Monday, January 25, 2010


Paul Krugman finally comes out in support of Bernanke. Here are the reactions and repeat of my case against Bernanke:

1. Bernanke hired Krugman back at the University and possibly played a role in giving a career break. So one can say that a sense of gratitude may have prevented Krugman to oppose Bernanke. Though one cannot deny completely such an argument, being professional of highest quality and integrity it is unlikely that such a reason will be there for Krugman to back Bernanke. At the most, it might have played a minute-scale role.

2. Krugman himself clearly does not want to be a Fed Chief and seems reluctant to get associated with Obama Administration in any active manner. What better way to achieve that than to support the incumbent for another term!

3. Krugman's main arguments against Bernanke are 3: Bernanke's opposition to financial regulatory reforms, insufficient explanation about regulatory failure of Fed in Housing bubble and unemployment. Of these 3, I agree with the first one, Bernanke is fundamentally not inclined for any deep reforms of the system and openly engages in 'maintaining Fed turf'. About regulatory failures, I think he has at least admitted to certain extent Fed failures in that regard whereas I do not believe addressing unemployment is Fed's top responsibility per say. I believe that is the job for Administration and Congress when Fed has to concern with inflation, soundness of financial system and mechanisms to control asset bubbles.

4. As Krugman said on his blog / Op-Ed, Bernanke is not offering any insights in terms of why Fed failed to notice the housing bubble as an asset bubble of consequences and Bernanke is least interested in proposing mechanisms to avoid such asset bubbles in future. It is not that every one missed. It is that Greenspan Fed missed housing bubble when there were many voices who were pointing those dangers. Further, Bernanke has not acknowledged the role of 'low interests' in that mess as well as ill fated exhortations of Greenspan to take 1 year ARM. As Krugman himself commented, Bernanke wrongly argued in Atlanta in the first week of this year (annual meeting of American Economic Association) that at a national level there was no housing bubble compared to other OECD nations when in reality he ignored regional variations in housing prices and bubbles. That was one of the most blatant and intellectually dishonest attempt by Bernanke to absolve Fed. That one single act fundamentally moved my opinion against Bernanke and it should be so for all those voting Senators too. If we want to inculcate the culture of accountability, those who deny their own accountability should be shown the door. This is a glaring failure of Obama Administration.

5. Bernanke can be like Chief Justice Roberts, who was good in his Senate hearing but as is shown by the last week's campaign finance ruling by Supreme Court; he could very well flip at a crucial moment to decide something on more partisan, ideological basis. This would happen when financial reforms would reach critical juncture. As likely, if Bernanke persists in retaining stranglehold of Fed and it's secrecy; America would loose a chance to reboot the system completely.

6. Krugman thinks that MA Senate election resulted in making Bernanke to loose the support. Politically Senators may have chosen this moment to declare the opposition, but there were many questions open about Bernanke for a while and many have been ambivalent, opposed to him for a while.

7. Bernanke continues to hide working of Fed. He should have provided all the relevant information about AIG dealing of NY Fed since clearly many things were not done right there and biases of Fed to favor big banks were clearly in play. (It is possible even at the last minute more damaging details would come out to derail Bernanke reappointment.)

8. I think that Bernanke vote is as consequential as Iraq War Resolution. People may not hold Senators so tight to this vote, but it is the question of whether America wants to use this opportunity to set in motion a process for 'full house cleaning' rather than half-hearted efforts by continuing with Bernanke.

9. Finally, seems like Krugman also do not want any destabilizing effect on the markets by derailing Bernanke reappointment. I believe caring too much for stability capital market and their reactions has brought this recession in the first place. Next, capital markets will stabilize after a while so one should not be so much worried if it is the question exploiting an opportunity to reboot the system. One cannot reboot the system by retaining the same tainted players whose judgment has been in doubt. As Krugman pointed names of other folks, there are many qualified folks who can be at the helm of Fed while guiding America to map a new financial system.

It is pity that America's rulers do not choose to take this opportunity.

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