Ben Bernanke will remain chairman of the Federal Reserve, White House chief of Staff Rahm Emmanuel announced Monday night, citing his efforts in "pulling the economy back from the brink of what would have been the second Great Depression."
Most economists seem to agree with the president. Bernanke may have started slow, but once the contours of the disaster became unmistakable he accelerated fast. The Fed became a font of innovation, extending credit to all comers with an array of exotic new lending programs. Still, I feel compelled to revisit Nouriel Roubini's assessment of Bernanke's tenure, published last month in the New York Times.
He and the Fed made three major mistakes when the subprime mortgage crisis began. First, he kept arguing that the housing recession would bottom out soon (it has not bottomed out even three years later). Second, he argued that the subprime problem was a contained problem when in reality it was a symptom of the biggest leverage and credit bubble in American history. Third, he argued that the collapse in the housing market would not lead to a recession, even though about one-third of jobs created in the latest economic recovery were directly or indirectly related to housing. Mr. Bernanke's analysis was mistaken in several other important ways. He argued that monetary policy should not be used to control asset bubbles. He attributed the large United States current account deficits to a savings glut in China and emerging markets, understating the role that excessive fiscal deficits and debt accumulation by American households and the financial system played.
But Roubini ended up supporting Bernanke's reappointment! So he must have done a fantastic job after that rocky start.
Or maybe Obama realizes that the really hard part is only just beginning. Unwinding the vast expansion of the Fed's balance sheet and figuring out how to tighten the screws on the money supply without plunging the country into an another economic contraction will be a tremendous challenge. Why saddle that grief on some up-and-coming Democratic economist? It's Bernanke's mess. Let him clean it up.