President Obama pulled out all the stops to clinch Senate approval of his nomination of Ben S. Bernanke to a second four-year term as chairman of the Federal Reserve. Now that the president seems to have enough votes for his nominee in hand, news of yet another “Louisiana Purchase” may be grabbing headlines soon.
Mr. Bernanke has become something of a lightning rod for critics on the left, who think his response to the financial crisis that triggered the recession has been too timid, and for those on the right, who charge that the Fed has been overly aggressive and will be unable to unwind its easy-money policy and unprecedented interventions into financial markets without dire economic consequences.
If nothing else, Mr. Bernanke has proved to be a consummate bureaucrat, spending most of his time in recent months lobbying for major expansions in the Fed’s regulatory powers, which, if granted, would take it far beyond the purposes for which it was created in 1913.
As a former Princeton University professor who established his academic reputation by publishing professionally respected papers on the causes of the Great Depression, Mr. Bernanke could have been a better steward of monetary policy. His research complements Milton Friedman and Anna J. Schwartz’s monumental “Monetary History of the United States” in showing that the widespread bank failures that followed the Fed’s “Great Contraction” of the money supply in 1928 caused credit markets to collapse as the customers of failed banks found it nearly impossible to borrow from surviving institutions that understandably were reluctant to lend to people they did not know.
The Fed’s easy-money policy of the mid-1920s fueled rampant real estate and stock-market speculation - and its later reversal of course caused the economy to contract sharply, helping to trigger the Great Depression.
Yet Mr. Bernanke denies that monetary policy had anything to do with inflating the recent real estate bubble or that his predecessor’s policy of curbing “irrational exuberance” by raising interest rates eventually popped it. He instead blames irresponsible bankers and lax banking regulations. He wants to transform the Fed into a kind of superregulator with responsibility for ferreting out sources of systemic risk that threaten the stability of the financial system, wherever it may rear its head, whether from commercial banks, mortgage lenders, hedge funds, insurance companies or stock brokerages.
In two valuable books published earlier this decade, “Reflections on the Great Depression” and “The Economics of the Great Depression,” Randall E. Parker of East Carolina University assembles the transcripts of interviews he conducted with dozens of economists from whom he sought professional opinions on the origins of the Great Depression and the lessons one should learn from it. While one might think the interviews produced twice as many opinions as the number of economists with whom Mr. Parker talked - and sharp differences certainly were revealed - there was unanimous agreement on one point: The Fed should not be an arbiter of stock prices or real estate values.
The Fed is supposed to have one and only one goal - to maintain a sound currency. It lost its direction early on, as its ineptness in responding to the events of 1929 through 1933 amply demonstrates.
Monetary policy may be enigmatic to most Americans, including policymakers. But it would not be far off the mark to interpret the Fed’s actions on Mr. Bernanke’s watch as being designed to enrich Wall Street, including the cradle of treasury secretaries, Goldman Sachs.
America needs a Fed chairman who will end its destabilizing influence in mismanaging the nation’s money and thereby avert cycles of boom and bust. Mr. Bernanke has demonstrated his inability to do that job.
William F. Shughart II is a senior fellow with the Independent Institute (www.independent.org) and a University of Mississippi economics professor.