Bryan Caplan  

Why Bernanke Should Be Canned

A Regulatory History Lesson... Kevin Murphy Interviewed...
Contrary to my expectations, Bernanke's been a disaster.  At the same time, though, I can't honestly say that his successor will be any better.  Why then do I strongly favor firing my former teacher?  Accountability.  When someone fails as badly as he has, he's got to be fired to send a message to his successors.

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COMMENTS (21 to date)
Devin Snead writes:

Although I definitely agree that Bernanke has been a disaster, I feel his successor will probably be much worse. I'd put my money on Larry Summers being the next Fed Chairman, and I think Summers will essentially have the Fed be a quasi-official part of the executive branch.

Sam Wilson writes:

Who would you like to see chair the Fed, Dr. Caplan?

J Cortez writes:

"Why hasn't Bernanke been fired yet?"

I'm curious as to why more people aren't asking that question. Of course, almost no one wants to ask the better question:

"Why have a central bank in the first place?"

I expect that the current Bernanke/Geithner idiocy will continue a few more years. I agree with Devin Snead that his replacement would probably be worse.

I've just heard recently that the Fed has hired a former Enron lobbyist to counter any possible accountability legislation that might arise from the current crisis. To my knowledge this has never happened before.

I think the Fed knows how badly they've screwed up (epic fail) and are trying to contain the political fall out. This is funny to me, since Bernanke in particular has said that the Fed is non-political. Why hire someone to lobby for you then?

Prakhar Goel writes:

If I remember correctly, Bernanke _can't_ be fired. It was one of the measures taken to ensure the fed's independence (wonder how thats worked out...). He can however be marginalized and sidelined.

Jesse writes:

Ron Paul for chairman!

Frank writes:

I agree with Cortez. There is no need for a central bank, especially one that is runned by private bankers. Conflict of interest perhaps!

blink writes:

It sounds like you and Tyler disagree strongly (emotionally?) about reappointment. Perhaps this is an opportunity for a Hanson-esque disagreement analysis. Or perhaps it is really just an opportunity for signaling.

JPIrving writes:

What exactly has Bernanke done that any other mainstream macro type wouldn't also have done?

I ask with no sarcasm, I am genuinely curious as to what his mistakes have been. Has he erred in "mainstream" view (not bailing out Lehman?) or do all Bernanke's mistakes lie in the 'free banking/no FED' quarter of the macro school yard?

It seems to me that Bernanke inherited a time bomb in the housing bubble. When the crises hit, he reacted the only way a man mainstream enough to become chairman would have: print money and bail out anything that moves (except those a-holes at Lehman!).

I am still moving to Europe and advising my friends to watch the Mad Max films for their educational value, but could we really expect the FED to react any differently?

Yancey Ward writes:

Like JPIrving, I can't imagine any central banker likely to end up holding the office doing anything significantly different from what Bernanke has actually done. He has pretty much followed the mainstream playbook for "managing" this crisis. If your complaint is about following this playbook, then I fully agree, but Bernanke's replacement will simply follow the same script anyway, so what difference does it make?

Michael Rappaport writes:

Yes, one should send a message but what message? A firing from Obama might suggest that Bernanke did not do enough nationalizing.

The Cupboard Is Bare writes:

@ Jesse:

Ron Paul for chairman!

The first thing Dr. Paul would do would be to close down the Fed. The second thing he would do would be to tender his resignation.


Gary writes:
I can't honestly say that his successor will be any better... he's got to be fired to send a message to his successors.

Wouldn't the message be, "we don't care about results (since we know you won't do any better than your predecessor), but we care deeply about looking good"? Might that sort of message inhibit future results?

cputter writes:

Like some commentators before me have noted I think Mr. Caplan is making that famous 'fatal deceit' in believing that there exists such a person wise, noble and omniscient enough to do Mr. Bernake's job at all.

It's ridiculous to think that had someone else (someone eligible for the job that is) been in Bernanke's position, let's call him Mr. O, they would have acted any differently. Sure, in Mr. O's amazingly complex model the porridge might've been a bit cooler so he'd turn up the heat more. In Bernanke's model the porridge was quite hot already so he didn't turn the heat up too much. Both would've tried to save various combinations of drowning raisins.

I'm guessing Bryan's got an amazingly complex model hidden away in a drawer somewhere (which he's forgotten to tell us about) that can measure the porridge just so, and make adjustments just so. All the while saving just those raisins (and letting the rest liquidate) which he knows Goldilocks will like just so... while she's eating her porridge just so...

The fact of the matter is Mr. Bernanke's been doing an amazing job. For what he's getting paid to do that is; a smoke and mirror show.

Now you see $10 trillion, now you don't!

bee writes:

Excellent point! Accountability is the single reason to fire him.

Gary Rogers writes:

To follow up on the comment by JPIrving, what exactly did Ben Bernanke do that you disagree with? To simply say that he failed without any discussion of his policies is not fair to Mr. Bernanke nor to any economist willing to become involved in a difficult situation. If we are going to find our way out of our current dilema, we need to identify good and bad policies rather than create villians. That, by the way, is why I like your blog so much. You generally do a good job in that regard.

