Saturday, January 30, 2010

Bernanke Confirmation

The vote 70-30 was not bad. However, clearly America's ruling class missed an opportunity to make a clean start in recasting Fed and Financial Regulatory System. I guess ultimately it amounted to how much uncertainty and risk Obama Administration wanted as well as what appetite Senate had for such a sweeping reform. Looking back it is understandable that folks accepted for lower risk even if it meant to continue with a compromised Fed chief.

There never had been any doubts about Bernanke's accomplishments, his qualifications and his ability to deliver in future. Once you discard Fed responsibility towards unemployment, it is clear that as far as monetary policy goes; he will be a champion guy. He is on the 'leading edge' of monetary innovations and he will for sure continue to lead that charge. I do not buy much into Fed's responsibility towards unemployment since I think essentially it is tied to taxation & currency exchange policy and hence primarily Congress and Administration have to administer that. This country does not have tradition of 'industrial policy' geared towards increasing businesses and employment. But that is what essentially has to be there. Matt Yeglesias has been talking about that and he is right there. Obama Administration is basically moving in that direction. Whatever preliminary job Administration is doing in rendering 'vision of Americas economy', Larry Summers is talking about export driven economy. President talked about that in his State of Union Address and such an export driven approach needs coordinated economic policy i.e. industrial policy which will be more to be driven by Administration and Congress; not much by Fed. Bernanke Fed will primarily concentrate on interest rates, innovations in setting interest rates (rates on reserves and all that), bank regulation and overall liquidity in the system. Dollar exchange rates, taxation and all other industrial policy matters will be driven by Administration and Congress.

Next question is some are speculating that Bernanke Fed will be weak in guarding Fed independence while negotiating financial regulation system overall since Senate kind of obliged him by appointing for the second term by going against the political wind. There is that possibility, but the sense I get from Bernanke is - he is not arrogant, but clearly he feels that Congress and this nation needed him (Bernanke) more and hence they are reappointing him. Bernanke is a stead fast person with immovable convictions. Success in averting economic collapse and acceptance by American Political System in ignoring his 'accountability failures' are only going to strengthen this streak of Bernanke thinking. The way he will understand all this is as - 'because I have been sticking to my opinions, these guys had to come around and accept my thinking; so there is no reason to change'. So I do not expect Bernanke to change any of his views going forward. He will continue to operate the Fed in the same manner - both with same weaknesses and strengths. One will have to live with that and move on.

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