls for more disclosure of Fed spending. People are asking for the transparency that Bernanke promised, has resisted and has yet to deliver.
Clearly, in nominating Ben Bernanke, Obama has opted for continuity over change. But he was elected primarily because most Americans actually wanted him to rock the old boat that appeared set on a course of decay.
In this case, staying the course is not safe and ordinary Americans appear to sense it.