Personally, I place most of the blame for current failures on policies of both the Bush and Obama administrations and on congress which has proven to be economically clueless. The "Paulson Panic" was triggered by the economic equivalent of crying "FIRE" in a crowded theater and, even though Mr. Bernanke was far too involved in the aftermath, his monetary policy decisions are another matter. Looking back, I would say that the work of the Fed and Treasury did avert a banking collapse, which I believe is one of Mr. Bernanke's greatest fears and for which he should receive credit. I also think the loose monetary policies, economic stimuli and unabated deficit spending leave us with future choices between the tradeoffs of uncontrolled inflation and extremely high interest rates. These will not be pleasant and will be far worse than what we saw in the late seventies and early eighties. Only time will tell how this will play out, but the time to prevent it was about ten years ago and we now have to live with the decisions that got us here.

In the mean time, I have no interest in replacing Mr. Bernanke unless I know what message is being sent or his replacement will be better. I am more concerned with taking the Fed, which is privately owned like Fannie and Freddie, and making it one of the key financial regulating bodies in the future. Talk about the potential for unintended consequences.

Gary Rogers writes:

I have a bad habit of throwing out opinions before reading the links behind blogs. The two links in this case were very good and elaborated on the points that I thought were missing. Sorry. I will say that I am much less concerned about federal reserve policy than bailouts and uncontrolled government spending but that does not make it unimportant. Good articles!

David C writes:

"The two links in this case were very good and elaborated on the points that I thought were missing."

Maybe you should reread it:

"I doubt that even the dinosaur Keynesians of the 60's would have embraced big government, bail-outs, and crony capitalism like Bernanke did. And I doubt that Bush would have come up with all these radical changes if Bernanke hadn't embraced them first."

That is, in a nutshell, Bryan Caplan's argument. The other link was from 2005, and therefore does not analyze the current crisis. He says we should fire Bernanke because he's become too liberal. He presents no empirical or theoretical evidence to back up this claim. This is, in essence, a terrible argument.

The Rage writes:

The "FED" has existed since the US was born. The main difference is it was "officialized" in 1913 and made into a permanent structure that operated 24/7 rather than in crisis as it did in 1907, 1893, 1873 ete ete when a major panic started. While it may have changed US behavior regarding pricing, there was a very good reason for it considering the social unrest of the last quarter of the 19th century and near repeat we were going to watch if the 1907 crisis wasn't adverted.

"Free Bankers" came out of the same enlightment movement that created "socialists". I take rationality over ideology any day of the week(considering Ron Paul reminds me more of Lenin everyday, I am glad for being rational. Reject demigods).

Bernanke should be fired only if you actually make a change of thinking. Summers is essentially a similiarly thinking person and doesn't fit the profile to make him FED chairman when that would just put more political problems in the Obama administrations corner.

No, if Bernanke goes, Wall Street should be afraid, very very afraid.

Keith writes:

"The "FED" has existed since the US was born."

Not correct. The US has had two central banks previously, but they were totally different institutions in both structure and function.

"While it may have changed US behavior regarding pricing, there was a very good reason for it considering the social unrest of the last quarter of the 19th century and near repeat we were going to watch if the 1907 crisis wasn't adverted."

The only reason for it was to benefit large banks at the expense of the general populace.

It is the story that comes up often in markets and democracies. It is a very common story. The market makes certain firms very successful, they in turn use the profits to become politically connected interests and then influence politicians to create higher taxes or increased labor costs or high license fees or whatever to limit their competitors, thereby increasing their own profits. It has happened with labor, cars, agriculture, medicine, chemicals, steel, oil, etc. Banks are no different.

"Free Bankers" came out of the same enlightment movement that created "socialists".

Totally false. Free banking is an embrace of the market. It is central banking that is socialistic. The fifth plank in Marx's communist manifesto was a central bank.

Read anything Frederich Hayek, Pascal Salin, Lawrence H. White, George Selgin have written on the subject, all of them have great insights on the subject and make much more sense than the bad system currently in place.

"No, if Bernanke goes, Wall Street should be afraid, very very afraid."

That is correct because then they would have to work and be prudent investors instead of the irrational gamblers that they are now.

Justin P writes:
When I studied monetary economics with him in 1995, Bernanke showed humility about the power of government to mitigate economic crises. He thought about long-run policy consequences - and recognized that a "do something - anything!" mentality often makes a bad downturn worse. Now he looks like any other DC demagogue. What a disappointment.

The big difference in when Caplan studied under Big Ben, Big Ben wasn't beholden to politicians.
Even the best man can get corrupted by Washington now, the great and wonderful legacy of FDR and the New Deal.

I'm sure Ben's ego got in there too. As a Depression scholar, Ben knew and rightfully so that the cause of the Depression was Fed policy at the time of too little money in the Economy. Smoot-Hawley amplified it and FDR prolonged it. Ben came in, maybe or maybe not really aware of the already disastrous Greenspan low Fed rates and took his eye off the ball. When the Housing Bubble crashed and Ben saw what could happen, he knee jerked into an ultra loose monetary policy. I think mainly because he didn't want to be the Fed Chairman that cause another depression by making the same mistakes of the 20's-30's of which his whole career is based.
Never underestimate the need for a man to try and preserve his "legacy" at all costs. It's the mistake Hoover made, the same mistake Bush made in signing TARP into law. They all didn't want to be "The One That Caused It."
The ultimate irony is that by trying to fight it, they just amplified it.

sammy writes:

accountability? ok, then i guess we need to know who should Bernanke be accountable to?

if it is the president that he is accountable to, then he has done the president's bidding all the time. if he is accountable to the banks, few would disagree that he saved several banks from total destruction.

arguably he saved the banking system from utter ruin as well.

this seems like a no-brainer to me.

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