Don't Let a Hysterical Congress Bring Down Bernanke

Political posturing should not prevent Ben Bernanke from being confirmed as Federal Reserve Chairman for another term. Lawmakers fearful of angry voters are holding Mr. Bernanke hostage, hoping that this will distance themselves from the unpopular bank bailouts engineered by the Fed (and Treasury Secretaries Paulson and Geithner) under both Presidents Bush and Obama. These are the same bailouts that virtually every serious business leader and economist credit as having prevented a repeat of the Great Depression.

This is Washington at its worse, or maybe it is simply what we have come to expect from Congress. Deflecting blame – loudly, belligerently, insincerely-- passes for leadership from a body held in lower esteem by 40% of Americans than used car salesmen. (That is a fact.) The anger of voters is real; they are like the subject of Edvard Munch’s painting— screaming for eternity, but inaudible. Congress professes to hear them, but is incapable of the intelligent and selfless management that voters want and that we so sorely need.

The Federal Reserve was established to keep Congress as far away from the management of the country’s finances as possible. Consider the recent pork-laden spending bills as Exhibit A in why this was a very smart decision. The notion that Congress would have been better able than Mr. Bernanke, or indeed Alan Greenspan, to anticipate and deflect the financial crisis is truly laughable. There were, to my knowledge, two or three investors such as hedge fund manager John Paulson who saw the tsunami coming, who bet against subprime mortgages, and who walked away with billions in profits. Two or three—among tens of thousands. If it had been more obvious, those few would not stand out.

Moreover, it has never been the job of the Fed to puncture investment bubbles. That Bernanke embraced a limited role was evident from his first public speech after being appointed. He said in his remarks delivered at Princeton University that the Fed is responsible primarily for maintaining price stability, not for intervening in markets in order to control asset prices. He supported that view by claiming that the Fed is in no better position that the public to judge asset values.

It is instructive, and perhaps encouraging, that Mr. Bernanke faces criticism from the left and the right. He is faulted for supporting the first stimulus package – which was correct in concept but dismal in execution (thank you, Congress), but also for resisting, more recently, another large spending program. He was entirely right on both counts. The nation needed to use its borrowing capacity to shore up a quickly sinking economy early in 2009, but needs also to rein in its deficit spending as quickly as possible.

Numerous bodies around the world, such as the bank of International Settlements, are trying to figure out how to prevent the next financial collapse. Here and abroad the notion of an uber-regulator has been proposed – an authority charged with watching for and heading off emerging systemic risks. A major obstacle is the realization that no government will ever want to step in and shut down an investment boom. Imagine if four or five years ago Bernanke had announced to the country that he thought housing prices were out of line, and he was going to raise interest rates in order to shut down the real estate boom. Think of the furor that would have been unleashed as homebuyers across the land took a beating on their equity, as loans were called, as developers were stranded with unsold properties, as inventories piled up in furniture stores, as construction crews were laid off. Yes—these terrible things have happened, but they were the result of market dynamics, not the inspiration of a financial appointee who would surely have been scalped.

We can fault Ben Bernanke for not moving faster to contain the downward spiral of mortgage defaults, we can fault him (and former Treasury Secretary Henry Paulson) for allowing Lehman to fail and we can fault him for not pressing the investment banks to take a haircut on AIG’s credit default swaps. We cannot fault him for lacking second sight.

Many in Congress are at risk of losing their jobs. Voters are reeling from 10% unemployment and are furious that bankers are making money while they scrimp to pay their mortgages. They are irate that the president and his colleagues in Congress have chosen this time of hardship to push programs like universal health care coverage that will further burden those still earning a living. Before throwing Bernanke overboard, his opponents should think very hard about having Nancy Pelosi and Harry Reid in charge of the nation’s finances. By contrast, Mr. Bernanke has considerable appeal.

Liz Peek is a financial columnist and frequent Fox Forum contributor. For more visit LizPeek.com.