Monday, August 24, 2009

Bernanke To Get a Second Term as Chair

President Obama is scheduled to announce that Princeton Professor Ben Bernanke will be renominated to a second term as Chairman of the Federal Reserve 's Board of Governors. It is not official. The ritual requires that the Fed Chairman fly from Jackson Hole to Martha's Vineyard: two of the least connected places in the U.S. of A. by commercial aircraft. (You thought flying from Wichita was wearisome.) Maybe he will fly one of those chartered planes they use to clear checks faster. Or (Scandal! Scandal!) a corporate jet!

I have said before that it is virtually Providential that this particular economist (Ben Bernanke) should be Fed Chairman at this point in America's history. As a young economist, Ben Benanke demonstrated that it was the financial collapse of intermediaries that transformed an ordinary economic downturn in 1929 into a world wide depression.

Right now, the peculiar world of macroeconomics is not centered in New York, Washington, London, or Frankfort, but in a tiny resort in the Grand Tetons: Jackson Hole. Having dragged a popup trailer over the 7,000 foot Grand Teton Pass, I can testify to the rugged beauty of this very isolated part of Wyoming. Malcolm, Jr. when we went cross country noticed that we had not in the whole state of Wyoming seen a town where the population was greater than the elevation.

The Wall Street Journal reports that the economists meeting in the Federal Reserve Bank of Kansas City's economic conference were rooting for Ben Bernanke to be reappointed. According to Jon Hilsenrath, "The economists and officials from around the world who met in the Grand Tetons are a naturally sympathetic audience.

"The group largely admires the aggressive, outside-of-the-textbook steps Mr. Bernanke took last fall after Lehman Brothers Holdings Inc. collapsed. "

Hilsenrath quotes Martin Feldstein"This is a group of people who like the Fed....Ben came to the Fed as an expert's expert on fundamental monetary policy and went far beyond that with all of his creative policies."

Unfortunately, I am not confident that Professor Bernanke has learned the lesson of the early 2000s. Unemployment was high after the 2001 recession not due to a lack of aggregate demand, but because many suffered the unpleasant effects of mal-investment.

If he believes that monetary policy is not responsible for bubbles and that the only short term worry is deflation of consumer prices, we are all in trouble.

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