Tuesday, August 25, 2009

Bernanke To Get Second Term

From the WSJ:

Wall Street and academic economists in recent weeks showed enthusiasm for giving Mr. Bernanke a second term, and some administration insiders felt similarly even though Mr. Bernanke was appointed by -- and served in the White House of -- President George W. Bush. Appointing a Democrat such as Janet Yellen, president of the Federal Reserve Bank of San Francisco, or Alan Blinder, former Fed vice chairman -- both former advisers to President Bill Clinton -- would have been popular with many Democrats. But a move by Mr. Obama to install his own person at the Fed might have have rattled markets and unsettled the foreign investors.

"I think this is a good thing for the markets," said Byron Wien, chief investment strategist at Blackstone Group. "Rather than going through a catechism of what Bernanke's done wrong, let's look at the net result. The economy is improving and the financial system is on the mend. It's a long way from perfect but it's also a long way from where it was a year ago."

Sometime over the last six months I was re-reading the Depression section in Milton Friendman's A Monetary History of the US. There is a chapter called The Great Contraction which details the banking system problems of the 1929-1933 period. Essentially, there were three banking panics over that time period which essentially froze the US economy and led to a huge drop in GDP. This is what Bernanke was trying to avoid with all of his plans. And -- he's been successful as the economy is currently bottoming.

The primary knock against Bernanke is he didn't see the mess coming. This is true. Oddly enough, the only people to see this coming were economic bloggers. There is a general train of thought going around that people who didn't see this mess shouldn't be involved in the clean-up. But frankly, Bernanke's outside the box thinking on how to solve the credit market problem should get solid marks. And the real grade should come in the performance of the credit markets since Bernanke's massive intervention. Interest rates are down. That tells us the risk premium has been priced at a far more normal level which is a damn good thing.

Ben is one of the key players that has helped us to get out of the mess. He deserves a second term.