Opinion Don’t fire the man who saved us all

Critics frequently point out that Bernanke has not always made the right calls. It’s a fair complaint,but who has always been right? Yes,he initially allowed the Fed to continue the regulatory laxity bequeathed him by Alan Greenspan. No,he did not foresee the full depth of the impending financial implosion. But who did? And,in my view,he and Henry Paulson,then the Treasury secretary,made an egregious error by letting Lehman Brothers collapse. (On the other hand,there were no good options.

But his job performance since,say,October 2008 has been superlative. To cite just a few examples,Bernanke led the Fed to lower its interest rates to virtually zero in December 2008 and then to hold them there. The central bank also invented approaches to lending and purchasing assets that breathed some life into moribund markets like commercial paper and mortgage-backed securities. It led the highly successful “stress tests” of 19 large financial institutions last spring.

The success of these policies is demonstrable. The simplest and most objective measures of financial distress are the differences,or “spreads,” between various (risky) interest rates and the corresponding (risk-free) Treasury rates. During the worst of the crisis,in September to November 2008 and again in February to March 2009,these spreads skyrocketed to dizzying heights. Since then,they have fallen remarkably,providing direct evidence that the Fed’s cure is working.

Success in righting the “real” economy has naturally been slower; financial markets always move much faster than gross domestic product,incomes and jobs. But it’s palpable nonetheless. The US economy was nearly in free fall during the last quarter of 2008 and the first quarter of 2009,dropping by 5.4 per cent and 6.4 per cent in real terms,respectively.

Then the moves by the Fed and the Obama administration took hold: GDP barely declined in the second quarter of 2009; and by the third quarter it began to rise. As this was happening,the job loss rate,which was staggering last winter,fell by more than three-quarters. On Friday we will get the initial estimate of fourth-quarter GDP growth,which analysts expect to top 5 per cent. And there is a good chance that job growth is about to resume.

This rapid improvement came faster than almost anyone expected. The plain truth is that,as bad as the recession was,it turned out to be less horrific than expected,and Ben Bernanke is one of the reasons. Unfortunately,“it could have been much worse” doesn’t buy you much in politics.

The Fed does not do Congress’s bidding,nor the president’s. When necessary,it can and does take politically unpopular actions. It can move quickly and decisively in emergencies. There are several threats to that independence right now. But perhaps none is as potentially damaging as turning the nomination of the Fed chairman into a political circus. Doing so would be a sharp break with history,for Fed nominations have not been partisan affairs. Jimmy Carter put Paul Volcker in office,and Ronald Reagan re-nominated him. Reagan’s choice,Alan Greenspan,replaced Volcker and was retained by the next three administrations.

Obama now proposes to keep in office a Republican chosen by George W. Bush. None of these were politically contentious — until now. No nominee for Fed chairman has ever been rejected by the Senate. Even no votes are relatively rare. In fact,the nominee who received the most negative votes in history was Paul Volcker,who won re-confirmation in 1983 by an 84-16 margin. Yet,in the eyes of many,Volcker was the greatest Fed chairman ever. There may be a lesson there.

The writer,a professor of economics at Princeton,was vice chairman of the Federal Reserve from 1994 to 1996.

The New York Times