BASELINE: The case for Ben Bernanke’s reappointment was weak to start with, weakened with his hearings, and is now held together by string and some phone calls from the White House. Bernanke is an airline pilot who pulled off a miraculous landing, but didn’t do his preflight checks and doesn’t show any sign of being more careful in the future – thank him if you want, but why would you fly with him again (or the airline that keeps him on)? The support for Bernanke in the Senate hangs by a thread – with Harry Reid providing a message of support, albeit lukewarm, after the markets close. The White House is telling people that if Bernanke is not reconfirmed there will be chaos in the markets and the economic recovery will be derailed. This is incorrect.The danger here is uncertainty – the markets fear a prolonged policy vacuum. Fortunately, there is a way to address this. Ben Bernanke should withdraw and the president should nominate Paul Krugman to take his place. Paul Krugman is an expert on monetary policy – he wrote the classic paper on balance of payments crises (and probably could have got the Nobel Prize just for that), his work on Japan in the 1990s shaped everyone’s thinking of how to handle potential deflation, and his assessment of the crisis and needed response in fall 2008 was right on the money.
Krugman is known to many academics as a trade theorist and as a pioneering modeler of growth with increasing returns. But just because Keynes wrote eloquently on Indian currency reform did not prevent him from also understanding what had gone wrong with the world economy – and how to substantially fix it. Krugman also has exactly the paper trail that you would like to see from any potential Fed chair. He has written pointedly and with complete clarity about all the leading policy issues of the day. There is no question where he stands, for example, on “too big to fail” financial institutions: he’s opposed and would push for fundamental financial reform and tough oversight. Big banks, without doubt, would be appalled. But the “Greenspan fallacy” was always that no one else could do his job and even considering an alternative would be destabilizing. Look at the mess that got us into. MORE
WALL STREET PIT: Paul Krugman says that Simon’s idea that he should be chair of the Fed is “crazy.” Krugman’s point is either that he wouldn’t be confirmed or that he wouldn’t be able to bring the Open Market Committee along. Maybe he’s right about the former; a Republican filibuster does seem reasonably likely. I don’t think he’s right about the latter; or, more precisely, I don’t think it matters. The FOMC is, on paper, a democratic body: they vote. There is a tradition that the votes are generally unanimous because of the perceived importance of demonstrating consensus. I don’t know how old this tradition is; it was certainly in place under Greenspan. But everyone knows that the members of the FOMC disagree about many things; that’s why the various bank president members go around giving speeches objecting (not in so many words) to the FOMC’s decisions. Given that we all know there are debates involved, how important is this fiction of consensus? MORE
PAUL KRUGMAN: A funny thing happened on the way to the Bernanke confirmation: the vote in Massachusetts turned an easy coronation into a tough fight. And this isn’t one of those cases where everyone who knows something is on one side. Look at two of my favorite econobloggers: the very judicious Calculated Risk says “We can do better”, while Brad DeLong says, “Don’t block Ben.” Where am I? Right now, I’m agonizing — which isn’t a place I ever expected to be, and not just because Bernanke hired me at Princeton. MORE