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Bernanke Prepares His Legacy, Obama Prepares to Pick a Successor

Irwin M. Stelzer

Data-driven, legacy-driven. Keep those two descriptives in mind and you will know a good deal about the prospects for a dialing back of asset purchases—“tapering”—by Federal Reserve Board chairman Ben Bernanke. After some confusing, market-roiling signals in the past two weeks, Bernanke has made it clear that Fed policy will continue to depend on incoming data. But not entirely. Lurking in the background is the near certainty that the chairman’s appearances before Congress last week will be his last before returning to academic life and entering the more lucrative, although also more boring, board rooms of corporate America. So he cannot but be conscious of his legacy. In addition to believing that history will treat kindly his efforts to support an ailing economy while the politicians contented themselves with creating strong headwinds preventing a robust recovery, he would prefer to return to Princeton secure in the knowledge that he is leaving an economy on track for a steady recovery.

That’s why he has made it clear that so long as he sits in the Fed chair he will continue current policies, or something close to current policies, even if the unemployment rate falls substantially. He might change the mix of ingredients in the stimulating medicine he has concocted, or even lower the dosage a bit, but the effect of any new formula on the economy will be the same as it has been.

No surprise to anyone who knows how to read Bernanke’s pronouncements: He has always said that if the unemployment rate falls only or largely because more workers have dropped out of the labor market, or if low inflation creates the threat of deflation, he will continue a loose monetary policy even if the unemployment rate falls below 6.5 percent. In short, he is unpersuaded by critics, mostly on the right, who argue that his massive interventions in the bond and mortgage markets are planting the seeds from which future inflation will spring, perhaps after the asset bubble he has created pops.

So much for the Bernanke legacy. We can safely predict that he will have both admirers and critics, with the balance between them to be determined by incoming data between now and his departure for greener fields, and thereafter. So far, the data do not provide unambiguous evidence for either Bernanke’s supporters or detractors. On the plus side, Bernanke can claim that he has succeeded in pushing up asset prices, creating a so-called “wealth effect” sufficient to forestall a dip into recession by luring consumers from the couch into auto showrooms and the housing market. Share prices shot to all-time highs recently, house prices are rocketing upwards, the number of jobs is increasing steadily if not spectacularly. But retail sales disappointed in June, GDP grew only by 1.8 percent in the first quarter, and forecasters are scrambling to lower their second-quarter growth forecasts to less than 1 percent. My own guess is that Bernanke has helped to prevent the slow recovery from becoming slower or even stalling. After all, with taxes up and government spending down, fiscal policy is tightening, creating what we have come to call “headwinds,” their strength increased by the impending implementation of Obamacare. At minimum, Bernanke can claim to have devised a monetary policy that keeps the economy inching forward in the face of those headwinds.

Can President Obama find a successor that can do as well, or better? Certainly, he is, as our British friends say, spoilt for choice—so spoilt that it is impossible to discuss all of the candidates on the list his staff is vetting.

He first has to decide just what he wants the new chair to be good at. If he deems the new regulatory regime incapable of preventing financial institutions from again forming a circular firing squad, a practice encouraged by the these institutions’ awareness that they are too big to be allowed to die, he will want someone with crisis-fighting experience, which is why the name of former treasury secretary Tim Geithner continues to pop up. Geithner more or less successfully allocated the $350 billion in the Troubled Asset Relief Program (TARP), and deflected pressure and criticism from the President during the recent financial melt-down. He professed to have no interest in the Fed job even before he earned about $400,000 for a few speeches. But few people say “no” to the president of the United States, and if asked Geithner would, with reluctance, real or feigned, probably accept.

But that is the least likely selection from a rich talent pool. The person most likely to be asked to replace Bernanke is Janet Yellen, now vice chair of the Fed. Her academic credentials are in good order (teaching posts at Harvard and the London School of Economics), and she has experience running the San Francisco Federal Reserve Bank. Yellen so abhors the economic and social consequences of unemployment that she is deemed the candidate most likely to keep policy on the easy side, and the economy growing. That would suit a president whose party faces hard-fought congressional elections in 2014—and heighten conservatives’ fear of future inflation.

A Yellen appointment would please the considerable feminist wing of Obama’s party, which the selection of another talented economist and late entrant into the race, Larry Summers, definitely would not. For sheer IQ, Summers is without peer. And his experience includes a stint as secretary of the treasury, another at the Council of Economic Advisers, and still another as Obama’s chief economic adviser. But Summers has two strikes against him. Strike one: He was forced to resign as president of Harvard after publicly observing that women have “different availability of aptitude at the high end” from men in science and engineering, rather than from discrimination. Strike two: He is impatient with lesser mortals, a group that includes almost everyone, not a good thing in a job that demands consensus-building. Still, it takes three strikes to get called “out,” so he remains a possibility.

The final candidate often mentioned is Roger Ferguson, Fed vice chairman from 1999-2006. Ferguson received a Ph.D. in economics from Harvard with numerous honors, and has been a fellow at Pembroke College, Cambridge. He has the added political advantage, as Obama undoubtedly sees it, of being an African-American. Women voters upset if Yellen is passed over, especially for Summers, would find it impolitic to voice loud complaints at the appointment of a talented black. Such is the stuff of American politics these days.

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