Thursday, December 17, 2009

Should Helicopter Ben Withdraw His Name?

Helicopter Ben Bernanke passed the Senate Banking Committee vote on his reconfirmation. But he passed by 16 to 7. Most of the Republicans voted against Bernanke, as did one Democrat, Sen. Jeff Merkley of Oregon. The reconfirmation now goes to the floor of the Senate, where it’s going to be held up for a while as Sen. Jim DeMint and others insist that the GAO Fed audit be voted on before Bernanke’s final vote.

That audit, by the way, would reveal the Fed’s FOMC policy discussions after six months, rather than the current-law five years. This is a good thing. More prompt disclosure. The public has a right to know, especially since Bernanke (as Alan Greenspan’s right-hand man) was instrumental in creating the easy-money housing and energy bubble that sank the economy, and since Bernanke (as Fed chairman) has provided unbelievable, ultra-easy, free-money, zero interest rates for too long.

Even with the recent modest corrections, rising gold and the declining dollar tell the story that Bernanke knows how to ease but not how to tighten. The emergency is long past, but he is still operating an emergency policy of ultra-easy, excess-dollar creation.

Aside from the fact that Bernanke doesn’t look at gold or the dollar as price signals to guide his policy, we have witnessed a complete reversal of the Fed’s intellectual framework. By that I mean, for 20 years or so, first under Paul Volcker and then during Alan Greenspan’s first three terms, the Fed argued that the tax-cut effects of low inflation would spur economic growth and low unemployment. This period lasted roughly from the early 1980s until the end of the century. But since Bernanke came on the scene, the sound-money, stable-dollar argument has disappeared.

For most of this decade, the Fed has been fighting unemployment by pumping in easy money. And it keeps telling us this will not cause inflation. With the CPI hitting nearly 5 percent in 2006 and almost 6 percent in 2008, Bernanke was dead wrong. And the fact remains that more money creation from the Fed produces inflation — not jobs or long-term economic growth.

Bernanke sees deflation and depression threats everywhere. That’s one of his biggest problems. He cut his academic teeth on studying the Depression, which seems to have blinded him from the modern use of sophisticated financial-market signals in our new, globalized, high-tech, rapid-information world.

So I think Bernanke’s reconfirmation could be in trouble on the Senate floor. I’m going to bet that most of the 40 Republicans will vote against him, and that they will be joined by a number of Democrats. If Bernanke were to be opposed by as many as 35 or 40 votes, it would substantially undermine his credibility.

Bernanke’s term extends to the end of January. I wonder if he realizes just how much opposition he may have. Unless he thinks he can garner a truly bipartisan vote in the weeks ahead, I wonder if he should consider withdrawing his name.